SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [NO FEE REQUIRED]

                  FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2005
                                       OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

    For the transition period from                    to
                                   ------------------    --------------------

                           COMMISSION FILE NO. 0-27432

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


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


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

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

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

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

Indicate  by  check  mark  if the registrant is a well-known seasoned issuer, as
defined  in  rule  405  of  the  Securities  Act.
                                Yes        No X
                                    ---      ---

Indicate  by  check  mark  if  the  registrant  is  not required to file reports
pursuant  to  Section  13  or  Section  15(d)  of  the  Act.
                               Yes         No  X
                                    ---       ---

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

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

Indicate  by  check  mark  whether  the registrant is 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.
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
                                    ---        ---

The  Aggregate  market  value  of the voting stock held by non-affiliates of the
registrant  based  on  the  average bid and asked prices as of June 30, 2005 was
$25,908,000.  The  Aggregate  market  value  of  the  voting  stock  held  by
non-affiliates  of  the  registrant based on the average bid and asked prices as
March  22,  2006  was  $27,050,000.

Indicate  number  of  shares  outstanding  of  each of the registered classes of
Common Stock at March 24, 2006: 26,085,268 shares Common Stock, $0.05 par value.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Certain  portions  of the Proxy Statement for the annual meeting of stockholders
to  be  held  in  2006  are  incorporated by reference into parts II, III and IV
hereof.
================================================================================


<PAGE>
<TABLE>
<CAPTION>
                                                    TABLE OF DEFINED TERMS
<S>                      <C>
After-Treatment Device   Engine pollutant emissions are generally reduced by engine modifications, fuel specifications or
                         exhaust gas after-treatment.  An after-treatment device is a component used to reduce engine
                         pollutant emissions downstream of the combustion chamber.  Catalytic converters and particulate
                         traps are examples of after-treatment devices.

Alternative Fuel         An alternative fuel is any fuel other than gasoline and diesel fuels, such as methanol, ethanol,
                         compressed natural gas, and other gaseous fuels.  Generally, alternative fuels burn more cleanly
                         and result in less air pollution.

BUWAL                    Bundesamt f r Umwelt, Wald und Landschaft (Swiss Agency for the Environment, Forest and
                         Landscape).

Catalytic Converter      A catalytic converter consists of a metal housing filled with a ceramic or metallic honeycomb
                         material which is covered with a catalytic compound.  The presence of the catalytic converter in
                         the engine exhaust system breaks down the chemicals in the exhaust and reduces harmful
                         pollutant emissions.

CO                       Carbon monoxide is a colorless, odorless and poisonous gas produced by the burning of fuels.
                         Automobiles are the primary source of carbon monoxide pollution.  When carbon monoxide
                         nters the bloodstream, it reduces the delivery of oxygen to the body's organs and tissues.  Health
                         threats are most serious for those who suffer from cardiovascular disease, particularly those with
                         angina or peripheral vascular disease.  Exposure to elevated carbon monoxide levels can cause
                         impairment of visual perception, manual dexterity, learning ability and performance of complex
                         tasks.

CO(2)                    Carbon dioxide is a colorless, odorless, incombustible gas formed during respiration, combustion
                         and organic decomposition.

CWMF                     Catalyzed Wire Mesh Filter, a form of diesel particulate filter.

Diesel Engine            An engine that operates on diesel fuel and principally relies on compression-ignition for engine
                         operation.  The nonuse of a throttle during normal operation is indicative of a diesel engine.

DOCs                     Diesel Oxidizing Catalysts - see "Oxidation Catalyst."

DPFs                     Diesel Particulate Filters -  see "Particulate Trap/Filter."

FBC                      Fuel Borne Catalyst.  A chemical compound of an organic and a metal added to fuel to make a
                         metal ash that promotes the more complete combustion of soot collected with it in a diesel
                         particulate filter.  The primary metals used are platinum, iron and cerium.

HC                       An exhaust and evaporative pollutant of hydrogen and carbon atoms resulting from unburnt fuel.
                         HC contributes to the formation of ozone, which is responsible for the choking, coughing and
                         stinging eyes associated with smog.  Ozone damages lung tissue, aggravates respiratory disease
                         and makes people susceptible to respiratory infections.  Children are especially vulnerable to
                         ozone's harmful effects, as are adults with existing disease.

NOx                      Oxides of nitrogen are a family of reactive gaseous compounds that contribute to air pollution in
                         both urban and rural environments.  Emissions of nitrogen oxides are produced during the
                         combustion of fuels at high temperatures.  The primary sources of atmospheric nitrogen oxides
                         include highway sources (such as light-duty and heavy-duty vehicles), nonroad sources (such as
                         construction and agricultural equipment, and locomotives) and stationary sources (such as power
                         plants and industrial boilers).  Nitrogen oxides are an important precursor to both ozone and acid
                         rain, and may affect both terrestrial and aquatic ecosystems.

Oxidation Catalyst       A type of catalyst (catalytic converter) that chemically converts hydrocarbons and carbon
                         monoxide to water vapor and carbon dioxide.

Particulate Trap/Filter  An after-treatment device that filters or traps diesel particulate matter from engine exhaust until
                         the trap becomes loaded so that a regeneration cycle is implemented to burn off the trapped
                         particulate matter.

PFCs                     Platinum Fuel Catalysts.  A form of fuel-borne catalyst that employs platinum to control vehicle
                         exhaust emissions of hydrocarbons, carbon monoxide, oxides of nitrogen and particulate matter.


                                        2
<PAGE>
PM                       Particulate matter includes dust, dirt, soot, smoke and liquid droplets emitted directly into the air
                         by sources such as factories, power plants, cars, engines, construction activity, fires and natural
                         windblown dust.  Particles formed in the atmosphere by condensation or the transformation of
                         emitted gases are also considered particulate matter.

Registration             In the U.S., fuels and fuel additives are required to be registered with federal, state or local
                         regulatory authorities for on-highway use before the fuel/fuel additive may be "introduced into
                         commerce."  The registration issued by the U.S. Environmental Protection Agency specifically
                         does not permit the registrant to make any claims regarding the registrant's fuel's diesel emissions
                         reduction performance.

Retrofit                 An engine "retrofit" includes (but is not limited to) any of these activities:

                         adding of new/better pollution control after-treatment equipment to certified engines;
                         upgrading a certified engine to a cleaner certified configuration;
                         upgrading an uncertified engine to a cleaner "certified-like" configuration;
                         converting of any engine to a cleaner fuel;
                         early replacement of older engines with newer (presumably cleaner) engines (in lieu of
                         regular expected rebuilding); and
                         use of cleaner fuel and/or emission-reducing fuel additive (without engine conversion).

SCR                      Selective Catalytic Reduction, a technology that reduces emissions of nitrogen oxides and allows
                         the engine to be tuned for maximum fuel economy.

Ultra Low Sulfur Fuel    Current EPA regulations specify that diesel test fuel contain 300 - 500 ppm sulfur for highway
                         engines and 300 - 4000 ppm sulfur for nonroad engines.  Significant reductions from these
                         current sulfur levels are necessary in order for many retrofit technologies to provide meaningful,
                         lasting emissions reductions.  The U.S. Environmental Protection Agency has mandated sulfur
                         reductions to 15 ppm beginning in January 2006.  In addition to enabling a wide array of
                         emissions control technologies, the use of ultra low sulfur diesel alone reduces emissions of
                         particulate matter.  Sulfate, a major constituent of particulate matter, is produced as a byproduct
                         of burning diesel fuel containing sulfur.  Reducing the sulfur content of fuel in turn reduces
                         sulfate byproducts of combustion and therefore particulate matter emissions.

Verification             The U.S. Environmental Protection Agency established the Environmental Technology
                         Verification Program to verify the performance of innovative environmental technologies that
                         can be used to monitor, prevent, control and clean pollution.  The verification program provides
                         credible, high-quality data on the performance of innovative commercial environmental
                         technologies.  In the market for diesel emission reduction technologies, the EPA's Retrofit
                         Technology Verification Program is designed to encourage owners of existing public and private
                         fleets of diesel powered vehicles and equipment to install new or enhanced emissions control
                         technologies on their engines.  Through the Retrofit Technology Verification Process, the EPA
                         qualifies manufacturers' retrofit technologies to be posted on the Office of Transportation and Air
                         Quality (OTAQ's) Verified Technology List.  In order for manufacturers to qualify, the
                         manufacturer must undergo product testing (under standardized protocols or other developed
                         protocols, including the appropriate federal test procedures) to provide proof to federal, state and
                         local regulatory authorities that the manufacturer's product does in fact perform as claimed.

VERT                     Verminderung der Emissionen von Real-Dieselmotoren im Tunnelbau (Curtailing Emissions
                         from Diesel Engines in Tunnel Construction).  A research program conducted between 1994-
                         2000, sponsored by Swiss, German and Austrian occupational health authorities, which
                         developed performance criteria and specifications for diesel particulate filters.  VERT develops,
                         tests and certifies diesel particulate filter systems.
</TABLE>


                                        3
<PAGE>
PART I

FORWARD-LOOKING  STATEMENTS

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

ITEM 1.  BUSINESS

GENERAL

     Clean  Diesel  Technologies,  Inc., a Delaware corporation with a principal
place of business at 300 Atlantic Street, Stamford, CT 06901, was formed in 1994
as  a  wholly owned subsidiary of Fuel-Tech N.V., incorporated under the laws of
the  Netherlands  Antilles  (Fuel  Tech),  to  develop  technologies that reduce
harmful  emissions  from  diesel  engines  while  reducing  fuel consumption and
improving  fuel  economy.  CDT was spun-off by Fuel Tech in a rights offering in
December  1995.  Over  the past ten years, CDT has developed its technologies in
the  areas  of  platinum  fuel  catalysts  (PFCs) for emissions control and fuel
economy  improvement  in  diesel  engines,  and  nitrogen  oxide (NOx) reduction
systems  for  control  of  NOx  emissions  from  diesel  engines.

     CDT  is now commercializing the Platinum Plus(R) fuel-borne catalyst (FBC),
a  diesel  fuel  PFC  additive,  the  ARIS(R)  NOx reduction system, an advanced
reagent  injection  system  used  in catalytic NOx reduction systems , and Clean
Diesel's  diesel  particulate  filter  technology  based  on catalyzed wire mesh
filter elements.  CDT has 26 U.S. patents issued and 17 U.S. patent applications
pending,  as  well  as  106  foreign  patents  issued  and  65  foreign  patent
applications pending.  Increasingly, combustion engine development is influenced
by  concern  over  global  warming caused by carbon dioxide (CO2) emissions from
fossil  fuels  and toxic exhaust emissions.  Because carbon dioxide results from
the  combustion of fossil fuels, reducing fuel consumption is often cited as the
primary  way  to reduce carbon dioxide emissions.  Diesel engines are as much as
40%  more  fuel-efficient  than gasoline engines.  Thus, increased use of diesel
engines  relative  to  gasoline  engines  is  one  way  to  reduce  overall fuel
consumption  and  thereby significantly reduce carbon dioxide emissions.  Diesel
engines,  however,  emit  higher  levels  of  two toxic pollutants than gasoline
engines  fitted with catalytic converters, specifically, particulate matter (PM)
and  nitrogen  oxides.  Both  of  these  pollutants affect human health and also
damage  the  environment.

TECHNOLOGIES AND PRODUCTS

     CDT  has  succeeded  in  developing  technologies  and  products that, when
combined  with  other  after-treatment devices, can reduce particulate emissions
and  nitrogen  oxides  from  diesel  engines  to or below the emission levels of
natural  gas  engines,  while also reducing fuel consumption.  This results in a
reduction  in fuel costs and greenhouse gas emissions, primarily carbon dioxide,
as  well  as  a  reduction in emissions of particulates, nitrogen oxides, carbon
monoxide  and  un-burnt  hydrocarbons.

PLATINUM PLUS FBC

     CDT has successfully developed and patented the Platinum Plus additive as a
diesel  fuel  soluble,  fuel-borne  catalyst,  which  contains minute amounts of
platinum  and  cerium  catalysts  and  is  used  to  improve  combustion, reduce
emissions  and  improve  the  performance  and  reliability  of emission control
equipment.  Platinum  Plus  FBC takes the catalytic action into engine cylinders
where  it  improves  combustion  thereby  reducing  particulates,  un-burnt
hydrocarbons  and  carbon  monoxide  emissions  and improves fuel economy. Fleet
tests using Platinum Plus FBC have shown improvements in fuel economy of between
3%  and 12%. Platinum Plus FBC can be used alone or with either regular or ultra
low-sulfur  diesel fuel to reduce particulate emissions by 10% to 25% within the
engine  while  also  improving the performance of diesel oxidation catalysts and
particulate filters (which trap up to 95% of particulates but in doing so become
clogged  with  soot) by burning off the soot particles at lower temperatures and
further  reducing  toxic emissions of carbon monoxide and un-burnt hydrocarbons.

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


                                        4
<PAGE>
     CDT  completed  the  first stage of development of the Platinum Plus FBC in
1999.  In  December of that year, CDT received EPA registration for the Platinum
Plus  FBC  for  use in bulk fuel by refiners, distributors and truck fleets.  In
2000,  CDT  completed  the  certification  protocol  for particulate filters and
additives  for  use  with  particulate  filters  with  VERT, the main recognized
authority  in  Europe  that  tests  and  verifies diesel particulate filters for
emissions  and  health effects.  In 2001, the Swiss Authority BUWAL approved the
Platinum  Plus  fuel-borne  catalyst for use with particulate filters.  In 2002,
the  U.S.  Mining, Safety and Health Administration (MSHA) accepted the Platinum
Plus  fuel-borne  catalyst  for use in mines, with or without diesel particulate
filter  after-treatment.

     In  2003,  CDT  received  EPA  verification for the Platinum Plus FBC and a
diesel-oxidation catalyst (the Purifier System).  In June 2004, CDT received EPA
verification  for  the  Catalyzed  Wire  Mesh  Filter System, which combines the
Platinum  Plus  fuel  borne  catalysts with a catalyzed wire mesh filter (CWMF).
CDT  has  also  applied  to  the  California  Air  Resources  Board  (CARB)  for
verification  of  these  combination  systems.  In  2005,  CDT  applied for CARB
verification  of  Platinum  Plus  FBC in combination with high efficiency diesel
particulate  filter.  Verification  is given for specific engine groups, and the
initial  verification  and  applications  are  for  older  engines  (pre-1994
manufactured),  which  are  higher  emitters of particulates and nitrogen oxides
than  newer  engines.  CDT  also  received verification extension for fuel-borne
catalysts  and  diesel-oxidizing catalysts to cover engines manufactured between
1994 and 2003.  Verification is needed for the end user of the Platinum Plus FBC
to  get  emissions reduction credit from the EPA's voluntary retrofit program or
CARB's  mandatory  retrofit  program.  In the U.S., truck fleets, municipalities
and off-road equipment operators are generally moving toward using only verified
technologies  when  installing  retrofit  emissions  reduction  systems.

     Over  the  past  several  years,  CDT  has  carried out 11 large fleet fuel
economy demonstration trials in the U.S. in a range of industries, including the
waste hauling, beverage, grocery and fuel delivery industries.  The improvements
in fuel economy from using Platinum Plus FBC in these demonstrations ranged from
3%  to  12%,  with  an  average 8% improvement.  The best results were generally
attributable  to  short-haul  "stop-and-go" driving, as is generally the pattern
for local delivery vehicles, buses and garbage trucks.  Lab engine test beds run
at  both Cummins Engine Company and the Southwest Research Institute showed a 2%
to  8%  improvement  in fuel economy, respectively, which have been confirmed by
field  testing  programs.  Platinum  Plus  FBC  is  effective with normal sulfur
diesel,  ultra  low sulfur diesel, arctic diesel (kerosene) and biodiesel.  When
used with biodiesel and kerosene, Platinum Plus FBC prevents the normal increase
in  nitrogen  oxides  associated  with  biodiesel.

ARIS SCR

     The  ARIS  (Advanced  Reagent  Injection  System) is the patented injection
system  for  the reduction of nitrogen oxide emissions from diesel engines.  The
system  comprises  of  a single fluid computer-controlled injector that provides
precise  injection  of  nontoxic  urea-based  reagents  into  the  exhaust  of a
stationary  or  mobile  engine,  where  the system then converts nitrogen oxides
across  a  catalyst to nitrogen and water vapor.  The system has shown reduction
of nitrogen oxides of up to 90% and, on occasion, higher percentages on a steady
state  operation  and of up to 85% in transient operations.  This process, known
as  selective catalytic reduction (SCR), has been in use for many years in power
stations, and it is well proven in mobile and stationary applications.  The ARIS
system  is  a  compact  version  of  the selective catalytic reduction injection
system.  The  principal advantage of the patented ARIS system is that compressed
air  is  not  required to operate the system and that a single fluid is used for
both NOx reduction and injector cooling.  The system is designed for high-volume
production  and  is very compact, with very few components, making it inherently
cheaper  to  manufacture,  install  and operate than the compressed air systems,
which were first developed for heavy-duty vehicles.  The ARIS system may be used
in both stationary diesel engines for power generation and mobile diesel engines
used  in  trucks,  buses,  trains  and  boats.

CATALYZED  WIRE  MESH  DIESEL  PARTICULATE  FILTER

     Clean  Diesel had partnered with Mitsui and PUREarth in the development and
testing  of  catalyzed  wire mesh filter (CWMF) technology.  The CWMF technology
was initially developed by Mitsui/PUREarth for use in conjunction with CDT's FBC
as  a  lower  cost and reliable alternative to the traditional heavily catalyzed
filter  systems.  The  system  has  been  verified  by  CDT  under  the  EPA's
Environmental Technology Verification protocol as reducing toxic particulates by
up to 75 percent, carbon monoxide by 60 percent, hydrocarbons by 80 percent, and
NOx  by  9  percent.  It  also  provides  lower NO2 emissions levels relative to
traditional,  heavily catalyzed filter systems.  In 2005 the CWMF technology was
transferred  to  CDT  under  a  technology  transfer  agreement  with Mitsui and
PUREarth.  Under  the  agreement CDT acquired the worldwide title to the patents
and  other  intellectual  properties,  excluding  Japan.  The CWMF technology is
designed  for  use in a wide range of diesel engine particulate emission control
applications.

     The  CWMF technology is a durable, low-cost filter design to bridge the gap
between  low  efficiency  diesel-oxidation  catalysts  and  expensive,  heavily
catalyzed  particulate  filters. The wire-mesh filter system is designed to work
synergistically  with  a  FBC  for reliable performance.  This combined FBC/CWMF
technology  is  especially  suited  to  solving  the  challenging


                                        5
<PAGE>
problem  of delivering a reliable pollution control solution which can be easily
retrofitted  for  the  older,  higher-emission  diesel engines expected to be in
service  for  years  to  come.

     In  addition  to reducing the cost to achieve these emissions improvements,
the  patented  combination with a FBC permits the CWMF to operate effectively at
the  lower  exhaust  temperatures found in stop-and-go service applications. The
FBC  reduces the engine-out emissions and allows soot captured in the CWMF to be
reliably  combusted  at  lower  exhaust  temperatures.  Commercial  systems  of
Platinum  Plus  FBC  with  this  durable  CWMF  have demonstrated performance in
beverage  delivery  vehicles,  refuse  trucks  and  buses.

THE MARKET AND THE REGULATORY ENVIRONMENT

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

NEW DIESEL ENGINES

     While  engine  manufacturers  have,  to  date,  generally  met  emissions
regulations  by engine design changes (which tend to increase fuel consumption),
CDT  believes  that further reduction in emissions can be achieved best by using
combinations  of  cleaner-burning  fuels  and  after-treatment  systems  such as
diesel-particulate  filters  and catalytic systems for reducing nitrogen oxides.

     In  the  last  several  years,  emissions regulations for new mobile diesel
engines in the major markets of North America, Asia and Europe have continued to
tighten  and  are  now  40%  to  90%  lower  than  the  mid-1980s  regulations.
Regulations  proposed  through 2010 in the U.S., Europe and Asia are expected to
reduce  the  emissions  level  for new mobile diesel engines to 85 to 99% of the
levels  mandated  in the mid-1980s.  The market for mobile NOx reduction systems
is  expected  by  management  to develop between 2006 and 2010.  European engine
manufacturers  have  decided  to  use  urea  SCR in 2006, at least on heavy duty
vehicles  and very likely on medium and light trucks in later years.  There is a
clear  preference  to  use a single fluid system for the medium and light trucks
which  have  no  compressed  air  system.  It  also seems probable that European
manufacturers  will adopt particulate filters to meet 2010 regulations which are
being  formulated.

     In  May  2004  the  U.S.  Environmental  Protection  Agency (EPA) announced
proposals  to  regulate  'nonroad'  engines.  The  regulations are planned to be
phased  in  from  2008  to 2014.  Proposals include a wide range of construction
equipment,  agricultural equipment, as well as railroad and marine applications.

     CDT  believes  the U.S. market for diesel engines is poised for significant
growth  because  of  the  favorable  fuel  economy performance of diesel engines
coupled  with  the  increased  ability  to  control effectively, particulate and
emissions  of  nitrogen  oxides  from such engines.  Europe and Asia already use
significantly  more  mobile  diesel  engines,  particularly  for  passenger  and
light-duty  vehicles.  Most  U.S.  engine manufacturers have indicated that they
intend to use particulate filters, to meet new diesel vehicle regulations in the
2007 to 2010 time period.  European engine manufacturers have committed to adopt
urea-selective  catalytic reduction by the 2007 to 2010 period.  CDT believes it
is  probable that both particulate filters and some emissions of nitrogen oxides
control  technology  will be required in Europe and the U.S. by the 2010 to 2015
period.

EXISTING DIESEL ENGINES AND THE RETROFIT MARKET

     While  much  of  the  regulatory  pressure  and  the  response  from engine
manufacturers  has  focused  on  reducing  emissions  from new engines, there is
increasing  concern over pollution from existing diesel engines that have 20- to
30-year  life cycles.  CDT believes this trend underlies the growing interest in
the  potential  market  that  may  exist  for  retrofitting  diesel engines with
emissions  reduction systems.  Stationary diesel engines, construction equipment
and  public  transportation  vehicles such as buses and commercial and municipal
truck  fleets  will  all  be  included  in such a retrofit diesel engine market.

     In  1998,  the  California  Air  Resources  Board  (CARB)  declared  diesel
particulates  to  be  toxic  and  in  2000 it proposed reductions in particulate
emissions  from  over one million existing engines in California as well as more
stringent  controls  for  new  engines.  The  EPA  stated  its  objective  for
retrofitting  vehicles  with particulate controls and developed the Clean School
Bus U.S.A program to reduce emissions on school buses and the Smartway Transport
Program  to  reduce  both diesel emissions and fuel consumption on over-the-road
trucks.


                                        6
<PAGE>
COMPETITION

     There is significant competition among companies that provide solutions for
pollutant emissions from diesel engines.  Several companies market products that
compete  directly  with  CDT's  products and other companies offer products that
potential  customers  may  consider to be acceptable alternatives.  In addition,
newly  developed  products could be more effective and cost-efficient than CDT's
current  products  or  those  developed  in  the  future.

     CDT  faces  direct  competition  from companies with far greater financial,
technological,  manufacturing  and  personnel  resources,  including  Engelhard,
Donaldson, Fleetguard, Octel, Rhodia and Johnson Matthey.  Moreover, many of the
current  and  potential  future competitors have substantially more engineering,
sales  and  marketing capabilities and broader product lines than CDT does.  CDT
also  faces  indirect  competition  in  the form of alternative fuel consumption
vehicles  such  as  those  using  methanol,  hydrogen,  ethanol and electricity.

     CDT believes that its technologies and products occupy a strong competitive
position relative to others in the diesel emissions reduction technology market.
Competition  in  verified  particulate  reduction  systems  for retrofit is from
catalyst  systems suppliers like Johnson Matthey and Engelhard.  These companies
employ  systems  that  rely on much greater quantities of platinum and that have
the  undesirable  effect  of  increasing  emissions  of NO2, a component of NOx.
Competition  in  the diesel fuel additive market is from additive suppliers such
as  Associated  Octel,  who markets an iron product and Rhodia and Oxonica , who
market  cerium  products.  The  Platinum  Plus  FBC  competes  on performance in
regenerating  filters and lower metal usage which results in less ash buildup on
filters.  Platinum  Plus  FBC  also offers better performance in terms of carbon
monoxide reduction and hydrocarbon reduction.  In addition, Platinum Plus FBC is
the only fuel additive to provide fuel economy improvement.  Finally, in the NOx
control  market,  competition  is  from  other  suppliers  of  reagent-based
post-combustion  NOx  control  systems such as KleenAir Systems for retrofit and
Robert  Bosch  for  OEMs.  Bosch  has  stated  that it will offer a single fluid
system  after  2007.  CDT,  however,  already  has  proprietary technology for a
single  fluid  system,  which  requires  no  compressed  air  and involves fewer
components.

MARKET OPPORTUNITY

     The  two principal market drivers for CDT's products are emission reduction
and  fuel  economy  improvement.  Platinum  Plus FBC is an "enabling technology"
that enables emission reductions from the engine itself and enhances performance
of  the  exhaust  treatment  system while improving fuel economy.  The continued
tightening  of  clean air standards, emissions control regulations, pressure for
fuel  efficiency  and  growing  international awareness of the greenhouse effect
should  provide  CDT  with substantial opportunities in local markets throughout
North  America,  Asia  and  Europe.

     Without  compromising  the  fuel  economy benefits of diesel, a significant
reduction  of  particulate  and  NOx  emissions  can  only  be achieved by using
combinations  of  improved  engine  design,  cleaner  burning  fuels  and
after-treatment  systems  such  as  diesel  particulate  filters  and  catalytic
systems.  The  Platinum  Plus  FBC  (which improves combustion catalytically and
enables  higher  performance  of  exhaust  treatment  devices) and the ARIS 2000
technology  can  form  key  components of both of these after-treatment systems.

     The  convergence of requirements for emissions compliance and the high cost
of  fuel  make  the use of the products economical.  With diesel fuel selling at
approximately  $2.50 per USG, or more, in the United States as of December 2005,
a  fuel savings of at least 2% corresponds to $0.05 per USG and effectively pays
the  cost  of  dosing with Platinum Plus FBC by truck fleet operators.  Platinum
Plus  FBC  in  controlled  fleet  tests  showed  an  average  of 7% fuel economy
improvement.  In Europe, where diesel fuel retails in some countries for as much
as  $7.50  per  USG  because  of  the  high tax on fuels, potential fuel economy
benefits  are  even  more  pronounced.

MARKETING STRATEGY AND COMMERCIALIZATION

     The  market  for  after-treatment systems for emissions control from diesel
engines  is  currently  moving from the demonstration and development phase to a
commercialization  phase.  The  only  exception  to this general trend is in the
market  for  passenger  cars in France, where PSA Peugeot has taken the lead and
has  already begun offering particulate filter systems with fuel-borne catalysts
on  several  of  its  models.  EPA  and  CARB programs are only now beginning to
result  in  the  creation  of  active  markets  for  diesel  emissions reduction
technologies  and  products.  Thus,  the  market  for diesel emissions reduction
technologies  and  products  is  relatively  new.  CDT expects opportunities and
demand  for  verified  diesel emissions reduction technologies and products from
both  larger  companies  with  established  distribution  channels to the diesel
engine market and owners of existing public and private fleets of diesel-powered
vehicles.  At  the  same  time,  engine  manufacturers  are looking to subsystem
suppliers  to  provide complete exhaust subsystems including particulate filters
and/or  NOx  abatement  systems  and  eventually  both.


                                        7
<PAGE>
     It  is  an essential requirement of the U.S. retrofit market that emissions
control  products  and  systems  are verified under the EPA or CARB protocols to
qualify  for  credits  within  the  EPA  and  CARB  programs.  Funding for these
emissions  control  products and systems is mostly limited to those products and
technologies  that  have  already been verified.  CDT has  received verification
from  the  US  EPA  for two systems based upon the use of the Platinum Plus FBC.
The  Platinum  Plus  Purifier  System  uses  the  FBC  and a DOC for up to a 50%
particulate  reduction.  A second system is verified for up to 75% reduction and
uses  a  CWMF  and  the Platinum Plus FBC.   CDT may seek to verify its Platinum
Plus  FBC  in combination with additional emissions control devices manufactured
by  other  vendors.  CDT may receive royalties from sales of such devices in the
event sales of such devices include the Platinum Plus FBC product as part of the
devices'  verification.

     CDT  currently  manufactures and ships the Platinum Plus FBC product from a
toll  blender  in Pittsburg, Pennsylvania and from a small warehouse in Milford,
Connecticut.  However,  as  demand  for  the  product  increases, CDT intends to
expand  the  manufacturing and shipping points by supplying platinum concentrate
to  large  chemical  and additive manufacturing companies.  These companies will
then  blend and market the finished Platinum Plus FBC products to fuel suppliers
and  end  users.

     CDT  has  licensed  the ARIS 2000 NOx reduction technology in both the U.S.
and  Japan.  CDT  plans  to widen distribution to Europe and Asia by selling key
components  with  the  technology  licenses.   CDT  believes  this  strategy  of
licensing  the  products  and  technologies represents the most efficient way to
gain  widespread distribution quickly and to exploit demand for the technologies
in  North  America,  Asia  and  Europe.

In  2005  CDT  acquired  the rights to several worldwide patents from the Mitsui
Company  of  Japan relating to catalized wire mesh filter technology.  CDT is in
the  process  of commercializing the technology in combination with its Platinum
Plus  FBC.

HEALTH EFFECTS AND REGISTRATION OF ADDITIVES

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

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

     Engine  tests  in  the  U.S.  and  Switzerland  show that 95% to 99% of the
catalyst  metal  introduced to the fuel by the FBC is retained within the engine
and  exhaust after a filter and that the amount of platinum emitted from the use
of Platinum Plus FBC is roughly equivalent to platinum attrition from automotive
catalytic  converters.

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

     In  2002,  the U.S. Mining Safety and Health Administration (MSHA) accepted
the  use  of Platinum Plus FBC with particulate filters and also allowed its use
in  all  fuel  used  in  underground  mining,  even  without  filters.

     In  October  2003,  the EPA verified the Platinum Plus FBC Purifier System,
which  is  the  first  time the EPA has verified a metal catalyst additive-based
system.

     In January 2005 CDT announced it had initiated independent tests to address
recent  questions from the EPA on the use of its fuel borne catalyst as a result
of  growing  commercial  interest  in its diesel emission control products.  The
results  from testing of the Platinum Plus FBC over eight months at EPA approved
laboratories  confirmed  that any potentially allergenic platinum emissions from
the  use  of the Platinum Plus FBC were hundreds to thousands of times below the
lowest published safe level and were consistent with reported platinum emissions
from  catalyzed  control  devices.


                                        8
<PAGE>
SOURCES OF SUPPLY

     Platinum  and cerium are the principal raw materials used in the production
of  the Platinum Plus fuel borne catalyst.  These metals are generally available
from  multiple  sources in the market place.  CDT does not anticipate a shortage
in  the  supply  of  the  raw materials used in the production of the FBC in the
foreseeable  future.  While  CDT has outsourcing arrangements with two companies
in  the  precious  metal refining industry to procure this precious metal, there
are no fixed commitments with these parties to provide supplies and CDT may make
procurement  arrangements with others to fulfill the raw materials requirements.
In  the  past,  CDT  manufactured  the  product  internally  but  now  considers
outsourcing of the manufacturing process to a precious metal refinery to be more
cost  effective.

RESEARCH AND DEVELOPMENT

     During  2005,  CDT  employed several individuals in engineering and product
development.  During  the  years  ended  December  31, 2005, 2004, and 2003, the
research  and  development  expenses,  exclusive  of  patent  costs,  totaled
approximately    $439,000,  $506,000,  $855,000 respectively.  The 2005 decrease
resulted from lower personnel allocation and consultant use, partially offset by
higher  EPA testing expense.  In addition, 2004 expense was lower as a result of
the  completion  of  verification  testing  expense  in  2003.  CDT expenses all
research  and  development  costs  as  incurred.

PROTECTION OF PROPRIETARY INFORMATION

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

INSURANCE

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

EMPLOYEES

     CDT has 13 full-time employees.  In addition, one executive officer of Fuel
Tech  provides  management  and  legal  services  to CDT on an "as needed" basis
pursuant  to  a  Management and Services Agreement with Fuel Tech Inc.  CDT also
retains  several outside technical consultants and marketing agents for specific
projects  related  to  platinum,  engines  and  NOx  reduction and fuel additive
selling.

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

RISK  FACTORS  OF  THE  BUSINESS

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

CDT HAS INCURRED LOSSES IN THE PAST AND EXPECTS TO INCUR LOSSES IN THE FUTURE.

     Prior  to  2000, Clean Diesel Technologies was a development stage business
and  has  incurred  losses  since  inception totaling $34,841,000 (excluding the
effect  of  non-cash  preferred  stock  dividends).  At the date of this report,
Clean  Diesel Technologies has cash resources estimated to be sufficient for its
needs  into  the  first  quarter  of  2007.

     CDT  has  had  minimal  revenues  through  December 31, 2005 and expects to
continue  to  incur  operating  losses  at  least through 2006.  There can be no
assurance that CDT will achieve or sustain significant revenues or profitability
in  the future.  See the text below under the captions "Liquidity and Sources of
Capital" in Item 7, "Management's Discussion and Analysis of Financial Condition
and  Results  of  Operations,"  elsewhere  herein.


                                        9
<PAGE>
CDT FACES CONSTANT CHANGES IN GOVERNMENTAL STANDARDS BY WHICH ITS PRODUCTS ARE
EVALUATED.

     CDT  believes  that, due to the constant focus on the environment and clean
air standards throughout the world, a requirement in the future to adhere to new
and  more  stringent  regulations  both  domestically  and abroad is possible as
governmental  agencies  seek  to improve standards required for certification of
products  intended  to  promote  clean air.  In the event CDT's products fail to
meet  these  ever-changing  standards,  some  or  all of the products may become
obsolete.

FUTURE  GROWTH  OF  CDT'S  BUSINESS  DEPENDS  IN PART ON ENFORCEMENT OF EXISTING
EMISSIONS-RELATED  ENVIRONMENTAL  REGULATIONS AND FURTHER TIGHTENING OF EMISSION
STANDARDS  WORLDWIDE.

     CDT expects that the future business growth will be driven, in part, by the
enforcement of existing emissions-related environmental regulations and
tightening of emissions standards worldwide.  If such standards do not continue
to become stricter or are loosened or are not enforced by governmental
authorities, it could have a material adverse effect on business, operating
results, financial condition and long-term prospects.

THE POSSIBILITY OF NEW METAL STANDARDS, ,LOWER ENVIRONMENTAL LIMITS OR  STRICTER
REGULATION  FOR  HEALTH  REASONS  OF  PLATINUM  OR  CERIUM  EXISTS.

     New  standards  or  environmental  limits  on  the use of platinum and / or
cerium  metal by a governmental agency could adversely affect the ability of CDT
to  use  its  Platinum  Plus  FBC  in  some applications.  In addition CARB will
require  "multimedia"  analysis  of the FBC.  The EPA could require a "Tier III"
test of the Platinum Plus FBC at any time to determine additional health effects
of  platinum or cerium which tests would likely involve costs beyond the current
resources  of  Clean  Diesel.

CDT FACES COMPETITION AND TECHNOLOGICAL ADVANCES BY COMPETITORS.

     There is significant competition among companies that provide solutions for
pollutant emissions from diesel engines.  Several companies market products that
compete  directly  with  CDT's  products.  Other  companies  offer products that
potential customers may consider to be acceptable alternatives to CDT's products
and  services.  CDT  faces  direct  competition  from companies with far greater
financial,  technological,  manufacturing  and  personnel  resources,  including
Engelhard,  Donaldson,  Fleetguard,  Octel,  Rhodia,  Bosch and Johnson Matthey.
Newly  developed  products could be more effective and cost efficient than CDT's
current  or  future  products.  Many  of  the  current  and  potential  future
competitors  have  substantially  more  engineering,  sales  and  marketing
capabilities  and  broader product lines than CDT does.  CDT also faces indirect
competition  in  the form of alternative fuel consumption vehicles such as those
using  methanol,  hydrogen,  ethanol  and  electricity.

CDT DEPENDS ON INTELLECTUAL PROPERTY AND THE FAILURE TO PROTECT THE INTELLECTUAL
PROPERTY  COULD  ADVERSELY  AFFECT  FUTURE  GROWTH  AND  SUCCESS.

     CDT relies on patent, trademark and copyright law, trade secret protection,
and confidentiality and other agreements with employees, customers, partners and
others  to protect its intellectual property.  However, some of the intellectual
property  is  not  covered  by  any  patent  or patent application, and, despite
precautions,  it  may  be  possible  for  third  parties  to  obtain and use the
intellectual  property  without  authorization.

     CDT  does  not  know whether any patents will be issued from the pending or
future  patent  applications  or  whether  the  scope  of  the issued patents is
sufficiently  broad  to protect the technologies or processes.  Moreover, patent
applications  and  issued  patents  may be challenged or invalidated.  CDT could
incur  substantial  costs in prosecuting or defending patent infringement suits.
Furthermore,  the  laws  of  some foreign countries may not protect intellectual
property  rights  to  the  same  extent  as  do  the  laws of the United States.

     Some  of  the  key  patents,  including  the  fundamental platinum additive
patent,  will  expire  during  the period 2006-2008.  However, CDT believes that
other  longer  lived  patents,  including  those  for  platinum  additives  in
combination  with  after-treatment  devices, will provide adequate protection of
the  proprietary  technology,  but  there  can  be  no  assurances  CDT  will be
successful  in  protecting  the  proprietary  technology.

     As  part  of the confidentiality procedures, CDT generally has entered into
nondisclosure  agreements with employees, consultants and corporate partners and
has  attempted  to  control  access  to  and  distribution  of the technologies,
documentation  and  other  proprietary information.  CDT plans to continue these
procedures.  Despite  these  procedures,  third  parties could copy or otherwise
obtain  and  make  unauthorized use of the technologies or independently develop
similar  technologies.  The steps that have been taken and that may occur in the
future  might  not  prevent  misappropriation  of the solutions or technologies,
particularly  in  foreign  countries where laws or law enforcement practices may
not  protect  the  proprietary  rights  as  fully  as  in  the  United  States.


                                       10
<PAGE>
     There  can  be  no  assurance that CDT will be successful in protecting its
proprietary  rights.  Any  infringement  on any of the intellectual rights could
have  an  adverse  effect  on  the  ability  to  develop  and  sell successfully
commercially  competitive  systems  and  components.

IF  THIRD  PARTIES  CLAIM  THAT  THE  PRODUCTS  INFRINGE UPON THEIR INTELLECTUAL
PROPERTY RIGHTS, CDT MAY BE FORCED TO EXPEND SIGNIFICANT FINANCIAL RESOURCES AND
MANAGEMENT  TIME  LITIGATING SUCH CLAIMS AND THE OPERATING RESULTS COULD SUFFER.

     Third  parties  may  claim  that  the  products  and  systems infringe upon
third-party  patents  and  other  intellectual  property  rights.  Identifying
third-party patent rights can be particularly difficult, especially since patent
applications  are  not published until up to 18 months after their filing dates.
In  the  event  a  competitor  were to challenge the patents, or assert that the
products or processes infringe its patent or other intellectual property rights,
CDT  could  incur  substantial  litigation  costs,  be  forced to make expensive
product  modifications, pay substantial damages, or even be forced to cease some
operations.  Third-party infringement claims, regardless of their outcome, would
not  only  drain  financial  resources  but  also  divert the time and effort of
management  and  could  result  in customers or potential customers deferring or
limiting  their  purchase  or  use  of  the  affected products or services until
resolution  of  the  litigation.

AN EXTENDED INTERRUPTION OF THE SUPPLY OR A SUBSTANTIAL INCREASE IN THE PRICE OF
PLATINUM COULD HAVE AN ADVERSE EFFECT ON BUSINESS.

     The  cost of platinum or the processing cost associated with converting the
metal  may  have  a direct impact on the future pricing and profitability of the
Platinum  Plus  FBC.  Although  in the future, CDT intends to minimize this risk
through  various  purchasing  and  hedging strategies, there can be no assurance
that  this  will  be  successful.  A  shortage  in  the  supply of platinum or a
significant  prolonged  increase  in  the price of platinum, in each case, could
have  a material adverse effect on the business, operating results and financial
condition.

FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT
ON FUTURE SUCCESS.

     CDT's  success will depend, in large part, on the ability to retain current
key  personnel,  attract and retain additional qualified management, scientific,
and  manufacturing  personnel,  and  develop  and  maintain  relationships  with
research  institutions and other outside consultants.  The loss of key personnel
or  the  inability  to  hire  or  retain  qualified personnel, or the failure to
assimilate  effectively  such  personnel could have a material adverse effect on
the  business,  operating  results  and  financial  condition.

CDT'S RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND COMPETITIVE
FACTORS FROM WHICH CDT HAS LITTLE OR NO CONTROL OVER.

     The  factors  listed below, some of which CDT cannot control, may cause the
revenues  and  results  of  operations  to  fluctuate  significantly:
     -    Actions  taken  by  regulatory  bodies relating to the verification or
          registration  of  the  products.

     -    The  extent to which the Platinum Plus FBC and ARIS 2000 NOx reduction
          products  obtain  market  acceptance.

     -    The  timing  and  size  of  customer  purchases.

     -    Customer  concerns  about  the  stability  of the business which could
          cause  them  to  seek  alternatives  to  CDT's  product.

CDT IS CURRENTLY DEPENDENT ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF
REVENUES  AND THE REVENUES COULD DECLINE IF CDT IS UNABLE TO MAINTAIN OR DEVELOP
RELATIONSHIPS  WITH  CURRENT  OR  POTENTIAL  CUSTOMERS.

     A  few  customers  currently account for a significant portion of revenues.
For the three-year period ended December 31, 2005, three customers accounted for
approximately  43% of revenues. The majority of the revenues received from these
three  customers  consisted  of  license  fees  and ARIS hardware purchases. CDT
intends  to  establish  long-term  relationships  with  existing  customers  and
continue  to expand its customer base. While CDT diligently seeks to become less
dependent  on  any  single  customer,  it  is  likely  that  certain contractual
relationships  may result in one or more customers contributing to a significant
portion of the revenue in any given year for the foreseeable future. The loss of
one  or  more  of  these  significant customers may result in a material adverse
effect  on revenues, the ability to become profitable or the ability to continue
the  business  operations.


                                       11
<PAGE>
CDT  DEPENDS ON THE MARKETABILITY OF THREE PRIMARY PRODUCTS - PLATINUM PLUS FBC,
ARIS  SYSTEMS  AND  CATALYZED  WIRE  MESH  FILTERS.

     The  Platinum  Plus  fuel  borne  catalyst, ARIS advanced reagent injection
system  for selective catalytic reduction and the catalyzed wire mesh filter are
the  three  primary products of Clean Diesel.  Failure of any of the products to
achieve  market  acceptance  may  limit  the  company's growth potential.  Clean
Diesel  may  have  to  cease  operations  if all of the primary products fail to
achieve  market  acceptance  and/or  fail  to  generate  significant  revenues.
Additionally,  the  marketability  of  the  products is dependent upon obtaining
verifications  from agencies such as the EPA, CARB, or similar European agencies
as  well  as  the  effectiveness  of  the  products  in  relation  to  various
environmental  regulations  in  the  many  jurisdictions  in  which Clean Diesel
markets  and  sells  its  products.

CDT  MAY  NOT BE ABLE TO SUCCESSFULLY MARKET NEW PRODUCTS THAT ARE DEVELOPED AND
OR  OBTAIN  DIRECT  OR  INDIRECT  VERIFICATION OR APPROVALS OF THE NEW PRODUCTS.

     CDT  plans  to market other emissions reduction devices used in combination
with  the  Platinum  Plus  fuel  borne  catalyst  and  ARIS injector.  There are
numerous  development and verification issues that may preclude the introduction
of  these  products  into  commercial sale.  If CDT is unable to demonstrate the
feasibility  of  these  products  or  obtain  verification  or  approval for the
products  from  agencies such as the EPA, CARB or similar European agencies, CDT
may have to abandon the products or alter the business plan.  Such modifications
to  the  business  plan  will  likely delay achievement of milestones related to
revenue  increases  and  achievement  of  profitability.

NO  ASSURANCES  OF  ADDITIONAL  FUNDING

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

CURRENCY  FLUCTUATIONS  COULD  IMPACT  FINANCIAL  PERFORMANCE.

     The  majority  of recent activities have been in the U.S.  However, CDT has
increased  its  activities  in  Europe and Asia, and thus potential for currency
exposure  exists.  CDT  intends  to manage the risk to such exposure, if any, by
entering  into  foreign currency futures and options contracts.  There can be no
assurance  that  currency  fluctuation will not have a significant effect on the
operations  in  the  future.

CDT  HAS  NOT  AND  DOES NOT INTEND TO PAY DIVIDENDS ON THE COMMON STOCK SHARES.

     CDT  has  not  paid dividends on its common stock since inception, and does
not  intend  to  pay  any  dividends  to  the  holders  of  common  stock in the
foreseeable  future.  CDT  intends  to  reinvest  earnings,  if  any,  in  the
development  and  expansion  of  the  business.

THE  PRICE OF THE COMMON STOCK SHARES MAY BE ADVERSELY AFFECTED BY THE SALE OF A
SIGNIFICANT  NUMBER  OF  NEW  SHARES.

     The sale, or availability for sale, of substantial amounts of common stock,
including shares issued upon exercise of outstanding options and warrants, or in
the  event  that CDT elects to sell shares of common stock in the future to fund
continuing  operations,  in  the  public  market  or a private placement, or the
perception  by  the  market that these sales could occur, could adversely affect
the  market  price  of  the  common  stock and could impair the ability to raise
additional capital through the sale of equity securities or debt financing.  The
perceived risk of dilution may cause the existing stockholders and other holders
to sell their shares of stock, which would contribute to a decrease in the stock
price.  In  that  regard,  significant downward pressure on the trading price of
CDT's  common  stock  may  also  cause investors to engage in short sales, which
would  further  contribute to significant downward pressure on the trading price
of  the  stock.


                                       12
<PAGE>
CDT'S  COMMON  STOCK  IS  CURRENTLY  TRADED  ON THE OVER-THE COUNTER MARKET, THE
ALTERNATIVE  INVESTMENT  MARKET  OF  THE LONDON EXCHANGE AND THE FRANKFURT STOCK
EXCHANGE  AND AN INVESTOR'S ABILITY TO TRADE THE STOCK MAY BE LIMITED BY TRADING
VOLUME  AND  PRICE  VOLATILITY.

     The  trading  volume  in CDT's common stock has been relatively limited.  A
consistently  active trading market for its common stock may not continue on the
OTC market or on the Alternative Investment Market of the London Stock Exchange.
The  average  daily trading volume in the common stock on the OTC market for the
month  ended  January,  2006  was approximately 4,140 shares.  The average daily
trading  volume  in  the  common  stock  on Alternative Investment Market of the
London  Stock  Exchange  for the month ended January, 2006 was approximately 494
shares.  In  February  2006,  clean  Diesel began trading on the Frankfurt stock
exchange  in  Germany.

     There  has  been  significant  volatility  in the market prices of publicly
traded  shares  of emerging growth technology companies, including CDT.  Factors
such as announcements of technical developments, verifications, establishment of
distribution  agreements,  significant  sales  orders,  changes  in governmental
regulation  and  developments  in  patent  or  proprietary  rights  may  have  a
significant  effect  on  the  market  price of CDT's common stock.  In addition,
there  has  been a low average daily trading volume of the common stock.  To the
extent  this  trading  pattern  continues,  the  price  of  the common stock may
fluctuate  significantly  as  a result of relatively minor changes in demand for
such  shares  and  sales  of  stock  by  holders.

ITEM 2.  PROPERTIES

FACILITIES

     Clean  Diesel  Technologies  has  a 5 year lease expiring in March 2009 for
3,925  square  feet  of  administrative  office  space  at  300 Atlantic Street,
Stamford,  Connecticut.  The  annual cost of the lease including rent, utilities
and  parking  is  approximately $125,000. CDT has a lease for 400 feet of office
space  outside  London,  UK  through  September  2007  at  an  annual  cost  of
approximately  $33,000.  Clean Diesel Technologies also leases 2,750 square feet
of  warehouse  space  in  Milford,  Connecticut.  The  annual  cost of the lease
excluding  utilities  is  estimated  at  $20,000  and  runs  through  July 2008.

PATENTS  AND  TECHNOLOGY  ASSIGNMENTS

     CDT's  technology  is  comprised  of patents, patent applications, trade or
service  marks,  data,  and know-how. This technology was acquired by assignment
from  Fuel  Tech  or developed internally. The assignment agreement provides for
annual royalties of 2.5% of gross revenues derived from the sale of the Platinum
Plus  FBC, commencing in 1998 and terminating in 2008. Clean Diesel Technologies
may  at  any  time  terminate this royalty obligation by payment to Fuel Tech of
amounts  in  2006  of  $3.3  million, in 2007 of $2.2 million or $1.1 million in
2008.  CDT,  as  owner,  maintains  the  technology  at  its  expense.

     During  2005,  Clean  Diesel  Technologies  filed  10  additional US patent
applications  and  2  foreign  patent  applications.  In  addition  Clean Diesel
acquired  11  foreign granted patents and 2 US and 8 foreign patent applications
from  Mitsui.    Clean  Diesel  Technologies  now  has  a total of 26 US patents
granted and 106 foreign patents. There are currently 17 US and 65 foreign patent
applications  pending.  The patents expire in various years through 2025.  These
patents  and  patent  applications  cover  the  means  of  controlling  the four
principal  emissions  from  diesel  engines  (NOx,  particulates,  CO,  and HC).

ITEM 3.   LEGAL  PROCEEDINGS

          Clean  Diesel  Technologies  is not involved in any legal proceedings.

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

          There  were  no submissions of matter to a vote of security holders in
     the  fourth  quarter  of  2005.

PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER  PURCHASES  OF  EQUITY  SECURITIES

COMMON  STOCK

     Clean  Diesel  Technologies'  Common  Stock  is  traded  in  the  US on the
over-the-counter  (OTC)  market,  on  the  London  Stock  Exchange  through  the
Alternative  Investment  Market  (AIM)  and  in  Germany  on the Frankfurt stock
exchange.  Reports  of  transactions  of  Clean  Diesel Technologies' shares are
available on the OTC Electronic Bulletin Board (Symbol CDTI), on the AIM (Symbol
CDT  and CDTS) and on the Frankfurt exchange (Symbol CDI).  At December 29, 2005
there  were  369  registered holders and approximately 750 beneficial holders of
Common  Stock.


                                       13
<PAGE>
     No  dividends  have  been  paid  on  CDT's  Common  Stock  and Clean Diesel
Technologies does not intend to pay dividends on these shares in the foreseeable
future.  Prices  indicated  below  with  respect to the Clean Diesel share price
include  inter-dealer  prices  , without retail mark up, mark down or commission
and  may  not  necessarily  represent  actual  transactions.

<TABLE>
<CAPTION>
                                      OTC              LONDON STOCK EXCHANGE
                                 BULLETIN BOARD                 AIM
                                   (IN US$)                   (IN GBP)
     STOCK PRICE DATE:          HIGH      LOW            HIGH         LOW
     -----------------        -------  --------       -----------  ---------
<S>                           <C>      <C>            <C>          <C>
     1st Quarter  2004. . .      3.38      2.80              1.90       1.35
     2nd Quarter  2004. . .      2.90      2.00              1.45       1.18
     3rd Quarter  2004. . .      3.19      2.00              1.30       0.86
     4th Quarter  2004. . .      3.60      1.50              1.40       0.90

     1st Quarter  2005. . .      1.90      1.15              0.90       0.48
     2nd Quarter  2005. . .      2.30      1.01              0.97       0.33
     3rd Quarter  2005. . .      1.95      1.20              0.92       0.50
     4th Quarter  2005. . .      1.80      1.00              0.55       0.41
</TABLE>

SALES  AND  USES  OF  UNREGISTERED  SECURITIES  DURING  THE  PERIOD

     Pursuant to a Regulation S exemption for offshore placements and Regulation
D  exemption  for  private placements to U.S. accredited investors, Clean Diesel
Technologies  sold, effective November 4, 2005, 8.2 million of its Common Stock.
The  price  of the Common Stock was 0.40 sterling (GBP) per share (approximately
$.70  per  share).   The proceeds of the Common Stock issuance, $5.5 million net
of  $232,000  in  expenses,  will  be used for the general corporate purposes of
Clean  Diesel  Technologies.

     Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective October 8, 2004, 426,500 shares of its
Common  Stock.  The price of the Common Stock was 1.025 sterling (GBP) per share
(approximately  $1.83  per  share).   The proceeds of the Common Stock issuance,
$754,000,  net  of  $25,000  in  expenses  and  including  $135,400 of exchanged
deferred salary for the retired CEO, was used for the general corporate purposes
of  Clean  Diesel  Technologies.

     Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean  Diesel  Technologies sold, effective September 28, 2004, 1,000,000 shares
of  its Common Stock. The price of the Common Stock was 1.025 sterling (GBP) per
share  (approximately  $1.83  per  share).   The  proceeds  of  the Common Stock
issuance,  $1.789  million, net of $65,000 in expenses, was used for the general
corporate  purposes  of  Clean  Diesel  Technologies.

ITEM 6.  SELECTED  FINANCIAL  DATA

     Clean Diesel Technologies was incorporated on January 19, 1994, as a wholly
owned subsidiary of Fuel Tech.  Effective December 12, 1995, Fuel Tech completed
a  Rights  Offering  of  CDT's  common  stock,  with Fuel Tech retaining a 27.6%
ownership  interest in Clean Diesel Technologies. In 2005 and 2004, CDT obtained
$5.5  million  and  $2.5  million  of  proceeds,  respectively,  through private
placement  sales  of  its  common stock.  In addition in 2005 the Company had an
additional  $0.5  of  subscription  receivable  relating  to  the  2005  private
placement  which  was  received  by  the  company  in  2006.  As a result of the
additional  stock  transactions,  Fuel  Tech's  1,825,119 shares of CDT's common
stock  represent  approximately  a 7.0% interest in Clean Diesel Technologies at
December  31,  2005.

     As discussed elsewhere herein, prior to 2000, Clean Diesel Technologies was
a  development-stage business.  The following selected data are derived from the
financial  statements of CDT.    The data should be read in conjunction with the
financial  statements,  related  notes  and  other financial information herein.


                                       14
<PAGE>
<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                -----------------------------------------------
                                                 2005      2004      2003      2002      2001
                                               --------  --------  --------  --------  --------
     STATEMENTS OF OPERATIONS DATA                   (in thousands, except per share data)
<S>                                             <C>       <C>       <C>       <C>       <C>
     Additive  revenue                         $   411   $   299   $   212   $    40   $   114
     Hardware revenue                              349       369       161       102        62
     License and royalty revenue                    52        54       194       299     1,424
                                               ------------------  --------  --------  --------
     Total revenues                                812       722       567       441     1,600
     COSTS AND EXPENSES:
     Cost of revenue                               471       455       219        86       117
     General and administrative                  4,963     3,962     2,695     2,291     1,858
     Research and development                      439       506       855       693       365
     Patent amortization and other expense         170        90        58        43       196
                                               ------------------  --------  --------  --------

     Loss from operations                       (5,231)   (4,291)   (3,260)   (2,672)     (936)
     Foreign currency exchange gain(loss)         (221)      101        --        --        --
     Interest income/(expense), net                 26        47        15        30      (170)
                                               ------------------  --------  --------  --------
     Loss before preferred stock dividend       (5,426)   (4,143)   (3,245)   (2,642)   (1,106)

     Preferred stock dividend (non-cash)            --        --        --        --      (621)
     Preferred stock conversion premium             --        --        --        --    (1,276)
                                               ------------------  --------  --------  --------

     Net loss                                  $(5,426)  $(4,143)  $(3,245)  $(2,642)  $(3,003)
                                               ----------========  ========  ========  ========

     Basic and diluted loss per common share   $ (0.30)  $ (0.26)  $ (0.26)  $ (0.23)  $ (1.08)

     Weighted-average shares outstanding        18,389    16,071    12,721    11,419     2,777


                                                -----------------------------------------------
                                                 2005      2004      2003      2002      2001
                                               ------------------  --------  --------  --------
     BALANCE SHEET DATA                                          (in thousands)
     Current assets                            $ 5,505   $ 4,868   $ 7,023   $ 2,757   $ 4,612
     Total assets                                6,274     5,513     7,441     2,979     4,658
     Current liabilities                           496       391       868       223       808
     Long-term liabilities                           0         0         0       418       368
     Working capital                             5,009     4,477     6,155     2,534     3,804
     Stockholders' equity                        5,778     5,122     6,573     2,338     3,482
</TABLE>


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

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

RESULTS  OF  OPERATIONS
2005  VERSUS  2004

Revenues  and  cost of revenue were $812,000 and $471,000, respectively, in 2005
versus  $722,000  and  $455,000, respectively, in 2004.  The revenues consist of
the  following:


                                       15
<PAGE>
<TABLE>
<CAPTION>
     (in thousands)         2005    2004    2003
                           ------  ------  ------
<S>                        <C>     <C>     <C>
     REVENUE:
     Additive              $  411  $  299  $  212
     Hardware                 349     369     161
     License and royalty       52      54     194
                           ----------------------

     Total revenue         $  812  $  722  $  567
</TABLE>

     In  the  foregoing table "Additive" includes the Platinum Plus FBC products
and  concentrate; and "Hardware" includes the EPA verified Purifier System, ARIS
injectors  and  dosing  systems.  CDT  received EPA verification of its Purifier
System  (FBC  and  DOC)  in  October  2003,  and  a  second verification for its
catalyzed wire mesh filter system (FBC and CWMF) in June 2004. The Platinum Plus
FBC  is  registered  with  the  EPA.

     Additive  revenue  has  increased  as  a result of successful demonstration
programs  and  sales  of  the verified Purifier System which requires the use of
Platinum Plus FBC. Both further penetration of the European market and increased
sales  to  key beverage delivery and waste hauling customers relating to a grant
from  the  State  of  Pennsylvania,  increased  Clean Diesel's additive revenue.
Hardware  and  license  and  royalty  revenues  remained  relatively  constant.

CDT's  business  strategy  is to sell Platinum Plus FBC concentrate and finished
product to distributors, resellers and end users. The Company's ARIS strategy is
to license the ARIS 2000 NOx reduction system to other companies for an up-front
fee  for the technology and information transfer and a separate on-going royalty
per  unit  payment.  Clean  Diesel  is  also  selling  finished  ARIS systems to
potential ARIS licensees.   CDT currently has an exclusive license agreement for
both  stationary  and  mobile  ARIS  applications  with  DENOX  Inc.  of  Japan
(transferred  in 2005 from Mitsui Ltd.). CDT has a nonexclusive license for both
stationary  and  mobile  ARIS  applications in the United States with Combustion
Components  Associates  of Monroe, Connecticut.  CDT believes that the ARIS 2000
system  can  most  effectively  be  commercialized  through  licensing  several
companies  with  a related business in these markets.  Clean Diesel Technologies
is  actively  seeking  additional  ARIS licensees for both mobile and stationary
applications  in  the  US, Europe and Asia.  Clean Diesel acquired the rights to
proprietary technology for catalyzed wire mesh filters from Mitsui Ltd. in 2005.
Clean  Diesel  plans to license the rights to the catalyzed wire mesh technology
as  well  as  sell  finished  filters  for  use  with  the  Platinum  Plus  FBC.


General  and  administrative  expenses  increased  to  $4,963,000  in  2005 from
$3,962,000  in  2004  as  summarized  in  the  following  table:

<TABLE>
<CAPTION>
(in thousands)                               2005     2004     2003
                                           -------  -------  -------
<S>                                        <C>      <C>      <C>
Compensation and benefits                  $ 3,319  $ 2,535  $ 1,650
Occupancy                                      485      420      320
Professional                                   831      740      425
Other                                          328      267      300
                                           -------  -------  -------
Total general and administrative expense   $ 4,963  $ 3,962  $ 2,695
</TABLE>

     Compensation  and  benefit  expense  increased  as a result of increases in
management salaries and related expenses.   CDT hired a Chief Technology Officer
in  August  2005.  An  additional  director  was  added  to  the  Board in 2005.
Occupancy  increased in 2005 as a result of additional rent and related expenses
in both the US and Europe.   Professional fees including financial advisory fees
increased  in  2005  along  with  marketing  activities  in  Europe  and  Asia.

     Research  and  development  expenses  decreased  to  $439,000  in 2005 from
$506,000  in  2004.  The  decrease  in  research  and development related to the
transition  to  commercial  selling  efforts  in  2004  was  partially offset by
additional  costs  incurred  for  testing  required  by  the  EPA and additional
hardware  systems  testing.

     Patent  amortization  and  other costs increased to $170,000 in 2005 versus
$90,000 in 2004.  The 2005 increase is related to writing off of some patents in
2005,offset  by  additional  patent  applications  including  the acquisition of
additional  patents from the Mitsui Company of Japan  relating to catalyzed wire
mesh  filter  technology  and  the  higher  amortization related to prior years'
capitalized  costs.

     Interest  income  decreased  to $26,000 in 2005 from $47,000 in 2004 due to
the  lower  amount  of  invested  funds  prior  to the private placement funding
received  at  the  end  of  2005.


                                       16
<PAGE>
RESULTS  OF  OPERATIONS
2004  VERSUS  2003

Revenues  and  cost of revenue were $722,000 and $455,000, respectively, in 2004
versus  $567,000  and  $219,000, respectively, in 2003.  The revenues consist of
the  following:

<TABLE>
<CAPTION>
     (in thousands)         2004    2003    2002
                           ------  ------  ------
<S>                        <C>     <C>     <C>
     REVENUE:
     Additive              $  299  $  212  $   40
     Hardware                 369     161     102
     License & royalty         54     194     299
                           ----------------------

     Total revenue         $  722  $  567  $  441
</TABLE>

     In the foregoing table "Additive" includes the Platinum Plus FBC products
and concentrate; and "Hardware" includes the EPA verified Purifier System, ARIS
injectors and dosing systems.

     CDT  received  EPA  verification  of  its  Purifier System (FBC and DOC) in
October  2003,  and  a  second  verification  for its catalyzed wire mesh filter
system  (FBC  and CWMF) in June 2004.  Clean Diesel Technologies has applied for
verification for emission reduction by CARB for the CWMF/FBC system as well. The
Platinum  Plus  FBC  is  registered  with  the  EPA.

     Additive  revenue  has  increased  as  a result of successful demonstration
programs and sales of the verified Purifier System which requires the use of the
Platinum  Plus  FBC.  The  increase in hardware sales is primarily the result of
the EPA- sponsored State of Maine school bus retrofit program and increased ARIS
injector  sales  to  Mitsui.

     Clean  Diesel  Technologies  identified  a  market  opportunity  for  urea
selective  catalytic  reduction  (SCR)  systems  for  use with stationary diesel
engines  primarily  for power generation.  The ARIS  is a single-fluid injection
and  metering  system  complete  with  an  electronic  control  unit that can be
integrated  with  engine  electronic  and  diagnostic  systems.  CDT's  business
strategy  is  to license the ARIS NOx reduction system to other companies for an
up-front  fee for the technology and information transfer and a separate ongoing
royalty  per unit payment.  CDT currently has an exclusive license agreement for
both stationary and mobile ARIS applications with Mitsui Ltd. for Japan. CDT has
a  nonexclusive  license for both stationary and mobile ARIS applications in the
United  States with Combustion Components Associates of Monroe, Connecticut. CDT
previously  had  an ARIS stationary license agreement for North America with the
RJM  Corporation  of  Norwalk, Connecticut, but as of August 2004 RJM was out of
business  and the ARIS license reverted back to CDT.  CDT believes that the ARIS
2000  system  can  most  effectively be commercialized through licensing several
companies  with  a related business in these markets.  Clean Diesel Technologies
is  actively  seeking  additional  ARIS licensees for both mobile and stationary
applications  in  the  US,  Europe  and  Asia.

     General  and  administrative  expenses increased to $3,962,000 in 2004 from
$2,695,000  in  2003  as  summarized  in  the  following  table:

<TABLE>
<CAPTION>
(in thousands)                                2004     2003     2002
                                            -------  -------  -------
<S>                                         <C>      <C>      <C>
Compensation and benefits                   $ 2,535  $ 1,650  $ 1,335
Occupancy                                       420      320      265
Professional                                    740      425      325
Other                                           267      300      366
                                            -------  -------  -------
Total general and administrative expenses   $ 3,962  $ 2,695  $ 2,291
</TABLE>

     Compensation  and  benefit  expense  increased  as of the result of several
staff  additions  in  the US and Europe related to increased sales and marketing
efforts  and  a new CEO. Occupancy increased in 2004 as a result of the European
activity.  Professional  fees  also increased primarily due to the SEC secondary
registration process and fund-raising, which was terminated in the fall of 2004.

     Research  and  development  expenses  decreased  to  $506,000  in 2004 from
$855,000 in 2003. The decrease in research and development in 2004 is due to the
2003 verification testing relating to CARB and EPA testing and the transition to
commercial  selling  efforts  in  2004.

     Patent  amortization  and  other  costs increased to $90,000 in 2004 versus
$58,000  in  2003.  The  2004 increase is related to writing off some patents in
2004  and  the  higher  amortization  related to prior years' capitalized costs.


                                       17
<PAGE>
     Interest  income  increased  to $47,000 in 2004 from $15,000 in 2003 due to
the  higher  amount of invested funds related to the November 2003 fund-raising.

LIQUIDITY AND SOURCES OF CAPITAL

     Prior  to 2000, Clean Diesel Technologies was primarily engaged in research
and  development and has incurred losses since inception aggregating $34,841,000
(excluding  the  effect of the preferred stock dividends).  CDT expects to incur
losses  through  the  foreseeable  future  as  it  further  pursues  its
commercialization efforts.  Although CDT has begun selling limited quantities of
Platinum  Plus  additive  and Purifier Systems and generating ARIS licensing and
royalties,  revenue  to  date has been insufficient to cover operating expenses,
and  Clean Diesel Technologies continues to be dependent upon sources other than
operations  to  finance  its  working  capital  requirements.

     For  the  years  ended  2005, 2004 and 2003, Clean Diesel Technologies used
cash  of  $4,956,000,  $4,312,000,  and  $2,744,000,  respectively, in operating
activities.

     At  December 31, 2005, and December 31, 2004, Clean Diesel Technologies had
cash  and  cash  equivalents  of  $4,513,000  and  $4,265,000, respectively. The
increase in cash and cash equivalents in 2005 from 2004 was due to the timing of
Clean  Diesel's fundraising. Working capital increased to $4,521,000 at December
31,  2005,  from  $4,477,000  at  December  31,  2004. CDT anticipates incurring
additional  losses  through  at  least  2006  as  it  further  pursues  its
commercialization efforts. At the date of this report, Clean Diesel Technologies
has  cash  resources  estimated  to  be  sufficient for its needs into the first
quarter  of  2007.

     In  November  2005, Clean Diesel Technologies received $5.5 million (net of
$232,000 in expenses) through a private placement of 8.174 million shares of its
common  stock  on  AIM.

     In  October  2004,  Clean  Diesel  Technologies  received  $754,000 (net of
$25,000 in expenses) through a private placement of 426,500 shares of its common
stock  on  AIM.  As  part  of  the  transaction, retired CEO Jeremy Peter-Hoblyn
exchanged his deferred salary of $135,400 for 73,587 shares of CDT common stock.

     In  September  2004, Clean Diesel Technologies received $1.789 million (net
of  $65,000  in expenses) through a private placement of 1,000,000 shares of its
common  stock  on  AIM.

     In December 2003, Clean Diesel Technologies received $3.583 million (net of
$170,000  in  expenses)  through  a private placement of 1,282,600 shares of its
common  stock  on  AIM.

     In  September  2003, Clean Diesel Technologies received $3.866 million (net
of  $39,000  in expenses) through a private placement of 2,395,597 shares of its
common  stock  on  AIM.

     In  October 2002, Clean Diesel Technologies received $1.356 million (net of
$69,000 in expenses) through a private placement of 704,349 shares of its common
stock  on  AIM.

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

       In April 2003, Clean Diesel Technologies completed a nonexclusive license
agreement  with  Combustion  Component  Associates  Inc.  (CCA)  of  Monroe,
Connecticut,  for  the  mobile  ARIS  technology  in the US.  Under terms of the
agreement  CCA  agreed  to  pay  CDT  a  nonrefundable  $150,000 license fee and
committed  to  spend  an  additional  $100,000  in  developing,  testing  and
demonstrating  ARIS  mobile  prototypes.  CDT  recognized  the  $150,000 license
revenue in the second quarter of 2003, as there are no ongoing services required
to  be  performed  by  CDT.

     In  September  2004,  CCA  was  granted  an  additional  limited  two-year
nonexclusive  ARIS stationary license for the US market.  The license fee is due
at  the  end  of  a  two-year  trial  period.  Similar to the other ARIS license
agreements  for  stationary  applications,  a  per unit royalty of approximately
$1,500  (based  on  percentage of sales price) is due for each system.   CDT did
not  receive  any  revenue  from  this  license  in  2004  or  2005.

     In  December  2002,  Clean  Diesel  Technologies  completed  an  additional
exclusive  license  agreement  with  Mitsui  for  the mobile ARIS technology for
Japan.  Under terms of the agreement Mitsui agreed to pay CDT a $250,000 license
fee


                                       18
<PAGE>
and  Mitsui committed to spend an additional $200,000 in developing, testing and
demonstrating  ARIS  mobile  prototypes.  CDT recognized the $250,000 of license
revenue  in  the  fourth  quarter  of  2002.

     In  August  2001,  Clean  Diesel Technologies completed a license agreement
with  Mitsui  for  CDT's  ARIS 2000 NOx control system for all stationary diesel
power  generators  in  Japan.  Under  the  agreement, CDT received nonrefundable
up-front  license  payments  of  $495,000  and  will  receive  ongoing  standard
royalties of $1,500 to $2,500 on each system sold by Mitsui.  Mitsui also had an
option  to  license  the ARIS technology for mobile applications in Japan for an
additional  license  fee.

<TABLE>
<CAPTION>
                   FUTURE  CONTRACTUAL  OBLIGATIONS
                           Less than    1 to 3   4 to 5   Over 5
(in thousands)     Total     1 year     years    years    years
                   ------  ----------  -------  -------  -------
<S>                <C>     <C>         <C>      <C>      <C>

Operating Leases   $  525  $      179  $   346  $    --  $    --
                   ------  ----------  -------  -------  -------

Total              $  525  $      179  $   346  $    --  $    --
</TABLE>

     The  operating lease consists of a five-year lease for administrative space
in  Stamford,  Connecticut,  a  four-year  lease for warehouse space in Milford,
Connecticut,  and  a  27-month  office  lease  in  Whyteleafe,  England.

CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

     Clean  Diesel  Technologies  generates  revenue  from  the sale of additive
including  the  Platinum Plus FBC products and concentrate; "hardware" including
the EPA verified Purifier System, ARIS injectors and dosing systems; and license
and  royalty  fees  from  the  ARIS  2000  system.

     Clean  Diesel  Technologies'  shipping terms are FOB shipping point and CDT
recognizes  revenue  when its products are received unless the purchase order or
contract  specifically requires the Company to provide installation for hardware
purchases.  For  hardware  projects  where  CDT  is responsible for installation
either  directly  or  indirectly (third-party contractor), revenue is recognized
when  the  hardware  is  installed  and/or  accepted  if  the  project  requires
inspection/acceptance.

     The  Company  sells  to  end-user  fleets,  municipalities and construction
companies  as  well  as  fuel  resellers,  additive  distribution  companies and
emission  reduction  companies.

     License  revenue  is recognized when the license agreement is entered into,
the  license  period  commences, the technology rights, information and know-how
have  been  transferred  to  the  licensee  and  CDT  does  not have any ongoing
responsibilities  or  performance  requirements  and  collection  is  reasonably
assured.  Royalty  income  is  recognized  when  earned.

RESEARCH AND DEVELOPMENT COSTS

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

PATENT  EXPENSE

     CDT capitalizes all direct incremental costs associated with initial patent
filing  costs  and  amortizes the cost over the estimated remaining life of such
patent.  Patents are reviewed regularly and the remaining carrying amount of any
patents  deemed  not  commercial  or  cost  effective  are  written  off.

ITEM 7A.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK

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


                                       19
<PAGE>
     Clean  Diesel  Technologies generally receives most income in United States
dollars.  CDT  typically  makes  several  monthly  payments  in  various foreign
currencies  for salary expense, patent expenses, product tests and registration,
local  marketing  and  promotion, and consultants.  Clean Diesel also received a
portion  of  its  fundraising  proceeds in British Sterling, which is subject to
foreign  currency  fluctuations.

NEW ACCOUNTING PRONOUNCEMENTS

     FAS Statement 154, "Accounting Changes and Error Corrections" was issued in
May  2005  and  is effective for fiscal years beginning after December 15, 2005.
Unless  impracticable,  the  statement requires the retrospective application of
changes  in  accounting  principle to prior periods' financial statements versus
recognizing  the effect in net income of the period of change.  The Company does
not  expect the statement to have a material impact on its financial statements.


                                       20
<PAGE>
ITEM 8.  FINANCIAL  STATEMENTS  AND  SUPPLEMENTARY  DATA


REPORT  OF  INDEPENDENT  REGISTERED  PUBLIC  ACCOUNTING  FIRM

Board  of  Directors  and  Stockholders
Clean  Diesel  Technologies,  Inc.

We  have  audited  the accompanying balance sheets of Clean Diesel Technologies,
Inc.  as of December 31, 2005 and 2004 and the related statements of operations,
changes  in  stockholders'  equity and cash flows for each of the three years in
the  period  ended  December  31,  2005.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on  these  financial  statements  based  on  our  audits.

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

In  our  opinion,  the financial statements referred to above present fairly, in
all material respects, the financial position of Clean Diesel Technologies, Inc.
as  of December 31, 2005 and 2004 and the results of its operations and its cash
flows  for  each  of  the  three  years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.


Eisner  LLP

New  York,  New  York
February 15, 2006, except for Note 4 as to which the date is March 3, 2006


                                       21
<PAGE>
<TABLE>
<CAPTION>
CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEETS                                                        (IN THOUSANDS, EXCEPT SHARE DATA)

                                                                         ---------            ---------
                                                                           2005                 2004
                                                                         ---------            ---------
<S>                                                                      <C>                  <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                                $  4,513             $  4,265
Accounts receivable, net of allowance of $11 and $12 in 2005 and
  2004,  respectively                                                         125                  145
Inventories                                                                   285                  387
Other current assets                                                           94                   71
Subscription receivable, net                                                  488                   --
                                                                         ---------            ---------
TOTAL CURRENT ASSETS                                                        5,505                4,868
Patents, net                                                                  567                  418
Fixed assets, net of accumulated depreciation of $259 in 2005 and
    $188 in 2004, respectively                                                175                  200
Other assets                                                                   27                   27
                                                                         ---------            ---------
TOTAL ASSETS                                                             $  6,274             $  5,513
                                                                         =========            =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenue                                                         $      9             $     --
Accounts payable and accrued expenses                                         487                  391
                                                                         ---------            ---------
    TOTAL CURRENT LIABILITIES                                                 496                  391

Commitments (Note 6)

STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.05 per share,
  authorized 100,000, no shares issued and outstanding                                              --
Common stock, par value $0.05 per share, authorized
  30,000,000 shares, issued and outstanding 25,369,358
  and 17,165,868 shares, respectively                                       1,268                  858
Common stock, par value $0.05 per share, subscribed and to be
issued; 705,113 shares in 2005                                                 35
Additional paid-in capital                                                 44,068               38,431
Accumulated deficit                                                       (39,593)             (34,167)
                                                                         ---------            ---------
TOTAL STOCKHOLDERS' EQUITY                                                  5,778                5,122
                                                                         ---------            ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $  6,274             $  5,513
                                                                         =========           ==========
<FN>
See accompanying notes.
</TABLE>


                                       22
<PAGE>
<TABLE>
<CAPTION>
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS                           (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                    FOR THE YEAR ENDED DECEMBER 31,
                                            --------------------------------------------
Revenue:                                       2005             2004             2003
                                            ----------       ----------       ----------
<S>                                         <C>              <C>              <C>
    Additive revenue                        $     411        $     299        $     212
    Hardware revenue                              349              369              161
    License and royalty revenue                    52               54              194
                                            ----------       ----------       ----------
Total revenue                                     812              722              567

Costs and expenses:
    Cost of revenue                               471              455              219
    General and administrative                  4,963            3,962            2,695
    Research and development                      439              506              855
    Patent amortization and other expense         170               90               58
                                            ----------       ----------       ----------

Loss from operations                           (5,231)          (4,291)          (3,260)
Other income (expense)
    Foreign currency exchange gain (loss)        (221)             101               --
    Interest income                                26               47               15
                                            ----------       ----------       ----------

Net loss                                    $  (5,426)       $  (4,143)       $  (3,245)
                                            ==========       ==========       ==========

BASIC AND DILUTED LOSS PER COMMON SHARE     $   (0.30)       $   (0.26)       $   (0.26)
                                            ==========       ==========       ==========

WEIGHTED-AVERAGE NUMBER OF COMMON
      SHARES OUTSTANDING                       18,389           16,071           12,721
                                            ==========       ==========       ==========
<FN>
See accompanying notes.
</TABLE>


                                       23
<PAGE>
<TABLE>
<CAPTION>
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                                                        (IN THOUSANDS)

                                                       Common Stock
                                  Common Stock         To be Issued      Additional                     Total
                               -------------------  -------------------    Paid-in    Accumulated    Stockholders'
                                Shares    Amount     Shares    Amount      Capital      Deficit         Equity
                               --------  ---------  --------  ---------  ----------  -------------  ---------------
<S>                            <C>       <C>        <C>       <C>        <C>         <C>            <C>
Balance at December 31, 2002     11,968  $     598        --         --  $  28,519   $   ( 26,779)  $        2,338
Net loss for year                    --         --                              --         (3,245)          (3,245)
Exercise of warrants                 17          1                              (1)            --               --
Issuance of common stock          3,679        184                           7,265             --            7,449
Payment of directors' fees in
  common stock                       13          1                              26             --               27
Exercise of warrants                  2         --                               4             --                4
                               --------  ---------  --------  ---------  ----------  -------------  ---------------

Balance at December 31, 2003     15,679  $     784        --         --  $  35,813   $   ( 30,024)  $        6,573

Net loss for year                    --         --                              --         (4,143)          (4,143)
Options exercised                    34          2                              87             --               89
Issuance of common stock          1,427         71                           2,472             --            2,543
Payment of directors' fees in        26          1                              56                              57
  common stock                                                                                 --
Broker fee credit from 2003                                                      3                               3
                               --------  ---------  --------  ---------  ----------  -------------  ---------------

Balance at December 31, 2004     17,166  $     858        --         --  $  38,431   $   ( 34,167)  $        5,122

NET LOSS FOR YEAR                                                                          (5,426)          (5,426)
OPTIONS EXERCISED                     2         --                               2             --                2
ISSUANCE OF COMMON STOCK          8,174        409                           5,113             --            5,522
COMMON STOCK SUBSCRIBED AND
TO BE ISSUED                                             705         35        453                             488
                               --------  ---------  --------  ---------  ----------  -------------  ---------------
PAYMENT OF DIRECTORS' FEES IN        27          1                              69             --               70
  COMMON STOCK
                               --------  ---------  --------  ---------  ----------  -------------  ---------------

BALANCE AT DECEMBER 31, 2005     25,369  $   1,268       705  $      35  $  44,068   $    (39,593)  $        5,778
                               ========  =========  ========  =========  ==========  =============  ===============
<FN>
See accompanying notes.
</TABLE>


                                       24
<PAGE>
<TABLE>
<CAPTION>
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOW                                                                         (IN THOUSANDS)
                                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                                         -------------------------------------
                                                                            2005         2004         2003
                                                                         -----------  -----------  -----------
<S>                                                                      <C>          <C>          <C>
OPERATING ACTIVITIES
Net loss                                                                 $   (5,426)  $   (4,143)  $   (3,245)
Adjustments to reconcile net loss to cash used in operating activities:
  Depreciation and amortization                                                 163          132           81
  Write-off of inventory and patents and bad debt                                89           19           --
  Non-cash compensation expense for stock options                                --           88           --
Changes in operating assets and liabilities:
  Accounts receivable                                                             7          (40)         169
  Inventories                                                                    59          (76)          (6)
  Other current assets and security deposits                                    (23)          (7)           3
  Deferred compensation and pension benefits                                     --         (306)          --
  Accounts payable and accrued expenses                                         175           21          254
                                                                         -----------  -----------  -----------

Net cash used in operating activities                                        (4,956)      (4,312)      (2,744)
                                                                         -----------  -----------  -----------

INVESTING ACTIVITIES
Patent costs                                                                   (235)        (186)        (192)
Purchase of fixed assets                                                        (85)        (164)         (85)
                                                                         -----------  -----------  -----------
Net cash used in investing activities                                          (320)        (350)        (277)
                                                                         -----------  -----------  -----------

FINANCING ACTIVITIES
Proceeds from exercise of stock options                                           2            1            4
Proceeds from broker fee credit                                                  --            3           --
Proceeds from issuance of common stock, net                                   5,522        2,408        7,449
                                                                         -----------  -----------  -----------

Net cash provided by financing activities                                     5,524        2,412        7,453
                                                                         -----------  -----------  -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            248       (2,250)       4,432
Cash and cash equivalents at beginning of the year                            4,265        6,515        2,083
                                                                         -----------  -----------  -----------

CASH AND CASH EQUIVALENTS AT END OF THE YEAR                             $    4,513   $    4,265   $    6,515
                                                                         ===========  ===========  ===========

NON-CASH FINANCING ACTIVITIES

Payment of accrued directors' fees in common stock                       $       70   $       57   $       28
Stock issued as payment for deferred compensation                                            135           --
Common stock subscribed                                                         488           --           --
<FN>
See accompanying notes.
</TABLE>


                                       25
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

1.   BUSINESS  AND  BASIS  OF  PRESENTATION

     Clean  Diesel  Technologies,  Inc.  ("CDT" or "Clean Diesel" or "Company"),
located  in  Stamford  Connecticut  was incorporated in the State of Delaware on
January  19,  1994.  Clean  Diesel is a specialty chemical and energy technology
company  supplying  fuel  additives  and  proprietary  systems to reduce harmful
emissions  from  internal  combustion engines while improving fuel economy. Over
the past several years the Company has filed patents, developed its technologies
and  is  now  commercializing  Platinum  Plus,  a fuel borne catalyst (FBC); the
Purifier  System,  which  includes  the  FBC  combined with a traditional diesel
oxidation  catalyst;  the  FBC/catalyzed wire mesh filter (CWMF) system; and the
ARIS  NOx  reduction  system  through  a direct sales and licensing distribution
strategy.  CDT  is  developing  a  network  of licensed distributors to sell and
market  its patented Platinum Plus FBC, EPA verified Purifier System and the EPA
verified  FBC/CWMF  system.  CDT  continues to market and sell the FBC, Purifier
and  CWMF  systems  to  key  corporate  fleets  to  generate  demand  for  its
technologies.  CDT's  strategy  for the ARIS NOx reduction system is to continue
licensing the patented technology to engineering and automotive companies for an
up-front  license  fee and an ongoing royalty. The success of CDT's technologies
will  depend  upon  the  commercialization  opportunities  of  the technologies,
governmental  regulations,  and corresponding foreign and state agencies.  CDT's
raw  materials  are  maintained  offsite  and  the  majority of its blending and
manufacturing  is  performed  by  third  parties.

During  2005,  2004  and  2003, the Company incurred net losses of approximately
$5.4  million,  $4.1 million and $3.2 million, respectively, and at December 31,
2005,  has an accumulated deficit of approximately $40 million. In addition, net
cash  used  in  operating  activities  for the year ended December 31, 2005, was
approximately  $5  million.  Commencing in 2006, the Company initiated a plan to
reduce  administrative  overhead,  primarily  through  the  reduction  of  cash
compensation  to  certain  employees and the elimination of several consultants.
In  addition  the  Company completed a private placement of its common stock and
raised  net  proceeds  of  approximately  $6.0 million of which $5.5 million was
received  in  the  fourth  quarter  of 2005 and $0.5 million was received in the
first  quarter of 2006.  Based on a forecast of 2006 cash flows and factoring in
cash  on  hand  at December 31, 2005, of $4.5 million and the Company's plans as
described  above,  management  believes  that  the  company will have sufficient
working  capital  to  fund  its  operations  in  2006.

2.   SIGNIFICANT  ACCOUNTING  POLICIES

USE OF ESTIMATES

     The  preparation  of the financial statements in conformity with accounting
principles  generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets  and  liabilities and disclosures of contingent assets and liabilities at
the  date  of  the  financial statements and the reported amounts of revenue and
expenses  during  the period.  Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS

     Clean  Diesel  Technologies  considers  all  highly liquid investments with
original  maturities  of  three  months  or  less  when  purchased  to  be  cash
equivalents.  At  December  31,  2005,  substantially all of CDT's cash and cash
equivalents  were  on  deposit  with  two financial institutions.  All financial
instruments  are  reflected  in  the accompanying balance sheets at amounts that
approximate  fair  market  value.

FOREIGN CURRENCY

     The US dollar is considered the functional currency for CDT.  CDT maintains
a  UK  bank  account  for  its  UK  representative  office.  Foreign  currency
translation  gains  or  losses  are  recognized in the period incurred, which is
included in other income/(expense) in the accompanying statements of operations.
CDT  recorded a foreign currency loss of $221,000 on its UK bank holding in 2005
versus  a  gain  of  $101,000  in  2004.

INVENTORIES

     Inventories  are  stated  at the lower of cost or market and consist of the
following:

<TABLE>
<CAPTION>
    (in thousands)                2005   2004
                                 -----  -----
<S>                              <C>    <C>
    Finished Platinum Plus FBC   $  59  $ 142
    Platinum concentrate/metal     119    150
    Hardware (ARIS and Purifier)    55     77
    Other                           52     18
                                 -----  -----
    Total inventory              $ 285  $ 387
</TABLE>


                                       26
<PAGE>
CLEAN  DIESEL  TECHNOLOGIES,  INC.
NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)

REVENUE RECOGNITION

     Clean  Diesel  generates  revenue  from the sale of additives including the
Platinum  Plus FBC products and concentrate; hardware including the EPA verified
Purifier System, ARIS injectors and dosing systems; and license and royalty fees
from  the  ARIS  System.

     CDT  shipping  terms are FOB shipping point, but revenue is recognized when
its  products  are  received  and  collections are reasonably assured unless the
purchase order or contract specifically requires CDT to provide installation for
hardware  purchases.  For  hardware  projects  where  CDT  is  responsible  for
installation  either directly or indirectly (third-party contractor), revenue is
recognized  when  the  hardware  is  installed  and/or  accepted  if the project
requires  inspection/acceptance.

     For  2005,  a  single customer accounted for 24% of Clean Diesel's revenue.
For 2004, a different customer accounted for 35% of Clean Diesel's revenue.  For
2003, two customers, including the 2004 key customer, accounted for 59% of Clean
Diesel's  revenue.

     License  revenue  is recognized when the license agreement is entered into,
the  license  period  commences, the technology rights, information and know-how
have  been  transferred  to  the  licensee  and  CDT  does  not have any ongoing
responsibilities  or  performance  requirements  and  collection  is  reasonably
assured.  Royalty  income  is  recognized  when  earned.

     In  August  2001,  Clean Diesel Technologies completed an exclusive license
agreement  with Mitsui Ltd. for CDT's ARIS NOx control system for all stationary
diesel  power generators in Japan for the remaining life of the patents, through
2018.  Under  the  agreement,  CDT  received  a  nonrefundable  up-front license
payment  of  $495,000,  and  will  receive ongoing standard royalties of between
$1,500  and  $2,500  on  each  system sold by Mitsui. CDT recognized the license
payment  as  revenue in 2001, as there are no significant ongoing services to be
performed  by  CDT.

     In  December  2002,  Clean  Diesel  Technologies  completed  an  additional
exclusive license agreement with Mitsui for the mobile ARIS technology for Japan
for  the  remaining  life  of  the  patents,  through  2018.  Under terms of the
agreement  Mitsui  agreed to pay CDT a $250,000 license fee and Mitsui committed
to  spend  an  additional $200,000 in developing, testing and demonstrating ARIS
mobile  prototypes.  CDT  recognized  the $250,000 license revenue in the fourth
quarter  of  2002.

     In  May 2005, CDT and Mitsui Ltd. mutually agreed to transfer both Mitsui's
exclusive  ARIS mobile and stationary licenses to DENOX Inc. of Japan.  DENOX is
a  former  joint venture of Mitsui.  No additional license fees or payments were
involved  and  DENOX  agreed  to  the  same  per unit royalties and terms of the
original  license  agreement.

     In  April  2003, Clean Diesel Technologies completed a nonexclusive license
agreement  with  Combustion  Component  Associates  Inc.  (CCA)  of  Monroe,
Connecticut,  for the mobile ARIS technology in the US for the remaining life of
the  patents, through 2018.  Under terms of the agreement, CCA agreed to pay CDT
a  $150,000  nonrefundable  license  fee  and the licensee committed to spend an
additional  $100,000  in  developing,  testing  and  demonstrating  ARIS  mobile
prototypes.  CDT will also receive ongoing royalty payments on a per unit basis.
CDT  recognized  the  $150,000 license revenue in the second quarter of 2003, as
there  are  no  significant  ongoing  services  required to be performed by CDT.

     In  September  2004,  CCA  was granted a limited two-year nonexclusive ARIS
stationary license for the US market.  The license fee of $150,000 is due by the
end  of  a  two-year trial period.  Similar to the other ARIS license agreements
for  stationary  applications, a per unit royalty of approximately $1,500 (based
on  percentage  of  sales  price) is due for each ARIS system sold.  CDT did not
recognize  any  revenue  from  this  license  in  2004  and  2005.

GEOGRAPHIC INFORMATION

     CDT  sells  its  Platinum  Plus  additives  and  licenses  its ARIS systems
throughout  the  world.  A  geographic  breakdown  of  revenue  consists  of the
following:


                                       27
<PAGE>
<TABLE>
<CAPTION>
CLEAN  DIESEL  TECHNOLOGIES,  INC.
NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)

     (in thousands)   2005    2004    2003
                     ------  ------  ------
<S>                  <C>     <C>     <C>
     REVENUE:
     US              $  675  $  468  $  364
     UK/Europe           48       2       9
     Asia                89     252     194
                     ------  ------  ------
     Total revenue   $  812  $  722  $  567
</TABLE>

     Patents held by Clean Diesel consist of capitalized patent costs net of
accumulated amortization and are as follows:

<TABLE>
<CAPTION>
     (in thousands)          2005   2004
                            -----  -----
<S>                         <C>    <C>
     US patents, net        $ 138  $  79
     Foreign patents, net     429    339
                            -----  -----
     Total patents, net     $ 567  $ 418
</TABLE>

PATENT  EXPENSE

     CDT capitalizes all direct incremental costs associated with initial patent
filing  costs  and  amortizes the cost over the estimated remaining life of such
patent.  Patents  are reviewed regularly and the remaining carrying value of any
patents deemed not commercial or cost effective are written off.  The expiration
dates  of CDT's patents, in numerous countries throughout the world, ranges from
2006  to  2025.

RESEARCH AND DEVELOPMENT COSTS

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

GENERAL AND ADMINISTRATIVE EXPENSE

     General  and  administrative  expense  is  summarized  as  the  following:

<TABLE>
<CAPTION>
(in  thousands)                             2005    2004    2003
                                           ------  ------  ------
<S>                                        <C>     <C>     <C>
Compensation and benefits                  $3,319  $2,535  $1,650
Occupancy                                     485     420     320
Professional                                  831     740     425
Other                                         328     267     300
                                           ------  ------  ------
Total general and administrative expense   $4,963  $3,962   2,695
</TABLE>

STOCK-BASED COMPENSATION

     Clean  Diesel  Technologies  accounts  for  employee/director  stock option
grants  in  accordance  with  Accounting  Principles Board (APB) Opinion No. 25,
"Accounting  for  Stock  Issued  to Employees," and its related interpretations.
Under  CDT's  current  plan,  options  may  be granted at not less than the fair
market  value  on  the  date  of  grant and therefore no compensation expense is
recognized  for  the  stock  options  granted  to  employees.

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

<TABLE>
<CAPTION>
                                                                     2005      2004      2003
                                                                   --------  --------  --------
<S>                                                                <C>       <C>       <C>
     Net loss attributable to common stockholders as reported      $(5,426)  $(4,143)  $(3,245)
     Add: Stock-based compensation expense included in reported
         net loss, net of related tax effects                           --        88        --
     Deduct: Total stock-based employee compensation expense
         determined under fair value-based method for all awards,
         net of related tax effects                                   (875)     (826)   (1,176)
                                                                   ----------------------------
     Pro forma net loss attributable to common stockholders        $(6,301)  $(4,881)  $(4,421)
     Net loss per share attributable to common stockholders:
     Basic and diluted net loss per common share-as reported       $ (0.30)  $ (0.26)  $ (0.26)
     Basic and diluted per common share-pro forma                  $ (0.34)  $ (0.30)  $ (0.35)
</TABLE>


                                       28
<PAGE>
CLEAN  DIESEL  TECHNOLOGIES,  INC.
NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)

     In  December  2004,  the  FASB  issued SFAS No 123R, "Share-Based Payment,"
which  requires  all  share-based  payments  to  employees,  including grants of
employee stock options, to be recognized in the income statement as an operating
expense,  based on their fair values on the grant date.  Pro forma disclosure is
no  longer an alternative.  That cost will be recognized as compensation expense
over  the  service  period,  which  would normally be the vesting period  of the
options. The effective date of SFAS No. 123R for the Company is January 1, 2006.
As  permitted  by  SFAS  No. 123, the Company currently accounts for share-based
payments to employees using APB Opinion  No. 25's intrinsic value method and, as
such,  recognizes no compensation cost for employee stock options unless options
granted  have  an  exercise  price  below  market  value  on  the date of grant.
Accordingly,  the  adoption  of  SFAS  No. 123R's fair value method could have a
significant impact on the Company's results of operations, although it will have
no  impact  on the Company's overall financial position.  The impact of adoption
of  SFAS  No.  123R  cannot  be predicted at this time because it will depend on
various  factors including levels of share-based payments granted in the future.

     In  March  2005,  the  Board  of  Directors  elected to vest all employees'
outstanding,  unvested  2003 option grants and up to 25,000 unvested 2004 option
grants.  Since  the market price at the time of the vesting was below the option
grant  price, no additional expense was recognized on the Company's statement of
operations.  The  remaining  compensation  value  for the 363,000 of accelerated
unvested  option  grants  was  $498,000  and  is included in the pro forma table
above.  The  CDT  Board's  decision  to  accelerate  the vesting of these option
grants  was  in  response  to  the issuance by the FASB of SFAS No. 123R, "Share
Based  Payment."  As  a  result  of  this  measure,  CDT will not be required to
recognize  any  compensation  expense  in  future  periods associated with these
option  grants.

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

<TABLE>
<CAPTION>
                                      2005       2004       2003
                                   ---------  ---------  ---------
<S>                                <C>        <C>        <C>
        Expected dividend yield         0.0%       0.0%       0.0%
        Risk-free interest rate         4.2%       4.2%       4.1%
        Expected volatility           106.9%      99.4%      99.4%
        Expected life of option      4 YEARS    4 years    4 years
</TABLE>

     The weighted-average fair value per option granted was calculated as $0.86,
$1.39 and $2.10 in 2005, 2004 and 2003, respectively.

BASIC AND DILUTED LOSS PER COMMON SHARE

     Basic  and diluted loss per share is calculated in accordance with SFAS No.
128,  "Earnings  Per  Share".   Basic loss per share is computed by dividing net
loss  by  the  weighted-average  shares outstanding during the reporting period.
Diluted  loss  per  share is computed similar to basic earnings per share except
that the weighted-average shares outstanding are increased to include additional
shares  from  the  assumed  exercise  of stock options and warrants, if dilutive
using  the  treasury  stock  method.  CDT's  computation of diluted net loss per
share  for  2005,  2004  and  2003  does  not  include  common share equivalents
associated  with  3,246,000,  2,668,000 and 2,248,000 options, respectively, and
507,000,  532,000  and  557,000  warrants,  respectively, as the result would be
anti-dilutive.

3.   INCOME  TAXES

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

     At  December  31,  2005,  Clean  Diesel had tax losses available for offset
against  future  years'  taxable income of approximately $32.5 million, expiring
between  2009  and  2025.  Temporary  differences  were  insignificant as of the
balance  sheet dates.  CDT has provided a full valuation allowance to reduce the
related  deferred  tax  asset  to  zero  because  of the uncertainty relating to
realizing  these  tax  benefits  in  the  future.


                                       29
<PAGE>
CLEAN  DIESEL  TECHNOLOGIES,  INC.
NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)

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

4.   STOCKHOLDERS'  EQUITY

     During  2005,  Clean  Diesel  received  proceeds  of  $5.5  million (net of
expenses) through a private placement of approximately 8.2 million shares of its
common stock on the AIM of the London Stock Exchange.  In addition, Clean Diesel
received  subscriptions  for  an additional $487,500 (net of expense) related to
the  above  transaction for 0.7 million  shares of its common stock of which all
$487,500  had  been  received  by March 3, 2006.  In 2004, Clean Diesel received
cash  proceeds  of $2.4 million (net of expenses) through two private placements
totaling  approximately 1.4 million shares of its common stock on the AIM of the
London  Stock  Exchange.  In  2003,  proceeds  of $7.5 million (net of expenses)
through  two private placements totaling approximately 3.7 million shares of its
common  stock  on  the  AIM  of  the  London  Stock  Exchange  were  received.

     In  June  2005,  July  2004 and October 2003, CDT issued 27,179, 26,031 and
13,276  shares,  respectively, of common stock to its Board of Directors in lieu
of  approximately  $70,000, $56,500 and $27,500 of directors' fees pertaining to
their services for the years ended December 31, 2004, 2003 and 2002.   The share
price  used  represented  the  average of CDT's quarter-end high and low trading
prices.  Such  directors'  fees  had  been accrued and charged to expense during
2004,  2003  and  2002.

5.   STOCK  OPTIONS  AND  WARRANTS

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

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

<TABLE>
<CAPTION>
                                              2005                             2004                             2003
                                 ----------------------------------------------------------------  -------------------------------
                                   OPTIONS     WEIGHTED-AVERAGE     OPTIONS     WEIGHTED-AVERAGE     OPTIONS     WEIGHTED-AVERAGE
                                   (000'S)      EXERCISE PRICE      (000'S)      EXERCISE PRICE      (000'S)      EXERCISE PRICE
                                 ----------------------------------------------------------------  -------------------------------
<S>                              <C>           <C>                <C>           <C>                <C>           <C>
Outstanding, beginning
  of year                              2,668   $            2.39        2,248   $            2.45         1,567  $            2.60
Granted                                  674                1.17          469                1.97           681               2.12
Exercised                                 (2)               0.90          (49)               1.22            --                 --
Forfeited                                (94)               4.93           --                  --            --                 --
                                 ----------------------------------------------------------------  -------------------------------
Outstanding, end
  of year                              3,246   $            2.06        2,668   $            2.39         2,248  $            2.45
                                 ================================================================  ===============================
Exercisable, end
  of year                              2,835   $            2.19        2,197   $            2.47         1,711  $            2.49
Weighted-average fair value of
options granted during the year                $            0.86                $            1.39                $            2.10
</TABLE>


                                       30
<PAGE>
<TABLE>
<CAPTION>
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)

The following table summarizes information about stock options outstanding at
December 31, 2005:

                    OPTIONS OUTSTANDING                                    OPTIONS EXERCISABLE
=====================================================================  ============================
                               WEIGHTED-AVERAGE
   RANGE OF       NUMBER OF  REMAINING CONTRACTUAL  WEIGHTED-AVERAGE   NUMBER OF   WEIGHTED-AVERAGE
EXERCISE PRICES    OPTIONS       LIFE IN YEARS       EXERCISE PRICE     OPTIONS     EXERCISE PRICE
---------------------------------------------------------------------  ----------------------------
<S>               <C>        <C>                    <C>                <C>         <C>
$ .20 - $2.49     2,177,437           7.55                $1.54         1,766,435       $1.62
 2.50 -  4.63     1,063,500           5.42                 3.11         1,063,500        3.11
 5.63 -  6.82         5,000           0.42                 5.63             5,000        5.63
---------------------------------------------------------------------------------------------------
$0.20 - $6.82     3,245,937           6.84                $2.06         2,834,935       $2.19
</TABLE>

     In conjunction with the September 2003 stock offering, Clean Diesel granted
the  private placement investors 230,240 warrants (approximately one warrant for
each  10 shares of common stock purchased) at the same $1.63 price as the common
stock  issued.

     The following table presents a summary of Clean Diesel warrant activity and
related  information  for  the  years  ended  December  31:

<TABLE>
<CAPTION>
                                           Clean Diesel Warrants
                                 2005                        2004                        2003
                        --------------------------  --------------------------  --------------------------
                        Warrants   EXERCISE PRICE   Warrants   EXERCISE PRICE   Warrants   EXERCISE PRICE
                         (000'S)      PER SHARE      (000'S)      PER SHARE      (000'S)      PER SHARE
                        --------------------------  --------------------------  --------------------------
<S>                     <C>        <C>              <C>        <C>              <C>        <C>
Outstanding, beginning
  of year                    532   $1.50  - $10.00       557   $ 1.50 - $10.00       379   $ 1.50 - $10.00
Granted                        -                 -        --                --       230   $          1.63
Exercised                      -                 -        --                --       (19)  $   1.50 - 2.00
Forfeited or expired         (25)  $          3.00       (25)  $         10.00       (33)                -
                        ----------------------------------------------------------------------------------
Outstanding, end
  of year                    507   $  1.50 - $2.25       532   $ 1.50 - $10.00       557   $ 1.50 - $10.00
                        ==================================================================================
</TABLE>

<TABLE>
<CAPTION>
                WARRANTS  OUTSTANDING                                  WARRANTS EXERCISABLE
================================================================  ===============================
                             WEIGHTED-AVERAGE
RANGE OF          NUMBER OF  REMAINING YEARS   WEIGHTED-AVERAGE                  WEIGHTED-AVERAGE
EXERCISE PRICES   WARRANTS    EXERCISE LIFE     EXERCISE PRICE      EXERCISABLE      PRICE
----------------------------------------------------------------  ------------------------------
<S>               <C>        <C>               <C>                <C>            <C>
$1.50 - $2.00       466,908         5.58              $1.73          466,908          $1.73
     2.25            39,825         4.40               2.25           39,825           2.25
------------------------------------------------------------------------------------------
$1.50 - $2.25       506,733         5.49              $1.77          506,733          $1.77
</TABLE>

6.   COMMITMENTS

     Clean Diesel is obligated under a sublease agreement through March 2009 for
its  principal  office,  through  July 2008 for its Connecticut warehouse space,
and  through  September  2007  for  its  Surrey,  England, administrative space.
Annual  rent  including  utilities  is $125,000 for the US administrative space,
$21,000  for  the  warehouse  space and $33,000 for the UK administrative space.
For  the  years  ended  December  31,  2005,  2004  and  2003,  rental  expense
approximated  $162,000,  $128,000  and  $111,000,  respectively.

     Effective  October 28, 1994, Fuel Tech granted two licenses to Clean Diesel
for  all  patents  and  rights  associated  with  its  platinum  fuel  catalyst
technology.   Effective  November  24, 1997, the licenses were canceled and Fuel
Tech  assigned to CDT all such patents and rights on terms substantially similar
to  the  licenses.  In  exchange  for  the  assignment, CDT will pay Fuel Tech a
royalty  of  2.5%  of  its  annual gross revenue from sales of the platinum fuel
catalysts  commencing  in  1998. The royalty obligation expires in 2008. CDT may
terminate  the  royalty  obligation  to  Fuel Tech by payment of $3.3 million in
2006,  $2.2  million in 2007 or $1.1 million in 2008.  CDT as assignee and owner
will  maintain  the  technology  at its own expense. Royalties incurred in 2005,
2004  and  2003  amounted to $10,300 $7,450 and $4,800, respectively.  Royalties
payable  to  Fuel  Tech at December 31, 2005, 2004 and 2003 were $10,300, $7,450
and  $4,800,  respectively.

7.   RELATED  PARTY  TRANSACTIONS

     Clean  Diesel  has  a Management and Services Agreement with Fuel Tech. The
agreement  requires Clean Diesel to reimburse Fuel Tech for management, services
and  administrative  expenses incurred on behalf of Clean Diesel.   Clean Diesel
agreed  to  pay Fuel Tech a fee equal to an additional 3 to10% of the costs paid
on  Clean  Diesel's  behalf,  dependent


                                       31
<PAGE>
CLEAN  DIESEL  TECHNOLOGIES,  INC.
NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)

upon the nature of the costs incurred.  One Fuel Tech officer/director serves as
an  officer/director  of Clean Diesel.  The financial statements include charges
from Fuel Tech of certain management and administrative costs, which approximate
$71,000,  $69,000  and  $69,000  for the years ended December 31, 2005, 2004 and
2003,  respectively.

     Clean  Diesel  had  a  deferred salary plan with its former Chief Executive
Officer  in  which he deferred $62,500 of his annual salary until CDT reaches $5
million  in  revenue.  This  agreement  was  terminated  in  March  2001 and the
executive's  salary  was returned to full pay.  In October 2004 as part of Clean
Diesel's  private placement on the AIM exchange, the former CEO exchanged all of
his  outstanding  $135,400  of  deferred compensation for 73,587 shares of CDT's
common  stock.

     Clean  Diesel  made  annual  pension  payments  or  accruals  pursuant to a
deferred  compensation plan on behalf of its former Chief Executive Officer. The
former  CEO also agreed to defer payment of the deferred compensation plan until
the  Company  reached  $5 million in revenue or he retired. In June 2003 the CEO
elected  to  discontinue  his  deferred  compensation  plan.  For the year ended
December  31,  2003,  $22,900  of  expense was recognized in connection with the
plan.  In  September 2004, the CEO retired and in October 2004 the full $305,600
balance  was  paid.

8.   MARKETING  AND  JOINT  DEVELOPMENT  AGREEMENTS

     Clean  Diesel and AMBAC International reached an agreement in December 1997
under  which  the  parties  will jointly share in the cost of development of the
ARIS  injector  for  urea  SCR  (selective  catalytic  reduction).

CDT  holds  the  exclusive marketing rights to the injector for a period of five
years  subject  to certain minimum purchases of injectors from AMBAC. CDT agreed
to  purchase  injectors exclusively from AMBAC until November 3, 2002, or to pay
AMBAC  for  50%  of  AMBAC's  development  cost  and a royalty on injectors made
elsewhere  for  CDT.  No rights or licenses have been granted by either party to
the  other  on  patents or inventions conceived prior to the agreement. However,
the  parties  have  filed  a joint patent on the specific ARIS injector. CDT has
retained  all  rights  to  its  underlying  patents  including  the  fundamental
return-flow  injection  concept  on which the US Patent Office has granted CDT a
patent.

9.   RECENT  ACCOUNTING  PRONOUNCEMENTS

     FAS Statement 154, "Accounting Changes and Error Corrections" was issued in
May  2005  and  is effective for fiscal years beginning after December 15, 2005.
Unless  impracticable,  the  statement requires the retrospective application of
changes  in  accounting  principle to prior periods' financial statements versus
recognizing  the effect in net income of the period of change.  The Company does
not  expect the statement to have a material impact on its financial statements.

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

<TABLE>
<CAPTION>
                                                   1st Quarter      2nd Quarter      3rd Quarter      4th Quarter
                                                  Ended 3/31/05    Ended 6/30/05    Ended 9/30/05    Ended 12/31/05    Total Year
                                                    Unaudited        Unaudited        Unaudited        Unaudited          2005
                                                 ---------------------------------------------------------------------------------
<S>                                              <C>              <C>              <C>              <C>               <C>
TOTAL REVENUE                                    $          192   $          268   $          166   $           186   $       812
GROSS PROFIT *                                               82              107               64                88           341

NET LOSS ATTRIBUTABLE TO    COMMON STOCKHOLDERS          (1,191)          (1,286)          (1,489)           (1,460)       (5,426)

BASIC NET LOSS PER COMMON SHARE                           (0.07)           (0.07)           (0.09)            (0.07)        (0.30)

DILUTED NET LOSS PER COMMON SHARE                         (0.07)           (0.07)           (0.09)            (0.07)        (0.30)
</TABLE>


                                       32
<PAGE>
<TABLE>
<CAPTION>
                                                   1st Quarter      2nd Quarter      3rd Quarter      4th Quarter
                                                  Ended 3/31/04    Ended 6/30/04    Ended 9/30/04    Ended 12/31/04    Total Year
                                                    Unaudited        Unaudited        Unaudited        Unaudited          2004
                                                 ---------------------------------------------------------------------------------
<S>                                              <C>              <C>              <C>              <C>               <C>
Total revenue                                    $          194   $           93   $          241   $           194   $       722
Gross profit *                                               62               40               92                73           267
Net loss attributable to
common stockholders                                        (808)            (885)          (1,243)           (1,207)       (4,143)
Basic net loss per common share                           (0.05)           (0.06)           (0.08)            (0.07)        (0.26)
Diluted net loss per common share                         (0.05)           (0.06)           (0.08)            (0.07)        (0.26)
----------------------------------------------------------------------------------------------------------------------------------
<FN>
Note:  The sum of the quarters' earnings per share may not equal the full-year per share amounts.
* Gross profit is defined as total revenue less cost of revenue.
</TABLE>


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

     None.

ITEM 9A.  CONTROLS  AND  PROCEDURES

     As of the date of this filing, an evaluation was performed under the
supervision and with the participation of the Company's management, including
its CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures.  Based on that evaluation, the
Company's management, including its CEO and CFO concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2005.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
December 31, 2005.

ITEM 9B.  OTHER INFORMATION

     NONE

PART III

ITEM 10.  DIRECTORS  AND  EXECUTIVE  OFFICERS  OF  THE  REGISTRANT

     Information  regarding  directors and executive officers of CDT will be set
forth  under  the  captions  "Election  of  Directors", "Directors and Executive
Officers  of  Clean  Diesel Technologies" and "Committees of the Board" in CDT's
Proxy  Statement  related to the 2006 annual meeting of stockholders (the "Proxy
Statement")  and  is  incorporated  by  reference  herein.

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

ITEM 11.  EXECUTIVE  COMPENSATION

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

ITEM  12.  SECURITY  OWNERSHIP  OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED  STOCKHOLDERS  MATTERS

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


                                       33
<PAGE>
ITEM 13.  CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

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

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Information required by this item will be set forth under the caption
"Audit Fees" in the Proxy Statement and is incorporated by reference herein.

PART IV

ITEM  15.  EXHIBITS  AND  FINANCIAL  STATEMENT  SCHEDULES

(A)  (1)  FINANCIAL  STATEMENTS
     The  Financial  Statements  identified below and required by Part II, Item
     8 of this Form 10-K are set forth above.
               Report  of  Independent  Registered  Public  Accounting  Firm
               Balance  Sheets  as  of  December  31,  2005,  and  2004
               Statements  of  Operations for the years ended December 31, 2005,
                 2004,  and  2003
               Statements of Changes in Stockholders' Equity for the years ended
                 December  31,  2005,  2004,  and  2003
               Statements  of  Cash Flows for the years ended December 31, 2005,
                 2004,  and  2003

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


                                       34
<PAGE>
(B) EXHIBITS

The following exhibits are, as indicated by reference symbol, filed herewith or
incorporated by refernce.  Portions of Exhibits 10 (o) and 10(p) have been
omitted pursuant to a request for confidential treatment.

<TABLE>
<CAPTION>
<S>          <C>
*3(i)(a)     Restated Certificate of Incorporation of June 18, 2004.
*3(i)(b)     Certificate of Elimination of Series A Convertible Preferred Stock of June 18, 2004.
*3(ii)       By-Laws.
**4          Specimen Stock Certificate, Common Stock.
***10(a)     Assignment of Intellectual Property Rights Fuel Tech N.V. to Platinum Plus, Inc. As of November 5, 1997.
***10(b)     Assignment of Intellectual Property Rights by Fuel Tech, Inc. to Clean Diesel Technologies, Inc. as of
             November 5, 1997.
***10(c)     Assignment Agreement as of November 5, 1997 among Platinum Plus, Inc., Fuel-Tech N.V. and Clean
             Diesel Technologies, Inc.
****10(d)    1994 Incentive Plan as amended through August 8, 1996.
*****10(e)   Amendment of Section 5.1 of 1994 Incentive Plan, effective June 9, 1999.
*10(f)       Amendment of Section 6.11 of 1994 Incentive Plan, effective June 11, 2004.
*10(g)       Form of Incentive Stock Option Agreement.
*10(h)       Form of Non-Qualified Stock Option Agreement.
*10(i)       Form of Non-Executive Director Stock Option  Agreement.
+10(j)       Management Services Agreement between Clean Diesel Technologies, Inc., Fuel Tech, Inc. and Fuel-
             Tech N.V. as of June 1, 1996.
++10(k)      Office Premises Lease of January 29, 2004.
***10(l)     Registration Rights Agreement between Clean Diesel Technologies, Inc. and Fuel-Tech N.V. of
             November 5, 1997.
+++10(m)     Registration Rights Agreement between Clean Diesel Technologies, Inc. and Fuel-Tech N.V. of March
             24, 1997.
++++10(n)    Registration Rights Agreement between Clean Diesel Technologies, Inc. and the holders of Series A
             Convertible Preferred Stock as of  November 11, 1998.
++10(0)      License Agreement of July 13, 2001 between Clean Diesel Technologies, Inc. and Mitsui Co., Ltd  as
             amended by Amendment No. 1 of December 18,  2002.
++10(p)      License Agreement of March 31, 2003 between Clean Diesel Technologies, Inc. and Combustion
             Components Associates, Inc.
++10(t)      Agreement by and between David W. Whitwell and  Clean Diesel Technologies, Inc. dated as of
             March 1, 2001.
++10(u)      Agreement by and between R. Glen Reid and Clean Diesel Technologies, Inc. dated as of April 1, 2002.
@10(s)       Agreement by and between Bernhard Steiner and Clean Diesel Technologies, Inc., dated as of September
             13, 2004.
#10(v)       Amendment No.1 of 1 March 2006 to agreement of September 13, 2004 between Bernhard Steiner and
             Clean Diesel Technologies Inc.
@@           Separation Agreement of January 19, 2006 between James M. Valentine and Clean Diesel Technologies,
             Inc.
14@@@        Codes of Ethics and Business Conduct
#23(a)       Consent of Eisner LLP.
#31(a)       Bernhard Steiner Certification
#31(b)       David Whitwell Certification
#32          Certification by CEO and CFO
</TABLE>

- - - - - - - - - - - - - - -
<TABLE>
<CAPTION>
# Filed herewith.
<S>          <C>
*            Previously filed as Exhibit to Registration Statement on Form S-8 (No. 333-117057) of July 1, 2004.
**           Previously filed as Exhibit to Registration Statement on Form S-1 (No. 33-95840) of August 16, 1995.
***          Previously filed as Exhibit to Form 10-K for the year ended December 31, 1997.
****         Previously filed as Exhibit to Form 10-K for the year ended December 31, 1996.
*****        Previously filed as Exhibit to Form 10-K for the year ended December 31, 2000.
+            Previously filed as Exhibit to Form 10-Q for the period ended September 30, 1996.
++           Previously filed as Exhibit to Form 10-Q for period ended June 30, 2004.
+++          Previously filed as Exhibit to Registration Statement on Form S-1 of August 7, 1998.
++++         Previously filed as Exhibit to Form 10-Q for the period ended  September 30, 1998.
@            Previously filed as Exhibit to Form 8-K of July 30, 2004.
@@           Previously filed as Exhibit to Form 8-K of January 19, 2006.
@@@          Previously filed as Exhibit to Form 10-K for the year ended December 31, 2004.
</TABLE>


                                       35
<PAGE>
                                   SIGNATURES

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

                                        CLEAN  DIESEL  TECHNOLOGIES,  INC.


March 28, 2006                          By:  /s/  Bernhard Steiner
--------------                             -------------------------------------
     Date                                         Bernhard Steiner
                                                  Chief Executive Officer and
                                                  Director

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

<TABLE>
<CAPTION>
<S>                         <C>
/s/ Bernhard Steiner        Chief Executive Officer, President and Director
--------------------------  (principal executive officer)
    Bernhard Steiner


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


/s/ Jeremy D. Peter-Hoblyn  Director
--------------------------
    Jeremy D. Peter-Hoblyn


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


/s/ Derek R. Gray           Director, Non-Executive Chairman of the Board of Directors
--------------------------
    Derek R. Gray


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


 /s/ John J. McCloy         Director
--------------------------
     John J. McCloy
</TABLE>

     Dated: March 28, 2006


                                       36