**UNITED      STATES **

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      DC 20549**

**FORM      10-QSB**

|   | x | Quarterly                report under Section 13 or 15(d) of the Securities Exchange Act of                1934 |
|--------|---|-----------------------------------------------------------------------------------------------------------------|

|   | o | Transition                report under Section 13 or 15(d) of the Securities Exchange Act of                1934 |
|--------|---|------------------------------------------------------------------------------------------------------------------|

**H2DIESEL      HOLDINGS, INC.**

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

----

**INDEX**

| **PART                  I.      FINANCIAL                  INFORMATION** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Item                  1.                                                                               | Financial                  Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|                                                                                                   | Consolidated                  balance sheets as of September 30, 2007 (Unaudited) and December                  31,                  2006                                                                                                                                                                                                                                                                                                                                                          | 3 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|                                                                                                   | Consolidated                  statements of operations for the three and nine months ended September                  30,                  2007 (Unaudited), for the three months ended September 30, 2006                  (Unaudited), for the period from February 28, 2006 (Inception)                  through                  September 30, 2006 (Unaudited) and for the period from February                  28, 2006                  (Inception) through September 30, 2007 (Unaudited) | 4 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|                                                                                                   | Consolidated                  statement of stockholders’ equity for the nine months ended September 30,                  2007 (Unaudited)                                                                                                                                                                                                                                                                                                                                                    | 5 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|                                                                                                   | Consolidated                  statements of cash flows for the nine months ended September 30,                  2007                  (Unaudited), for the period from February 28, 2006 (Inception)                  through                  September 30, 2006 (Unaudited) and for the period from February                  28, 2006                  (Inception) through September 30, 2007 (Unaudited)                                                                                       | 6 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|                                                                                                   | Notes                  to consolidated financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                        | 7-14 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item                  2.                                                                               | Plan                  of Operation                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 15-18 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item                  3.                                                                               | Controls                  and Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 18 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| **PART                  II.      OTHER                  INFORMATION**         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item                  5.                                                                               | Other                  Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 19 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item                  6.                                                                               | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 20 |
|                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Signatures                                                                                             | 21                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

**H2DIESEL      HOLDINGS, INC.**

**(A      Development Stage Enterprise)**

**Consolidated      Balance Sheets**

|                                                                                                                                                                                                      |   | September 30, 2007 (Unaudited) |        | December 31,                2006 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-------------|---------------------------------------|--------|
| ASSETS                                                                                                                                                                                                    |   |                                          |        |                                  |   |   |   |
|                                                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| Current                assets:                                                                                                                                                                            |   |                                          |        |                                  |   |   |   |
| Cash                                                                                                                                                                                                      |   | $                                             | 2,192,069   |                                  | $      | 1,031,923 |   |
| Prepaid                and deferred expenses                                                                                                                                                              |   |                                          | 23,750      |                                  |   | 70,275 |   |
| Total                current assets                                                                                                                                                                       |   |                                          | 2,215,819   |                                  |   | 1,102,198 |   |
|                                                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| License                agreement                                                                                                                                                                          |   |                                          | 8,061,300   |                                  |   | 8,061,300 |   |
|                                                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| TOTAL                ASSETS                                                                                                                                                                               |   | $                                             | 10,277,119  |                                  | $      | 9,163,498 |   |
|                                                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| LIABILITIES                AND STOCKHOLDER'S EQUITY                                                                                                                                                       |   |                                          |        |                                  |   |   |   |
|                                                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| Current                liabilities:                                                                                                                                                                       |   |                                          |        |                                  |   |   |   |
|                                                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| Accounts                payable and accrued expenses                                                                                                                                                      |   | $                                             | 784,004     |                                  | $      | 190,504 |   |
| Loan                payable-related party                                                                                                                                                                 |   |                                          | 50,000      |                                  |   | 50,000 |   |
| License                agreement payable-current portion                                                                                                                                                  |   |                                          |        |                                  |   |   |   |
| (net                of unamortized discount of $299,910 and $650,698)                                                                                                                                     |   |                                          | 2,200,090   |                                  |   | 1,449,302 |   |
| Accrued                dividend on preferred stock                                                                                                                                                        |   |                                          | 124,694     |                                  |   | - |   |
| Total                current liabilities                                                                                                                                                                  |   |                                          | 3,158,788   |                                  |   | 1,689,806 |   |
|                                                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| License                agreement payable                                                                                                                                                                  |   |                                          |        |                                  |   |   |   |
| (net                of unamortized discount of $1,960,720 and $2,195,117)                                                                                                                                 |   |                                          | 4,039,280   |                                  |   | 4,804,883 |   |
| Total                Liabilities                                                                                                                                                                          |   |                                          | 7,198,068   |                                  |   | 6,494,689 |   |
|                                                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| Stockholders'                equity:                                                                                                                                                                      |   |                                          |        |                                  |   |   |   |
| Series                A Cumulative Convertible Preferred Stock: $100 stated value, 300,000                shares authorized, 42,550 shares issued and outstanding as of September                30, 2007 |   |                                          | 1,644,118   |                                  |   | - |   |
| Common                stock, $0.001 par value, 100,000,000 shares authorized; 17,266,150                shares                issued and outstanding                                                      |   |                                          | 17,266      |                                  |   | 17,091 |   |
| Additional                paid-in-capital                                                                                                                                                                 |   |                                          | 14,064,576  |                                  |   | 8,043,792 |   |
| Deficit                accumulated during the development stage                                                                                                                                           |   |                                          | (12,646,909 | )                                     |   | (5,392,074 | ) |
| Total                stockholders' equity                                                                                                                                                                 |   |                                          | 3,079,051   |                                  |   | 2,668,809 |   |
| TOTAL                LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                 |   | $                                             | 10,277,119  |                                  | $      | 9,163,498 |   |

----

**H2DIESEL      HOLDINGS, INC.**

**(A      Development Stage Enterprise)**

**Consolidated      Statements of Operations**

|                                                         |   | For the Three Months ended September 30, 2007  |       | For the Three Months ended September 30, 2006  |   | For the Nine Months ended September 30, 2007  |   | For the Period from February 28, 2006 (Inception) to September 30, 2006  |       | For the Period from February 28, 2006 (Inception) to September 30, 2007 |   |
|--------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                         |   | (Unaudited)                                                                            |       | (Unaudited)                                                                            |   | (Unaudited)                                                                           |   | (Unaudited)                                                                                                                          |       | (Unaudited)                                                                                                                    |   |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |
| Operating                expenses:                           |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Research                and development expenses             |   |                                                                                   | 217,060    |                                                                                   |   | 67,632                                                                                |   |                                                                                                                                 | 419,799    |                                                                                                                           |   | 136,034 |   |   | 503,908 |   |
| Merger                expenses                               |   |                                                                                   | -          |                                                                                   |   | 135,000                                                                               |   |                                                                                                                                 | -          |                                                                                                                           |   | 135,000 |   |   | 340,000 |   |
| General                and administrative expenses           |   |                                                                                   | 2,151,344  |                                                                                   |   | 1,691,062                                                                             |   |                                                                                                                                 | 4,295,465  |                                                                                                                           |   | 3,582,655 |   |   | 8,624,797 |   |
| Total                operating expenses                      |   |                                                                                   | 2,368,404  |                                                                                   |   | 1,893,694                                                                             |   |                                                                                                                                 | 4,715,264  |                                                                                                                           |   | 3,853,689 |   |   | 9,468,705 |   |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Net                loss from operations                      |   |                                                                                   | (2,368,404 | )                                                                                      |   | (1,893,694                                                                            | )      |                                                                                                                                 | (4,715,264 | )                                                                                                                              |   | (3,853,689 | ) |   | (9,468,705 | ) |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Interest                income                               |   |                                                                                   | 29,389     |                                                                                   |   | -                                                                                     |   |                                                                                                                                 | 36,818     |                                                                                                                           |   | - |   |   | 36,818 |   |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Interest                expense                              |   |                                                                                   | (195,667   | )                                                                                      |   | (212,274                                                                              | )      |                                                                                                                                 | (585,185   | )                                                                                                                              |   | (447,622 | ) |   | (1,223,818 | ) |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Gain                on fair value adjustment                 |   |                                                                                   | 78,705     |                                                                                   |   | -                                                                                     |   |                                                                                                                                 | 629,640    |                                                                                                                           |   | - |   |   | 629,640 |   |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Net                loss                                      |   | $                                                                                      | (2,455,977 | )                                                                                      | $      | (2,105,968                                                                            | )      | $                                                                                                                                    | (4,633,991 | )                                                                                                                              | $      | (4,301,311 | ) | $ | (10,026,065 | ) |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Preferred                dividends                           |   |                                                                                   | (85,259    | )                                                                                      |   | -                                                                                     |   |                                                                                                                                 | (2,620,844 | )                                                                                                                              |   | - |   |   | (2,620,844 | ) |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Net                loss available to common shareholders     |   | $                                                                                      | (2,541,236 | )                                                                                      | $      | (2,105,968                                                                            | )      | $                                                                                                                                    | (7,254,835 | )                                                                                                                              | $      | (4,301,311 | ) | $ | (12,646,909 | ) |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Basic                and diluted net loss per share          |   | $                                                                                      | (0.15      | )                                                                                      | $      | (0.16                                                                                 | )      | $                                                                                                                                    | (0.42      | )                                                                                                                              | $      | (0.37 | ) |   |   |   |
|                                                         |   |                                                                                   |       |                                                                                   |   |                                                                                  |   |                                                                                                                                 |       |                                                                                                                           |   |   |   |   |   |   |
| Weighted                average number of shares outstanding |   |                                                                                   | 17,258,462 |                                                                                   |   | 13,000,000                                                                            |   |                                                                                                                                 | 17,147,192 |                                                                                                                           |   | 11,558,989 |   |   |   |   |

----

**H2DIESEL      HOLDINGS, INC.**

**(A      Development Stage Enterprise)**

|                                                                                                            |   |                            |       |                                 |   |         |   |            |    |           |   | **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 | ) | $ | 2,668,809 |   |
|                                                                                                            |   |                            |       |                                 |   |         |   |            |    |           |   |                          |   |      |       |   |   |   |   |   |   |   |
| Cumulative                effect of change in accounting principle                                              |   |                            | -          |                                 |   | -            |   |            |  - |           |   |  -                       |   |      | (1,574,100 | ) |   | - |   |   | (1,574,100 | ) |
| Compensation                expense associated with options                                                     |   |                            | -          |                                 |   | -            |   |            |  - |           |   |  -                       |   |      | 1,979,918  |   |   | - |   |   | 1,979,918 |   |
| Issuance                of common stock-Registration Rights agreement                                           |   |                            | 174,900    |                                 |   | 175          |   |            | -       |           |   |  -                       |   |      | 944,285    |   |   | - |   |   | 944,460 |   |
| Issuance                of preferred stock in private offering                                                  |   |                            | -          |                                 |   | -            |   |            | 42,550  |           |   | 1,644,118                     |   |      | -          |   |   | - |   |   | 1,644,118 |   |
| Issuance                of warrants in private offering                                                         |   |                            | -          |                                 |   | -            |   |            | -       |           |   | -                             |   |      | 2,610,882  |   |   |  - |   |   | 2,610,882 |   |
| Dividend                associated with the beneficial conversion feature of the preferred                stock |   |                            | -          |                                 |   |  -      |   |            |  - |                |   |  -                       |   |      | 2,496,150  |   |   | (2,496,150 | ) |   | - |   |
| Private                placement costs                                                                          |   |                            | -          |                                 |   |  -      |   |            |  - |           |   |  -                       |   |      | (436,351   | ) |   | - |   |   | (436,351 | ) |
| Dividends                accrued on preferred stock                                                             |   |                            | -          |                                 |   |  -      |   |            |  - |           |   |  -                       |   |      | -          |   |   | (124,694 | ) |   | (124,694 | ) |
| Net                loss for the Nine months ended September 30, 2007                                            |   |                            | -          |                                 |   | -            |   |            | -       |           |   | -                             |   |      | -          |   |   | (4,633,991 | ) |   | (4,633,991 | ) |
|                                                                                                            |   |                            |       |                                 |   |         |   |            |    |           |   |                          |   |      |       |   |   |   |   |   |   |   |
| Balance                at September 30, 2007 (Unaudited)                                                        |   |                            | 17,266,150 |                                 | $      | 17,266       |   |            | 42,550  |           | $      | 1,644,118                     |   | $         | 14,064,576 |   | $ | (12,646,909 | ) | $ | 3,079,051 |   |

----

**H2DIESEL      HOLDINGS, INC.**

**(A      Development Stage Enterprise)**

**Consolidated      Statement of Cash Flows**

|                                                                                                                               |   | For                the Nine Months ended September 30, 2007 |       | For the Period from February 28, 2006 (Inception) to September 30, 2006  |   | For the Period from February 28, 2006 (Inception) to September 30, 2007  |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                               |   | (Unaudited)                                                                               |       | (Unaudited)                                                                                                                          |   | (Unaudited)                                                                                                                          |   |
| CASH                FLOWS FROM OPERATING ACTIVITIES:                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |
|                                                                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |
| Net                loss                                                                                                            |   | $                                                                                         | (4,633,991 | )                                                                                                                                    | $      | (4,301,311                                                                                                                           | )      | $ | (10,026,065 | ) |
| Adjustments                to reconcile net loss to net cash used in operating activities:                Amortization of discount |   |                                                                                      | 585,185    |                                                                                                                                 |   | 447,622                                                                                                                              |   |   | 1,223,818 |   |
| Compensation                expense associated with stock options                                                                  |   |                                                                                      | 1,979,918  |                                                                                                                                 |   | 864,161                                                                                                                              |   |   | 3,409,261 |   |
| Compensation                expense associated with accrued warrants                                                               |   |                                                                                      | 167,735    |                                                                                                                                 |   | -                                                                                                                                    |   |   | 167,735 |   |
| Issuance                of common stock, options and warrants for services                rendered                                 |   |                                                                                      | -          |                                                                                                                                 |   | 2,161,098                                                                                                                            |   |   | 1,788,745 |   |
| Gain                on fair value adjustment                                                                                       |   |                                                                                      | (629,640   | )                                                                                                                                    |   | -                                                                                                                                    |   |   | (629,640 | ) |
|                                                                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
| Changes                in operating assets and liabilities:                                                                        |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
| Prepaid                and Deferred expenses                                                                                       |   |                                                                                      | 46,525     |                                                                                                                                 |   | (76,964                                                                                                                              | )      |   | (23,750 | ) |
| Accounts                payable and accrued expenses                                                                               |   |                                                                                      | 425,765    |                                                                                                                                 |   | 312,281                                                                                                                              |   |   | 616,269 |   |
| Net                cash used in operating activities                                                                               |   |                                                                                      | (2,058,503 | )                                                                                                                                    |   | (593,113                                                                                                                             | )      |   | (3,473,627 | ) |
|                                                                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
| CASH                FLOWS FROM INVESTING ACTIVITIES:                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
|                                                                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
| Acquisition                of License Agreement                                                                                    |   |                                                                                      | (600,000   | )                                                                                                                                    |   | (1,500,000                                                                                                                           | )      |   | (2,500,000 | ) |
| Cash                used in investing activities                                                                                   |   |                                                                                      | (600,000   | )                                                                                                                                    |   | (1,500,000                                                                                                                           | )      |   | (2,500,000 | ) |
|                                                                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
| CASH                FLOWS FROM FINANCING ACTIVITIES:                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
|                                                                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
| Proceeds                from issuance of founders' shares                                                                          |   |                                                                                      | -          |                                                                                                                                 |   | 554                                                                                                                                  |   |   | 554 |   |
| Proceeds                from private offerings issuance of common stock, net of                costs                               |   |                                                                                      | -          |                                                                                                                                 |   | 1,745,211                                                                                                                            |   |   | 3,531,493 |   |
| Proceeds                from private offerings issuance of preferred stock, net of                costs                            |   |                                                                                      | 3,818,649  |                                                                                                                                 |   | -                                                                                                                                    |   |   | 3,818,649 |   |
| Proceeds                from convertible note payable                                                                              |   |                                                                                      | -          |                                                                                                                                 |   | 765,000                                                                                                                              |   |   | 765,000 |   |
| Proceeds                from loan payable-related party                                                                            |   |                                                                                      | -          |                                                                                                                                 |   | 50,000                                                                                                                               |   |   | 50,000 |   |
| Cash                provided by financing activities                                                                               |   |                                                                                      | 3,818,649  |                                                                                                                                 |   | 2,560,765                                                                                                                            |   |   | 8,165,696 |   |
| Net                (decrease) increase in cash and cash equivalents                                                                |   |                                                                                      | 1,160,146  |                                                                                                                                 |   | 467,652                                                                                                                              |   |   | 2,192,069 |   |
| Cash                and cash equivalents - beginning of period                                                                     |   |                                                                                      | 1,031,923  |                                                                                                                                 |   | -                                                                                                                                    |   |   | - |   |
| Cash                and cash equivalents - end of period                                                                           |   | $                                                                                         | 2,192,069  |                                                                                                                                 | $      | 467,652                                                                                                                              |   | $ | 2,192,069 |   |
|                                                                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
| Supplemental                Disclosure of Non-Cash Investing and Financing                Activities                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
|                                                                                                                               |   |                                                                                      |       |                                                                                                                                 |   |                                                                                                                                 |   |   |   |   |
| Payable                for License Agreement (net of discount)                                                                     |   | $                                                                                         | -          |                                                                                                                                 | $      | 6,015,553                                                                                                                            |   | $ | 5,015,553 |   |
| License                Agreement acquired in exchange for issuance of common                stock                                  |   | $                                                                                         | -          |                                                                                                                                 | $      | 545,747                                                                                                                              |   | $ | 545,747 |   |

----

----

----

** **

----

| Weighted                Average Exercise Price | $2.90                                      |
|------------------------------------------------|--------------------------------------------|
| Expected                Life                   | 5                -                10 years |
| Volatility                                     | 100.0%                                     |
| Dividend                Yield                  | 0%                                         |
| Risk-free                interest rate         | 4.21%                - 4.72%               |

|                                                                  |   | Number of                Shares |      | Weighted                Average                Exercise                Price |   | Weighted                Average                Remaining                Contractual Life                (Years) |   | Aggregate                Intrinsic                Value |   |
|-----------------------------------------------------------------------|--------|--------------------------------------|-----------|------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
| Options                outstanding at December 31, 2006               |   |                                 | 4,100,000 |                                                                         | $      | 1.65                                                                                                            |   |                                                    | 9.70   |   |   |   |   |
| Granted                                                               |   |                                 | 1,505,000 |                                                                         | $      | 6.30                                                                                                            |   |                                                    | 9.16   |   |   |   |   |
| Options                outstanding at September 30, 2007              |   |                                 | 5,605,000 |                                                                         | $      | 2.90                                                                                                            |   |                                                    | 9.00   |   |   |   |   |
| Vested                and expected to vest – September 30, 2007 |   |                                 | 3,475,000 |                                                                         | $      | 2.55                                                                                                            |   |                                                    | 8.91   |   | $ | 13,746,250 |   |
| Options                exercisable at September 30, 2007              |   |                                 | 2,325,000 |                                                                         | $      | 2.26                                                                                                            |   |                                                    | 8.96   |   | $ | 9,778,750 |   |

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** **

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**ITEM      2. PLAN OF OPERATION**

**Cautionary      Statement Regarding Forward-Looking Statements **

|   | · | our                lack of operating history; |
|--------|--------|-----------------------------------------------|

|   | · | our                dependence                on additional financing and our need to make payments under our license                and to develop our business; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | our                ability to gain market acceptance of our                biofuel; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | our                ability to establish production facilities for our bio-fuel and to                generate revenues from sales of our                biofuel; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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 whether our                fuel qualifies for tax credits and other governmental                support. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Plan      of Operation**

**Background**

**Operational      Plan**

|  | · | completing                additional test burns 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; |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|  | · | booking                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. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------|

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**Financing      Plan**

**Critical      Accounting Policies**

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**Off−Balance      Sheet Arrangements**

**ITEM      3. CONTROLS AND PROCEDURES **

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**PART      II. OTHER INFORMATION**

**ITEM      5. OTHER EVENTS**

*Amendment      No. 3 to the Exclusive License Agreement. *

|   | · | The                due date for the US$1,500,000 payment due October 31, 2007 was extended                to                November 15, 2007. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | H2Diesel                will pay Mr. Petrucci US$2,000,000 on or before November 15, 2007,                with                US$1,500,000 of such payment allocated to the payment formerly due                on                October 31, 2007 and US$500,000 of such payment allocated as a prepayment                of the US$1,000,000 payment due on March 20,                2008. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Amendment      No. 4 to the Exclusive License Agreement.*

|   | · | The                due date for the US$2,000,000 payment due on or before November 15,                2007                was extended to November 29, 2007. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | H2Diesel                will pay Mr. Petrucci the remaining US$500,000 of the payment due                on March                20, 2008 on February 20, 2008. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | H2Diesel                will pay Mr. Petrucci the US$1,000,000 payment, due in 2009, on February                20, 2009. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|

|   | · | H2Diesel                will pay Mr. Petrucci US$500,000 of the US$1,000,000 payment due in                2010 on February 20, 2010. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

*Amendment No. 1 to the Stock Purchase and Termination      Agreement with Xethanol. *

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**ITEM      6. EXHIBITS AND REPORTS ON FORM 8-K**

| **Exhibit                  Number** |   | **Exhibit                  Description**                                                                                                                                                                                                                      |
|-------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                                |   | Stock                  Purchase and Termination Agreement, dated October 5, 2007 between                  Xethanol                  Corporation and the Company. (1)                                                                                          |
|                                |   |                                                                                                                                                                                                                                                          |
| 10.2                                |   | Amendment                  No. 1 dated November 13, 2007, to the Stock Purchase and Termination                  Agreement, dated October 5, 2007 between Xethanol Corporation and                  the                  Company.                             |
|                                |   |                                                                                                                                                                                                                                                          |
| 10.3                                |   | Amendment                No. 3, dated                November 3, 2007, to the Exclusive License Agreement.                                                                                                                                                    |
|                                |   |                                                                                                                                                                                                                                                          |
| 10.4                                |   | Amendment                  No. 4, dated November 9 2007, to the Exclusive License                  Agreement.                                                                                                                                            |
|                                |   |                                                                                                                                                                                                                                                          |
| 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 company's current report on Form 8-K filed on                October 10, 2007. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------|

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**SIGNATURES**

| Date:                November 14, 2007 | By:    | /s/                David                A. Gillespie                                               |
|----------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                                   |   | David                A. Gillespie                                                                  |
|                                   |   | President                and Chief Executive Officer                                               |
|                                   |   | (Principal                executive and principal financial                officer of the Company) |

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