**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**


**FORM
      10-QSB**




xQuarterly
      report under
      Section 13 or 15(d) of the Securities Exchange Act of 1934




For
      the
      quarterly period ended June 30, 2007




oTransition
      report under
      Section 13 or 15(d) of the Securities Exchange Act of 1934




For
      the
      transition period from ___________ to _____________




Commission
      File No. 000-51903




**H2DIESEL
      HOLDINGS, INC.**


(Exact
      name of small business issuer as specified in its charter)




Florida
            26-0067474(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)




11111
      Katy Freeway, Suite 910


Houston,
      Texas 77079


(Address
      of principal executive offices)




(713)
      973-5720


(Issuer's
      telephone number)




Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the issuer was required to file such reports), and (2) has been subject
      to
      such filing requirements for the past 90 days. Yes x   No o




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




State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of August 10, 2007: 17,266,150 shares of common stock outstanding, $0.001
      par
      value per share.




Transitional
      Small Business Disclosure Format. Yes o   No x







**INDEX**
  PART
                    I. FINANCIAL INFORMATIONItem
                    1.
                Financial
                    StatementsConsolidated
                    balance sheets as of June 30, 2007 (Unaudited) and December 31,
                    2006
                
                3Consolidated
                    statements of operations for the three and six months ended June
                    30, 2007
                    (Unaudited), for the three months ended June 30, 2006 (Unaudited),
                    for the
                    period from February 28, 2006 (Inception) through June 30, 2006
                    and for
                    the period from February 28, 2006 (Inception) through June 30,
                    2007
                    (Unaudited)
                
                4Consolidated
                    statement of stockholders’ equity for the six months ended June 30, 2007
                    (Unaudited)
                
                5Consolidated
                    statements of cash flows for the six months ended June 30, 2007
                    (Unaudited), for the period from February 28, 2006 (Inception)
                    through
                    June 30, 2006 and for the period from February 28, 2006 (Inception)
                    through June 30, 2007 (Unaudited)
                
                6Notes
                    to consolidated financial statements
                
                7-13Item
                    2.
                Plan
                    of Operation
                
                14-17Item
                    3.
                Controls
                    and Procedures
                
                17PART
                    II. OTHER INFORMATIONItem
                    6.
                Exhibits
                
                18Signatures
                
                19
  
 
 **H2DIESEL
        HOLDINGS, INC.**
 **(A
        Development Stage Enterprise)**
 **Consolidated
        Balance Sheets**
  June
                  30,2007
              
              December
                  31,(Unaudited)
              
              2006ASSETSCurrent
                  assets:Cash
              
              $
              3,779,186
              
              $
              1,031,923Prepaid
                  and deferred expenses
              
              
              45,000
              
              
              70,275Total
                  current assets
              
              
              3,824,186
              
              
              1,102,198License
                  agreement
              
              
              8,061,300
              
              
              8,061,300TOTAL
                  ASSETS
              
              $
              11,885,486
              
              $
              9,163,498LIABILITIES
                  AND STOCKHOLDER'S EQUITYCurrent
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              377,180
              
              $
              190,504Loan
                  payable-related party
              
              
              50,000
              
              
              50,000License
                  agreement payable-current portion
                (net of unamortized discount of $495,577 and $650,698)
              
              
              2,604,423
              
              
              1,449,302Liability
                  under registration rights agreement
              
              
              1,023,165
              
              
              -Total
                  current liabilities
              
              
              4,054,768
              
              
              1,689,806License
                  agreement payable
                (net of unamortized discount of $1,960,720 and $2,195,117)
              
              
              4,039,280
              
              
              4,804,883Total
                  Liabilities
              
              
              8,094,048
              
              
              6,494,689Stockholders'
                  equity:Series
                  A Cumulative Convertible Preferred Stock: $100 stated value, 300,000
                  shares authorized, 42,550 shares issued and outstanding as of June
                  30,
                  2007
              
              
              1,644,118
              
              
              -Common
                  stock, $0.001 par value, 100,000,000 shares authorized; 17,091,250
                  shares
                  issued and outstanding
              
              
              17,091
              
              
              17,091Additional
                  paid-in-capital
              
              
              12,235,903
              
              
              8,043,792Deficit
                  accumulated during the development stage
              
              
              (10,105,674
              )
              
              (5,392,074
              )Total
                  stockholders' equity
              
              
              3,791,438
              
              
              2,668,809TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              11,885,486
              
              $
              9,163,498
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  3
  **H2DIESEL
        HOLDINGS, INC.**
 **(A
        Development Stage Enterprise)**
 **Consolidated
        Statements of Operations**
  For
                  the Three Months ended June 30, 2007
              
              For
                  the Three Months ended June 30, 2006
              
              For
                  the Six Months ended June 30, 2007
              
              For
                  the Period from February 28, 2006(Inception) to June
                30,
                  2006
              
              For
                  the Period from February 28, 2006(Inception) to June
                30,
                  2007(Unaudited)
              
              (Unaudited)
              
              (Unaudited)
              
              
              
              (Unaudited)Operating
                  expenses:Research
                  and development expenses
              
              
              99,457
              
              
              -
              
              
              202,739
              
              
              68,402
              
              
              286,848Merger
                  expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              340,000General
                  and administrative expenses
              
              
              1,024,273
              
              
              1,854,553
              
              
              2,144,121
              
              
              1,891,593
              
              
              6,473,453Total
                  operating expenses
              
              
              1,123,730
              
              
              1,854,553
              
              
              2,346,860
              
              
              1,959,995
              
              
              7,100,301Net
                  loss from operations
              
              
              (1,123,730
              )
              
              (1,854,553
              )
              
              (2,346,860
              )
              
              (1,959,995
              )
              
              (7,100,301
              )Interest
                  income
              
              
              7,429
              
              
              -
              
              
              7,429
              
              
              -
              
              
              7,429Interest
                  expense
              
              
              (195,835
              )
              
              (235,348
              )
              
              (389,518
              )
              
              (235,348
              )
              
              (1,028,151
              )Gain
                  on fair value adjustment
              
              
              104,940
              
              
              -
              
              
              550,935
              
              
              -
              
              
              550,935Net
                  loss
              
              $
              (1,207,196
              )
              $
              (2,089,901
              )
              $
              (2,178,014
              )
              $
              (2,195,343
              )
              $
              (7,570,088
              )Preferred
                  dividends
              
              
              (2,535,586
              )
              
              -
              
              
              (2,535,586
              )
              
              -
              
              
              (2,535,586
              )Net
                  loss available to common shareholders
              
              $
              (3,742,782
              )
              $
              (2,089,901
              )
              $
              (4,713,600
              )
              $
              (2,195,343
              )
              $
              (10,105,674
              )Basic
                  and diluted net loss per share
              
              $
              (0.22
              )
              $
              (0.16
              )
              $
              (0.28
              )
              $
              (0.21
              )Weighted
                  average number of shares outstanding
              
              
              17,091,250
              
              
              13,000,000
              
              
              17,091,250
              
              
              10,472,326
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  4
 
 **H2DIESEL
        HOLDINGS, INC.**
 **(A
        Development Stage Enterprise)**
 Condensed
        Consolidated Statement of Changes in Stockholders' Equity
 For
        the
        Six Months Ended June 30, 2007
  **Deficit****Accumulated****Additional**
              
              **During
                  the****Common
                  Stock**
              
              **Preferred
                  Stock**
              
              **Paid-in-**
              
              **Development****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Stage**
              
              **Total**Balance
                  at December 31, 2006
              
              
              17,091,250
              
              $
              17,091
              
              
              -
              
              $
              -
              
              $
              8,043,792
              
              $
              (5,392,074
              )
              $
              2,668,809Cumulative
                  effect of change in accounting principle
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,574,100
              )
              
              -
              
              
              (1,574,100
              )Compensation
                  expense associated with options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,065,530
              
              
              -
              
              
              1,065,530Issuance
                  of preferred stock in private offering
              
              
              -
              
              
              -
              
              
              42,550
              
              
              1,644,118
              
              
              
              
              
              -
              
              
              1,644,118Issuance
                  of warrants in private offering
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,610,882
              
              
              -
              
              
              2,610,882Dividend
                  associated with the beneficial conversion feature of the preferred
                  stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,496,150
              
              
              (2,496,150
              )
              
              -Private
                  placement costs
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (406,351
              )
              
              -
              
              
              (406,351
              )Dividends
                  accrued on preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (39,436
              )
              
              (39,436
              )Net
                  loss for the six months ended June 30, 2007
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,178,014
              )
              
              (2,178,014
              )Balance
                  at June 30, 2007 (Unaudited)
              
              
              17,091,250
              
              $
              17,091
              
              
              42,550
              
              $
              1,644,118
              
              $
              12,235,903
              
              $
              (10,105,674
              )
              $
              3,791,438
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  5
 
 **H2DIESEL
        HOLDINGS, INC.**
 **(A
        Development Stage Enterprise)**
 **Consolidated
        Statement of Cash Flows**
  For
                  the Six Months ended June 30, 2007
              
              For
                  the Period from February 28, 2006(Inception) to June 30, 2006
              
              For
                  the Period from February 28, 2006(Inception) to June 30, 2007(Unaudited)
              
              
              
              (Unaudited)CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (2,178,014
              )
              $
              (2,195,343
              )
              $
              (7,570,088
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Amortization
                  of discount
              
              
              389,518
              
              
              235,348
              
              
              1,028,151Compensation
                  expense associated with stock options
              
              
              1,065,530
              
              
              45,334
              
              
              2,494,873Issuance
                  of common stock, options and warrants for services
                  rendered
              
              
              -
              
              
              1,527,238
              
              
              1,788,745Gain
                  on fair value adjustment
              
              
              (550,935
              )
              
              -
              
              
              (550,935
              )Changes
                  in operating assets and liabilities:Prepaid
                  and Deferred expenses
              
              
              25,275
              
              
              (85,127
              )
              
              (45,000
              )Accounts
                  payable and accrued expenses
              
              
              147,240
              
              
              236,352
              
              
              337,744Net
                  cash used in operating activities
              
              
              (1,101,386
              )
              
              (236,198
              )
              
              (2,516,510
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of License Agreement
              
              
              -
              
              
              (1,500,000
              )
              
              (1,900,000
              )Cash
                  used in investing activities
              
              
              -
              
              
              (1,500,000
              )
              
              (1,900,000
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from issuance of founders' shares
              
              
              -
              
              
              -
              
              
              554Proceeds
                  from private offerings issuance of common stock, net of
                  costs
              
              
              -
              
              
              1,745,765
              
              
              3,531,493Proceeds
                  from private offerings issuance of preferred stock, net of
                  costs
              
              
              3,848,649
              
              
              -
              
              
              3,848,649Proceeds
                  from convertible note payable
              
              
              -
              
              
              -
              
              
              765,000Proceeds
                  from loan payable-related party
              
              
              -
              
              
              50,000
              
              
              50,000Cash
                  provided by financing activities
              
              
              3,848,649
              
              
              1,795,765
              
              
              8,195,696Net
                  increase in cash and cash equivalents
              
              
              2,747,263
              
              
              59,567
              
              
              3,779,186Cash
                  and cash equivalents - beginning of period
              
              
              1,031,923
              
              
              -
              
              
              -Cash
                  and cash equivalents - end of period
              
              $
              3,779,186
              
              $
              59,567
              
              $
              3,779,186Supplemental
                  Disclosure of Non-Cash Investing and Financing
                  ActivitiesPayable
                  for License Agreement (net of discount)
              
              $
              -
              
              $
              -
              
              $
              5,615,552License
                  Agreement acquired in exchange for issuance of common
                  stock
              
              $
              -
              
              $
              545,747
              
              $
              545,747
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
  6
  H2Diesel
        Holdings, Inc.
 (A
        Development Stage Enterprise)
 Notes
        to
        Condensed Consolidated Financial Statements
  Note
        1  –  DESCRIPTION
        OF BUSINESS AND BASIS OF PRESENTATION
 
 H2Diesel
        Holdings, Inc. (the “Company”) is a development stage company that, through its
        wholly owned subsidiary, H2Diesel Inc., a Delaware corporation (“H2Diesel”),
        holds an exclusive license for North America, Central America and the Caribbean
        to exploit proprietary technology (the “Technology”) to manufacture bio-fuel
        that is intended to be marketed as a new class of bio-fuel or fuel additive
        (the
“Additive”) for power generation, heavy equipment, marine use and as heating
        fuel (the “H2Diesel Bio-fuel”).
  The
        accompanying unaudited consolidated financial statements of the Company have
        been prepared in accordance with generally accepted accounting principles
        for
        the interim financial information and with the instructions to Form 10-QSB
        of
        Regulation S-B. Accordingly, they do not include all of the information and
        notes required by generally accepted accounting principles for complete
        financial statements. In the opinion of management, the unaudited interim
        financial statements furnished herein include all adjustments necessary for
        a
        fair presentation of the Company’s financial position at June 30, 2007
        (Unaudited) and the results of its operations for the three and six months
        ended
        June 30, 2007 (Unaudited), for the three months ended June 30, 2006, for
        the
        period from February 28, 2006 (Inception) through June 30, 2006 and for the
        period from February 28, 2006 (Inception) through June 30, 2007 and cash
        flows
        for the six months ended June 30, 2007 (Unaudited), for the period from February
        28, 2006 (Inception) through June 30, 2006 and for the period from February
        28,
        2006 (Inception) through June 30, 2007. All such adjustments are of a normal
        and
        recurring nature. Interim financial statements are prepared on a basis
        consistent with the Company’s annual financial statements. Results of operations
        for the three and six months ended June 30, 2007 are not necessarily indicative
        of the operating results that may be expected for the year ending December
        31,
        2007.
  The
        consolidated balance sheet as of December 31, 2006 has been derived from
        the
        audited financial statements at that date but does not include all of the
        information and notes required by accounting principles generally accepted
        in
        the United States for complete financial statements. The consolidated statement
        of operations and the consolidated statement of cash flows for the period
        from
        February 28, 2006 (Inception) to June 30, 2006 have been derived from the
        audited financial statements at June 30, 2006.
  For
        further information refer to the consolidated financial statements and notes
        thereto included in the Company’s Annual Report on Form 10-KSB for the year
        ended December 31, 2006.
  Use
        of
        Estimates
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of assets, liabilities,
        revenues and expenses and related disclosure of contingent assets and
        liabilities. The Company’s most significant estimate is the value of its
        exclusive license. Other significant estimates include the valuation of shares,
        warrants or options issued for services and the estimated useful life of
        the
        exclusive license used to calculate amortization. The Company evaluates its
        estimates on an ongoing basis. Actual results could differ significantly,
        especially as to the estimated value of its exclusive license from those
        estimates under different assumptions or conditions.
  7
  H2Diesel
        Holdings, Inc.
 (A
        Development Stage Enterprise)
 Notes
        to
        Condensed Consolidated Financial Statements
  Loss
        per Common Share
  Loss
        per
        share (“EPS”) is computed based on the weighted average number of common shares
        outstanding and excludes any potential dilution. Diluted EPS reflects the
        potential dilution that could occur if securities or other contracts to issue
        common stock were exercised or converted into common stock or resulted in
        the
        issuance of common stock, which would then share in the earnings of the Company.
        The shares issuable upon the exercise of stock options and warrants are excluded
        from the calculation of net loss per share as their effect would be
        antidilutive. As of June 30, 2007 and 2006, there were 8,107,625 and 4,920,000,
        respectively, shares of common stock equivalents including options (4,405,000
        shares of common stock as of June 30, 2007 and 500,000 shares of common stock
        as
        of June 30, 2006) and warrants (3,702,625 shares of common stock as of June
        30,
        2007 and 4,420,000 shares of common stock as of June 30, 2006 ) that could
        potentially dilute EPS in the future that were not included in the computation
        of EPS because to do so would have been antidilutive. As of June 30, 2007
        there
        were 42,550 shares of convertible preferred stock, which are convertible
        into
        1,063,750 shares of common stock, that were not included in the computation
        of
        EPS because to do so would have been antidilutive as well.
  Recently
        Issued Accounting Standards
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
        entities to choose to measure many financial instruments and certain other
        items
        at fair value. SFAS 159 is effective for fiscal years beginning after November
        15, 2007. The Company does not expect the adoption of SFAS 159 to have a
        material impact on its consolidated financial position, results of operations
        or
        cash flows.
 
 In
        December 2006, the FASB issued FASB Staff Positions (FSP) EITF 00-19-2
“Accounting for Registration Payment Arrangements”. Under this pronouncement,
        contingently payable registration payment arrangements are accounted for
        separately from and do not affect the classification of the underlying shares,
        warrants or other financial instruments subject to the registration payment
        provisions. This was accomplished by amending SFAS No. 133 and No. 150 to
        include scope exceptions for registration payment arrangements. A liability
        for
        a registration payment arrangement should be recognized when payment is probable
        and the amount is reasonably estimable (whether at inception or during the
        life
        of the arrangement) in accordance with SFAS No. 5, “Accounting for
        Contingencies.” The FSP is effective for registration payment arrangements and
        the financial instruments subject to such arrangements that are entered into
        or
        modified after December 21, 2006. For registration payment arrangements and
        financial instruments subject to those arrangements that were entered into
        before December 22, 2006, companies are required to account for transitioning
        to
        the FSP through a cumulative-effect adjustment to the opening balance of
        accumulated deficit or retained earnings in fiscal years beginning after
        December 15, 2006. The Company implemented this FSP effective January 1,
        2007
        and recorded a $1,574,100 contingent liability.
  8
  H2Diesel
        Holdings, Inc.
 (A
        Development Stage Enterprise)
 Notes
        to
        Condensed Consolidated Financial Statements
  Note
        2 ****  –  GOING
        CONCERN
  The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. The Company is in the development
        stage and has not generated any revenues. As a result, the Company has incurred
        a net loss of $7,570,088 and negative cash flows from operating activities
        of
        $2,516,510 since Inception. The Company is obligated to pay $9.1 million
        in
        additional payments under the Master License, including $2.1 million during
        2007, of which $0.6 million was paid during July 2007, and $1.0 million
        during March 2008. These matters raise substantial doubt about the Company’s
        ability to continue as a going concern. The Company’s consolidated financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty. The Company’s continued existence is dependent upon several
        factors, including obtaining additional debt or equity financing, production
        of
        its products, developing a market for its products, and achieving certain
        levels
        of sales volume and profitability from the sale of its products and sublicenses
        of its technology. Management is investigating various sources of debt or
        equity
        financing and is developing marketing and production plans for its
        products.
  Note
        3  –  OPTIONS
  The
        following table summarizes information about the stock options outstanding
        at
        June 30, 2007:
  Weighted
                  Average Exercise Price
              $2.05Expected
                  Life
              5
                  -
                  10 yearsVolatility
              100.0%Dividend
                  Yield
              0%Risk-free
                  interest rate
              4.54%
                  - 4.72%
  9
  H2Diesel
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Condensed Consolidated Financial Statements
 A
        summary
        of the status of the Company’s options outstanding as of June 30, 2007 and the
        changes during the year ending on that date is presented below:
  Number
                  of
                Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Remaining
                  Contractual
                Life
                (Years)
              
              Aggregate
                Intrinsic
                ValueOptions
                  outstanding at December 31, 2006
              
              
              4,100,000
              
              $
              1.65
              
              
              9.70Granted
              
              
              305,000
              
              $
              7.48
              
              
              6.40Options
                  outstanding at June 30, 2007
              
              
              4,405,000
              
              $
              2.05
              
              
              9.00Vested
                  and expected to vest –
                  June 30,
                  2007
              
              
              3,100,000
              
              $
              2.13
              
              
              9.20
              
              $
              12,180,000Options
                  exercisable at June 30, 2007
              
              
              1,925,000
              
              $
              1.95
              
              
              9.22
              
              $
              7,830,000
  Options
        outstanding at June 30, 2007 have an exercise price of $1.50 to $10.50 per
        share. Options exercisable at June 30, 2007 do not include 1,305,000 performance
        based options.
  The
        aggregate intrinsic value in the table above represents the total intrinsic
        value (the difference between the Company’s closing stock price on June 30, 2007
        and the exercise price, multiplied by the number of in-the-money options)
        that
        would have been received by the option holders had vested option holders
        exercised their options on June 30, 2007. This amount changes based upon
        changes
        in the fair market value of the Company’s stock. As of June 30, 2007 $1,101,649
        of the total unrecognized compensation costs related to stock options is
        expected to be recognized over a period of approximately 2 years and nine
        months.
  Note
        4 ****  –  COMMITMENTS
        AND CONTINGENCIES
  The
        Company entered into a Registration Rights Agreement dated October 17, 2006
        with
        the purchasers of its common stock in the Company’s October 2006 private
        placement. Under the Registration Rights Agreement, the Company is required
        to
        file a “resale” registration statement with the SEC covering 2,915,000 shares of
        common stock issued in the Private Placement. The Company is obligated to
        maintain the effectiveness of the “resale” registration statement from the
        effective date through and until October 20, 2007 unless all securities
        registered under the registration statement have been sold or are otherwise
        able
        to be sold without restrictions. The Company agreed to use its best efforts
        to
        have the “resale” registration statement declared effective by the SEC as soon
        possible after the initial filing, but by no later than April 20, 2007 (180
        days
        after the closing of the Merger). Because the Company did not file the
        registration statement prior to November 20, 2006 (the “Filing Deadline”), the
        Company was required to issue additional shares of common stock to the
        purchasers in the Private Placement, in an amount equal to 1% of the shares
        sold
        in the Private Placement for each 30 day period following the Filing Deadline
        until the registration statement is filed up to a maximum of 6% of the shares
        sold in the Private Placement. In July 2007, pursuant to this agreement,
        the
        Company issued 174,900 shares of common stock to the purchasers in the Private
        Placement. On July 6, 2007, the Company filed a registration statement with
        the
        SEC to register the shares held by non-affiliates issued in the October 2006
        private placement, including the additional shares issued for exceeding the
        filing deadline.
   10
  H2Diesel
        Holdings, Inc.
 (A
        Development Stage Enterprise)
 Notes
        to
        Condensed Consolidated Financial Statements
  On
        January 1, 2007, the Company implemented EITF 00-19-2, which requires a company
        to recognize a liability for registration rights payments when they are probable
        and the amount is reasonable estimable. The Company recorded a $1,574,100
        contingent liability at January 1, 2007 based on the Company’s stock price at
        that date. For the six months ended June 30, 2007 the Company recorded a
        gain on
        fair value adjustment of $550,935 related to this liability as the Company’s
        stock price declined during this period.
  Note
        5  –  PREFERRED
        STOCK SALE
  On
        May 9,
        2007, the Company completed the offering (the “Private Placement”) of 27,950
        shares of the Company’s newly issued Series A Cumulative Convertible Preferred
        Stock, par value $0.001 per share (the “Preferred Stock”) at price of $100.00
        per share to persons who qualify as “accredited investors” under the Securities
        Act of 1933, as amended (the “Securities Act”). The gross proceeds were
        $2,795,000. Under the terms of the Private Placement, each investor had the
        option to purchase a number of additional securities up to each individual
        investors initial subscription on the same terms as those of the Private
        Placement (the “Subscriber Option”). On June 8, 2007, we sold an additional
        14,600 shares of Preferred Stock at price of $100.00 per share, in connection
        with exercises of the Subscriber Option. The gross proceeds were $1,460,000.
  The
        Preferred Stock is convertible at the election of the holders into shares
        of
        Company common stock, par value $0.001 per share, of the Company (the “Common
        Stock”) at an initial conversion price of $4.00 per share. Each share of
        Preferred Stock will accrue cumulative dividends on a quarterly basis at
        a rate
        of 8% per annum. All dividends will be paid in shares of Company common stock
        having a fair market value at the time of issuance equal to the amount of
        dividends to be paid, provided that to the extent the shares of common stock
        to
        be issued are not then registered under the registration rights agreement
        described below, dividends shall cumulate but shall remain unpaid until such
        time as the shares are registered and issued. The Company may elect to pay
        any
        dividends in cash in lieu of issuing shares of common stock. For the period
        ended June 30, 2007 the Company accrued dividends of $39,435 which is included
        in accounts payable and accrued expenses.
  The
        Preferred Stock shall also participate on an as-converted basis with all
        dividends paid on the shares of Common Stock. Upon any liquidation of the
        Company, the holders of the Preferred Stock will be entitled to be paid,
        prior
        to the Common Stock or any other securities that by their terms are junior
        to
        the Preferred Stock (collectively with the common stock, “Junior Securities”),
        the original issue price of the Preferred Stock plus all accrued and unpaid
        dividends (collectively, the “Liquidation Preference”). To the extent the
        proceeds of liquidation are insufficient to pay such amounts in full, the
        proceeds available will be allocated pro rata among the shares of Preferred
        Stock. Any shares of Preferred Stock outstanding on the third anniversary
        of the
        Private Placement shall automatically convert into a number of shares of
        Common
        Stock determined by dividing the Liquidation Preference by the Conversion
        Price
        of the Preferred Stock then in effect.
  11
  H2Diesel
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Condensed Consolidated Financial Statements
  Each
        investor in the Private Placement also received a warrant exercisable for
        a
        number of shares of common stock equal to 50% of the number of shares of
        common
        stock into which the Preferred Stock purchased by such investor is initially
        convertible. The initial exercise price of the warrants is $6.00 per share.
        At
        any time following the first anniversary of the Closing Date and provided
        that
        the shares of Common Stock issuable upon exercise of the Warrants are not
        then
        registered for resale pursuant to an effective registration statement under
        the
        Securities Act, the Warrants may also be exercised by means of a “cashless
        exercise.”
  In
        connection with the Private Placement, we agreed to register the resale of
        the
        shares of Common Stock issuable (i) upon conversion of the Preferred Stock,
        (ii)
        as dividends on the Preferred Stock, and (iii) upon exercise of the Warrants
        (collectively, the “Registrable Shares”), all in accordance with a Registration
        Rights Agreement dated May 9, 2007 among the Company and each of the investors
        in the Private Placement (the “Registration Rights Agreement”). Under the
        Registration Rights Agreement, we were required to file the “resale”
registration statement with the SEC covering such shares on or before the
        60th
        day following the closing of the Private Placement. On July 6, 2007, the
        Company
        complied with this deadline by filing a registration statement with the SEC
        covering such shares. We are obligated to maintain the effectiveness of the
        “resale” registration statement from the effective date through and until 13
        months after the date of closing of the Private Placement, unless all securities
        registered under the registration statement have been sold or are otherwise
        able
        to be sold pursuant to Rule 144 under the Securities Act, without regard
        to
        volume limitations, provided we comply with our reporting obligations. We
        agreed
        to use our best efforts to have the “resale” registration statement declared
        effective by the SEC as promptly as practicable after the initial filing,
        but by
        no later than 210 days after the closing of the Private Placement. We may
        be
        required to issue additional shares of Company Common Stock to purchasers
        in the
        Private Placement, in an amount not to exceed 6.0% of the Registrable Shares
        if
        we fail to meet certain registration rights obligations.
  The
        Preferred Stock is convertible into 1,063,750 shares of common stock, at
        the
        election of the holders, at an initial conversion price of $4.00 per share.
        The
        fair market value of this beneficial conversion was calculated based on the
        difference between the share price of the common stock, at the time of issuance,
        and the initial conversion price. This resulted in a preferred stock dividend
        in
        the amount of $2,496,150 recorded during the six months ended June 30,
        2007.
  The
        Company is required to make quarterly dividend payments of 8% on the $4,255,000
        that was raised from the sale of the Preferred Stock. Dividends are to be
        paid
        in shares of the Company’s common stock. For the period ended June 30, 2007, the
        Company recorded a preferred stock dividend expense of $39,436.
  In
        connection with the Private Placement, Empire Financial Group received a
        cash
        commission of $345,500 which represents 10% of the consideration paid by
        investors introduced by it in connection with the Private Placement, and
        also
        will receive a warrant exercisable for 58,000 shares of Common Stock. The
        number
        of shares of common stock issuable upon exercise of the warrant will be
        proportionately increased to reflect any exercises of the Option. The warrant
        is
        otherwise on terms substantially similar to the terms of the Warrants issued
        in
        the Private Placement.
  12
  H2Diesel
        Holdings, Inc.
 (A
        Development Stage Enterprise)
 Notes
        to
        Condensed Consolidated Financial Statements
 
 Note
        6  –  AGREEMENTS
 
 In
        April
        2007, the Company entered into a one year consulting services agreement with
        a
        marketing consultant. The marketing company is to provide test burn agreements
        and various other marketing services to the Company. The Company is obligated
        to
        pay a monthly retainer fee of $5,000. In addition, the Company entered into
        a
        stock option agreement for up 1,500,000 shares of common stock at an exercise
        price of $6.00 per share. All of the options have a five year term and expire
        in
        April 2012. The vesting of the options is performance based. Any unvested
        options expire in April 2010.
  On
        March
        27, 2007, the Company entered into a Letter of Intent with Twin Rivers
        Technologies, LP with respect to the potential development of the Company’s
        first production plant at Twin Rivers’ facility located in Quincy, MA. The
        Letter of Intent contemplates an exclusive period through August 31, 2007
        during
        which Twin Rivers will negotiate with the Company regarding definitive
        agreements covering the siting, construction, operation and management of
        the
        Company’s proposed initial 25 million gallon per year production facility, the
        supply of vegetable oils and other commodity feedstocks and the off take
        of
        finished bio-fuel by Twin Rivers from the facility. There can be no assurance
        that definitive agreements will be entered into .
  On
        May 1,
        2007, the Company entered into a Test Burn Agreement with Dynegy Oakland,
        LLC, a
        Delaware limited liability company and an affiliate of Dynegy Inc. (“Dynegy”)
        for the purpose of evaluating the Company’s proprietary biofuel technology in
        power generation applications. The Agreement requires the Company to supply
        our
        biofuel for a test program that will be performed at Dynegy’s Oakland Power
        Plant combustion turbine facility. The test program will include the evaluation
        of both technical and environmental performance characteristics of our biofuel.
        The agreement also requires the Company to pay 50% of all costs of environmental
        emissions testing conducted in connection with the test program, provided
        that
        our aggregate obligation with respect to such expenses shall not exceed
        $150,000. Dynegy is entitled to all revenue arising from sales of electricity
        generated during the testing. The parties have agreed to negotiate with respect
        to a mutually agreeable purchase agreement for our biofuel in the event testing
        is successful.
  In
        April
        2007, the Company entered into nine month agreements with two consultants
        to
        assist the Company with governmental affairs within the state of Florida,
        with
        respect to Company’s bio-fuels and tax incentive matters. In addition, the
        Company entered into stock option agreements for up to 31,000 shares of common
        stock at an exercise price of $6.25 per share. The options have a five year
        term
        and expire in April 2012. Of the 31,000 options, 50% vest at December 31,
        2007
        and the other 50% are performance based. Any unvested options expire in December
        2008.
  13
 
 **ITEM
        2. PLAN OF OPERATION**
  **Cautionary
        Statement Regarding Forward-Looking Statements**
  This
        report contains “forward-looking statements” within the meaning of the Private
        Securities Litigation Reform Act of 1995 that involve risks and
        uncertainties, many of which are beyond our control. Our actual results could
        differ materially and adversely from those anticipated in such forward-looking
        statements as a result of certain factors, including those set forth below
        and
        elsewhere in this report and under the heading “Risk Factors” in our Form 10-KSB
        for the year ended December 31, 2006. Important factors that may cause
        actual results to differ from projections include:
  ·
              our
                  lack of operating history;
  ·
              our
                  dependence
                  on additional financing and our need to make payments under our
                  license
                  and to develop our business;
  ·
              market
                  acceptance of our bio-fuel;
  ·
              our
                  ability to establish production facilities for our bio-fuel and
                  to
                  generate revenues from sales of our
                  bio-fuel;
  ·
              our
                  ability to enter into acceptable sublicensing agreements with respect
                  to
                  our technology and the ability of any sublicensee to successfully
                  sell
                  bio-fuel utilizing our licensed
                  technology;
  ·
              our
                  ability to compete with petroleum fuels and alternative fuels;
                  and
  ·
              governmental
                  regulation and oversight, including whetherour
                  fuel qualifies for tax credits and other governmental
                  support.
  All
        statements, other than statements of historical facts, included in these
        offering materials or otherwise provided by us regarding our
        strategy, fut ure
        operations, financial position, estimated revenue
        or losses, projected costs, prospects and plans and objectives of management
        are
        forward-looking statements. When used in this report, the words “will,” “may,” “believe,”
“anticipate,” “intend,” “estimate,” “expect,” “project,” “plan” and similar
        expressions are intended to identify forward-looking statements, although
        not
        all forward-looking statements contain such identifying words. All
        for ward-looking
        statements speak only as of their respective dates. We do not undertake any
        obligation to update any forward-looking statements or other information contained in this report. You should not place undue reliance
        on
        these forward-looking statements. Although we believe that our plans,
        int entions
        and expectations reflected in or suggested by the forward-looking statements
        in
        this report are reasonable, these plans, intentions or expectations may not
        be achieved.
  As
        used
        in this report, the terms “company” “us,” and “our” refers to H2Diesel Holdings,
        Inc., a Florida corporation, and the term “H2Diesel” refers to H2Diesel, Inc., a
        Delaware corporation, our wholly owned subsidiary, unless the context requires
        otherwise.
  14
  **Plan
        of Operation**
 
 **Background**
  We
        are a
        development stage company which to date has not generated any revenues. The
        operation and development of our business will require substantial additional
        capital during 2007 to fund, among other things, our operations, payments
        due
        under the exclusive license, the acquisition or development of manufacturing
        plants, research and development, and the financing of future acquisitions
        and
        investments.
  Our
        business strategy consists of developing two revenue streams: (a) direct
        sales
        from manufacturing plants that we may purchase or build (either directly
        or
        through joint ventures) in order to process, market and sell our chemical
        additive and/or H2Diesel Bio-fuel using our proprietary technology and (b)
        the
        collection of royalties through sublicensing our proprietary
        technology.
 
 **Operational
        Plan**
  Depending
        upon the availability of cash and other resources, our operational plan for
        the
        next several months includes :
 
 ● completing
        the test burn with Dynegy;
 ●  conducting
        additional testing with independent producers or others, including product
        application testing, to gain market acceptance of our biofuel among customers
        and equipment manufacturers;
 ●  commencing
        operations at a pilot biofuel production facility and constructing another
        facility under our arrangements with Twin Rivers to supply our product initially
        for testing and eventually for the broader biofuel market;
 ●
              developing
                  a marketing plan for the power generation industry and a technology
                  plan
                  that complements the marketing
                  plan;
 ●  book
        firm
        purchase orders for our biofuel;
 ●  entering
        into long term feedstock supply and transportation logistics agreements to
        supply our production facilities;
 ●  continuing
        our research and development efforts;
 ●  continuing
        our efforts to sublicense our technology;
 ●  developing
        additional strategic relationships, attracting potential customers and
        sublicensees and obtaining the capital commitments necessary to engineer,
        construct and operate biofuel plants in our exclusive territory;
 ●  continuing
        to pursue favorable tax incentives for our biofuel, particularly including
        our
        biofuel in the $1 per gallon credit afforded biodiesel and to have the benefit
        of such a change extend beyond the current expiration date of December 31,
        2008;
        and
 ●  recruiting
        additional key employees to expand the capabilities of our existing management
        team.
  15
  **Financing
        Plan**
 
 We
        have
        incurred a net loss of $7,570,088 and negative cash flows from operating
        activities of $2,516,510 since inception. As of June 30, 2007, we had
        approximately $3.8 million of available cash, and had approximately $377,000
        of
        accounts payable. We believe that we will need approximately $5 million to
        $10
        million to implement our short term plan for growth in 2007.
 
 We
        have
        several existing commitments for the expenditure of significant funds. Under
        the
        license agreement we are required to make several payments to the inventor,
        including a payment of $600,000 which was paid on July 31, 2007, $1.5 million
        on
        or before October 31, 2007 and $1.0 million annually over the following seven
        years, for future aggregate payments of $8.5 million. We have to pay various
        costs under our arrangements with Twin Rivers and will need to fund costs
        associated with the manufacture of bio-fuel at our pilot and any future
        production facilities. We also will incur costs to test our technology, continue
        research and development and sustain operations. In addition, under the
        sublicense with Xethanol, we have committed to provide Xethanol with
        additives.
  We
        are
        unlikely to be able to continue our operations unless we can obtain additional
        financing. Future capital requirements could vary significantly and will
        depend
        on certain factors, many of which are not within our control. These include,
        among others, the extent of development and testing of the technology needed
        before commercial operation, the nature and timing of licensing and sublicensing
        activities, costs of plant construction, sales expenses, hiring qualified
        management and employees, responding to competitive pressures and complying
        with
        regulatory requirements. If we are successful, the expansion of our business
        will require us to commit capital that substantially exceeds our current
        financial resources. Any needed financing may not be available on favorable
        terms, if at all.
  We
        have
        financed our operations to date primarily through the sale of our common
        and
        preferred stock and warrants in privately negotiated transactions with
        accredited investors.
 
 Our
        most
        recent financing occurred in May and June 2007. We raised $4,255,000 in proceeds
        from the sale of shares of 8% Series A Cumulative Convertible Preferred Stock,
        initially convertible at a conversion price of $4.00 per share, and warrants
        with an initial exercise price of $6.00 per share.
 
 **Critical
        Accounting Policies**
  Our
        financial statements and accompanying notes have been prepared in accordance
        with accounting principles generally accepted in the United States. The
        preparation of these financial statements requires we make estimates, judgments
        and assumptions that affect the reported amounts of assets, liabilities,
        revenues and expense. Management evaluates the accounting policies and estimates
        it uses to prepare the financial statements. We base our estimates on
        assumptions believed to be reasonable under current facts and circumstances.
        The
        Company’s most significant estimate is the value of its Master License
        Agreement. Other significant estimates include the valuation of shares, stock
        options and warrants issued. Actual amounts and results could differ from
        these
        estimates made by management.
  16
 
 **Off−Balance
        Sheet Arrangements**
  We
        do not
        have any off−balance sheet arrangement or commitment that will have a current
        effect on our financial condition, lead to changes in our financial condition,
        revenues or expenses, results of operations, liquidity, capital expenditures
        or
        capital resources that is material to investors.
  **ITEM
        3. CONTROLS AND PROCEDURES**
  Disclosure
        controls and procedures are controls and other procedures that are designed
        to
        ensure that information required to be disclosed in Company reports filed
        or
        submitted under the Exchange Act is recorded, processed, summarized and reported
        within the time periods specified in the Securities and Exchange Commission’s
        rules and forms. Disclosure controls and procedures include, without limitation,
        controls and procedures designed to ensure that information required to be
        disclosed in Company reports filed under the Exchange Act, is accumulated
        and
        communicated to management, including the Company’s principal executive officer
        and principal financial officer, as appropriate, to allow timely decisions
        regarding required disclosure.
  As
        required by Rule 13a-15 under the Exchange Act, the Company is required to
        carry
        out an evaluation of the effectiveness of the design and operation of the
        Company’s disclosure controls and procedures as of the end of the period covered
        by this report. This evaluation was carried out with the participation of
        the
        Company’s principal executive officer and principal financial officer. Based
        upon that evaluation, Company’s principal executive officer and principal
        financial officer concluded that the Company’s disclosure controls and
        procedures are effective at the reasonable assurance level such that the
        information relating to us and our consolidated subsidiary required to be
        disclosed in our Exchange Act reports (i) is recorded, processed, summarized
        and
        reported within the time periods specified in the SEC’s rules and forms, and
        (ii) is accumulated and communicated to our management, including our principal
        executive officer and principal financial officer, as appropriate to allow
        timely decisions regarding required disclosure.
  There
        were no changes in the Company’s internal controls over financial reporting that
        occurred during the quarter ended June 30, 2007 that have materially affected,
        or are reasonably likely to materially affect, the internal control over
        financial reporting.
  17
  **PART
        II. OTHER INFORMATION**
  **ITEM
        6. EXHIBITS AND REPORTS ON FORM 8-K**
  The
        following exhibits, which are furnished with this Quarterly Report or
        incorporated herein by reference, are filed as part of this Quarterly Report.
  **Exhibit Number**
              
              **Exhibit
                  Description**10.1
              
              Stock
                  Option Agreement between Kim Johnson and the Company.
                  (1)10.2
              
              Test
                  Burn Agreement dated May 1, 2007 between Dynegy Oakland, LLC and the
                  Company. (1)31.1
              
              Certification
                  of the Principal Executive Officer and Principal Financial Officer,
                  as
                  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1
              
              Certification
                  of the Principal Executive Officer and Principal Financial Officer,
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002.
  (1)  Incorporated
        by reference to the Quarterly Report on Form 10-QSB of the Company filed
        May 15,
        2007.
  18
  **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized, on the 14 th day of
        August 2007.
  Date:
                  August 14, 2007
              By:
              /s/David
                  A. GillespieDavid
                  A. GillespiePresident
                  and Chief Executive Officer(Principal
                  executive and principal
                financial
                  officer of the Company)
  19