This paper discusses the experimental investigation of extended expansion and thermal insulation on the performance of a diesel engine. A single cylinder naturally aspirated air-cooled diesel engine is modified to run on the concept of extended expansion (Miller cycle). In the modified engine, the expansion ratio is maintained greater than the effective compression ratio by modulating the intake valve closing time and the clearance volume. The cylinder head, valve, and the piston top are coated with partially stabilized zirconia (PSZ) for low heat rejection. Results show a significant improvement in fuel efficiency of the insulated extended expansion engine. A ratio of expansion ratio to effective compression ratio of 1.5 is found to be optimum.