**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




For
      the
      quarterly period ended September 30, 2006




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




For
      the
      transition period from ___________ to _____________




Commission
      File No. 000-50214




**WIRELESS
      HOLDINGS, INC.**


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


Florida
              26-0067474(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
  20283
        State Road 7, Suite 40
 Boca
        Raton, Florida 33498
 (Address
        of principal executive offices)
  (561)
        807-6325
 (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 [ ]
   Indicate
        by check mark whether the registrant is a shell company (as defined in
        Rule-12b-2 of the Exchange Act.) Yes [ ]   No [x ]
   State
        the
        number of shares outstanding of each of the issuer's classes of common equity,
        as of November 14, 2006: 17,091,250 shares of common stock outstanding, $0.0001
        par value per share.
   Transitional
        Small Business Disclosure Format. Yes [ ]   No [x]
   1
  Item
                    1.
                Financial
                    Statements
                3Consolidated
                    balance sheet as of September 30, 2006 (Unaudited)Consolidated
                    statements of operations for the three months endedSeptember
                    30, 2006 (Unaudited) and for the period fromFebruary
                    28, 2006 (Inception) through September 30, 2006 (Unaudited)
                4Consolidated
                    statement of stockholders’ equity for the period fromFebruary
                    28, 2006 (Inception) through September 30, 2006 (Unaudited)
                5Consolidated
                    statement of cash flows for the period fromFebruary
                    28, 2006 (Inception) through September 30, 2006 (Unaudited)
                6Notes
                    to consolidated financial statements
                7-18Item
                    2.
                Plan
                    of Operation
                19-23Item
                    3.
                Controls
                    and Procedures
                23**PART
                    II. OTHER INFORMATION**Item
                    1.
                Legal
                    Proceedings
                24Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                24Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                24Item
                    5.
                Other
                    Information
                24Item
                    6.
                Exhibits
                24Signatures
    2
  **WIRELESS
                    HOLDINGS, INC.****(A
                    Development Stage Enterprise)**Consolidated
                    Balance SheetSeptember
                    30, 2006(Unaudited)ASSETSCurrent
                    assets:Cash
                
                $
                467,652Deferred
                    expenses
                
                
                76,964Total
                    current assets
                
                
                544,616License
                    Agreement
                
                
                8,061,300TOTAL
                    ASSETS
                
                $
                8,605,916LIABILITIES
                    AND STOCKHOLDER'S EQUITYCurrent
                    liabilities:Accounts
                    payable and accrued expenses
                
                $
                312,281Loan
                    payable-related party
                
                
                50,000Convertible
                    note payable
                
                
                765,000License
                    Agreement payable-current portion(net
                    of unamortized discount of $78,405)
                
                
                2,421,595Total
                    current liabilities
                
                
                3,548,876License
                    Agreement payable(net
                    of unamortized discount of $2,958,420)
                
                
                4,041,580Total
                    Liabilities
                
                
                7,590,456Stockholders'
                    equity:Common
                    stock, $0.0001 par value, 25,000,000 sharesauthorized;
                    13,000,000 shares issued and outstanding
                
                
                1,300Additional
                    paid-in-capital
                
                
                5,315,471Accumulated
                    deficit
                
                
                (4,301,311
                )Total
                    stockholders' equity
                
                
                1,015,460TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                8,605,916
     3
  **WIRELESS
                    HOLDINGS, INC.****(A
                    Development Stage Enterprise)**Consolidated
                    Statements of Operations(Unaudited)For
                    the Three Months Ended September 30, 2006
                
                For
                    the Period from February 28, 2006(Inception) to September 30,
                    2006Operating
                    expenses:Research
                    and development expenses
                
                $
                30,132
                
                $
                61,034Merger
                    expenses
                
                
                135,000
                
                
                135,000General
                    and administrative expenses
                
                
                1,728,562
                
                
                3,657,655Total
                    operating expenses
                
                
                1,893,694
                
                
                3,853,689Net
                    loss from operations
                
                
                (1,893,694
                )
                
                (3,853,689
                )Interest
                    expense
                
                
                212,274
                
                
                447,622Net
                    loss
                
                $
                (2,105,968
                )
                $
                (4,301,311
                )Basic
                    and diluted net loss per share
                
                $
                (0.16
                )
                $
                (0.37
                )Weighted
                    average number ofshares
                    outstanding
                
                
                13,000,000
                
                
                11,558,989
   4
  **WIRELESS
                      HOLDINGS, INC.****(A
                      Development Stage Enterprise)**Consolidated
                      Statement of Changes in Stockholders' EquityFor
                      the Period from February 28, 2006 (Inception) to September
                      30,
                      2006(Unaudited)**Additional****Common
                      Stock**
                  
                  **Paid-in-**
                  
                  **Accumulated****Shares**
                  
                  **Amount**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Total**Balance
                      at February 28, 2006
                  
                  
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -Issuance
                      of founders' shares ($0.0001 per share)
                  
                  
                  5,541,250
                  
                  
                  554
                  
                  
                  -
                  
                  
                  -
                  
                  
                  554Issuance
                      of common stock in private offering,
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -net
                      of costs
                  
                  
                  3,250,000
                  
                  
                  325
                  
                  
                  1,744,886
                  
                  
                  -
                  
                  
                  1,745,211Issuance
                      of common stock for services rendered
                  
                  
                  2,015,000
                  
                  
                  202
                  
                  
                  1,230,211
                  
                  
                  -
                  
                  
                  1,230,413Issuance
                      of common stock for Put Right
                  
                  
                  1,300,000
                  
                  
                  130
                  
                  
                  793,685
                  
                  
                  -
                  
                  
                  793,815Issuance
                      of common stock for Master License
                  
                  
                  893,750
                  
                  
                  89
                  
                  
                  545,658
                  
                  
                  -
                  
                  
                  545,747Issuance
                      of warrants for services rendered
                  
                  
                  -
                  
                  
                  -
                  
                  
                  95,460
                  
                  
                  -
                  
                  
                  95,460Issuance
                      of options for Put Right
                  
                  
                  -
                  
                  
                  -
                  
                  
                  41,410
                  
                  
                  -
                  
                  
                  41,410Compensation
                      expense associated with options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  864,161
                  
                  
                  -
                  
                  
                  864,161Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (4,301,311
                  )
                  
                  (4,301,311
                  )Balance
                      at September 30, 2006
                  
                  
                  13,000,000
                  
                  $
                  1,300
                  
                  $
                  5,315,471
                  
                  $
                  (4,301,311
                  )
                  $
                  1,015,460
 5
  **WIRELESS
                      HOLDINGS, INC.****(A
                      Development Stage Enterprise)**Consolidated
                      Statement of Cash FlowsFebruary
                      28, 2006 (Inception) to September 30, 2006(Unaudited)CASH
                      FLOWS FROM OPERATING ACTIVITIES:Net
                      loss
                  
                  $
                  (4,301,311
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Amortization
                      of discount
                  
                  
                  447,622Compensation
                      expense associated with stock options
                  
                  
                  864,161Issuance
                      of common stock, options and warrants forPut
                      Right and services rendered
                  
                  
                  2,161,098Changes
                      in operating assets and liabilities:Deferred
                      expenses
                  
                  
                  (76,964
                  )Accounts
                      payable and accrued expenses
                  
                  
                  312,281Net
                      cash used in operating activities
                  
                  
                  (593,113
                  )CASH
                      FLOWS FROM INVESTING ACTIVITIES:Acquisition
                      of License Agreement
                  
                  
                  (1,500,000
                  )Cash
                      used in investing activities
                  
                  
                  (1,500,000
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIES:Proceeds
                      from issuance of founders' shares
                  
                  
                  554Proceeds
                      from private offering issuance of common stock, net of
                      costs
                  
                  
                  1,745,211Proceeds
                      from convertible note payable
                  
                  
                  765,000Proceeds
                      from loan payable-related party
                  
                  
                  50,000Cash
                      provided by financing activities
                  
                  
                  2,560,765Net
                      increase in cash and cash equivalents
                  
                  
                  467,652Cash
                      and cash equivalents - beginning of period
                  
                  
                  -Cash
                      and cash equivalents - end of period
                  
                  $
                  467,652Supplemental
                      Disclosure of Non-Cash Investing and Financing
                      ActivitiesPayable
                      for License Agreement (net of discount)
                  
                  $
                  6,015,553License
                      Agreement acquired in exchange for issuance of common
                      stock
                  
                  $
                  545,747
  6
 Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
 
 Note
        1  -  ORGANIZATION
        AND GOING CONCERN
  Wireless
        Holdings, Inc. (“Wireless”, the “Company,” “we” “our”) was incorporated June 4,
        2003 under the laws of the State of Florida. Wireless was organized for the
        purpose of engaging in business capital ventures and other business permitted
        under the laws of the United States and the State of Florida.
  On
        October 20, 2006 Wireless completed a so-called “reverse merger” transaction, in
        which we caused Wireless Acquisition Holdings Corp., a Delaware corporation
        and
        our newly-created, wholly-owned subsidiary to be merged with and into H2Diesel,
        Inc. (“H2Diesel”), a Delaware corporation (The “Merger”). H2Diesel is a recently
        formed development stage company that holds an exclusive license for North
        America, Central America and the Caribbean (the “ Territory ”)
        to
        exploit proprietary technology to manufacture bio-fuel that is intended to
        be
        marketed as “bio-diesel” fuel or heating fuel or, alternatively, as a new class
        of bio-fuel or fuel additive. As a result of the Merger, H2Diesel became
        our
        wholly-owned subsidiary, and a change of control occurred as former H2Diesel
        stockholders acquired 93.6% of the outstanding shares of our common stock.
        The
        Merger was consummated under Delaware law and pursuant to an Agreement of
        Merger
        and Plan of Reorganization, dated October 17, 2006.
  In
        connection with the Merger, the Company assumed all of H2Diesel’s obligations
        under its outstanding stock options and warrants. At the time of the Merger,
        H2Diesel had outstanding stock options and warrants to purchase 5,571,500
        shares
        of Common Stock of H2Diesel, which outstanding stock options and warrants
        are
        now options and warrants to purchase an equal number of shares of Company
        Common
        Stock as a result of the Merger. The Company did not have any warrants or
        options to purchase shares of its capital stock outstanding immediately prior
        to
        the closing of the Merger.
  Pursuant
        to a Purchase and Repayment Agreement, dated October 20, 2006 (the “ Purchase
        and Repayment Agreement ”)
        between the Company and Joseph Hess, our former President and Chief Executive
        Officer, which was entered into in connection with the Merger, we paid an
        aggregate of $300,000 to Mr. Hess in consideration of the payment in full
        of all indebtedness owed by the Company to Mr. Hess in the amount of
        $215,945 **** and
        the
        sale to us of 29,075,000 shares of Company Common Stock, which shares were
        then
        cancelled at the closing of the Merger. Immediately following the closing
        of the
        Merger and pursuant to an Acquisition Agreement dated October 20, 2006 (the
        “ Acquisition
        Agreement ”),
        and
        as part of the consideration for the repurchase of Mr. Hess’ shares, we sold to
        Mr. Hess all of the capital stock of our subsidiary, Action Wireless, Inc.,
        a
        Florida corporation (“ Action
        Wireless ”),
        through which we conducted our historical wireless products reseller business,
        and Mr. Hess assumed and agreed to indemnify and hold us harmless from the
        historical and future liabilities of those operations. Giving effect to the
        cancellation of Mr. Hess’ shares, there were 1,101,250 shares of Company
        Common Stock outstanding before giving effect to the stock issuances in the
        Merger .
  7
 Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
 We
        currently intend to carry on H2Diesel’s business as our sole line of business.
        H2Diesel holds an exclusive license in the Territory to make, have made and
        sell
        or sublicense others to make, have made and sell, bio-fuel that is intended
        to
        be marketed as “bio-diesel” fuel or heating fuel, or alternatively, as a new
        class of bio-fuel or fuel additive using a proprietary additive and know
        how
        which we believe simplifies and potentially reduces the cost of the traditional
        bio-diesel manufacturing process. Following the Merger we intend to change
        the
        name of the Company to “H2Diesel Holdings, Inc.” or a similar name. In addition,
        we expect to obtain a new trading symbol once our name change is
        complete.
  The
        merger is being accounted for as a “reverse merger” (i.e., a recapitalization of
        H2Diesel), since the stockholders of H2Diesel now own a majority of the
        outstanding shares of our common stock immediately following the merger.
        H2Diesel is deemed to be the acquiror in the reverse merger and, consequently,
        the assets and liabilities and the historical operations that will be reflected
        in the financial statements will be those of H2Diesel and will be recorded
        at
        the historical cost basis of H2Diesel. We have not included any historical
        financial data for Wireless Holdings, Inc. because as a result of the
        transactions entered into in connection with the Merger, including the transfer
        of our Action Wireless subsidiary to Mr. Hess and the cancellation of all
        of our
        indebtedness to Mr. Hess, none of our assets, liabilities or operations
        immediately preceding the Merger will continue following the
        Merger.
  H2Diesel,
        Inc. was organized under the General Corporation Law of the State of Delaware
        on
        February 28, 2006 (“Inception”). The Company is an alternative fuel company. The
        Company plans to produce, sell or sublicense to third parties for its
        manufacture and use, a proprietary vegetable oil based bio-fuel to be used
        as an
        additive or substitute for conventional petroleum diesel and bio-diesel,
        heating
        and other fuels, pursuant to an exclusive license agreement entered into
        by the
        Company on March 20, 2006 (the “Master License”). The Company’s business model
        is to utilize its licensed proprietary technology to manufacture or sublicense
        its fuel products for sale to alternative fuel manufacturers and
        distributors.
  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 $4,301,311 and negative cash flows from operating activities
        of
        $593,113 since Inception. The Company is obligated to pay $9.5 million in
        additional payments for the Master License (See note 5). 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, 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.
   8
 Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
 Interim
        Financial Statements
  The
        interim financial statements presented herein have been prepared pursuant
        to the
        rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
        information and footnote disclosures normally included in financial statements
        prepared in accordance with accounting principles generally accepted in the
        United States of America have been condensed or omitted pursuant to such
        rules
        and regulations. The interim financial statements should be read in conjunction
        with the Company’s notes, accounting policies and proforma information included
        in the Company’s report on Form 8-K for the period ended June 30, 2006 as filed
        with the SEC. In the opinion of management, all adjustments (consisting only
        of
        normal recurring adjustments) which are necessary to provide a fair presentation
        of financial position as of September 30, 2006 and the related operating
        results
        and cash flows for the interim period presented have been made. The results
        of
        operations, for the period presented are not necessarily indicative of the
        results to be expected for the year.
  Note
        2  -  SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES
  Basis
        of Presentation and Plan of Operation
  Since
        its Inception on February 28, 2006, the Company has devoted most of its
        activities to establishing its business, including raising capital and,
        accordingly, the Company presents its consolidated financial statements as
        a
        development stage enterprise as defined in Statement of Financial Accounting
        Standards (“SFAS”) No.7, “Accounting and Reporting by Development Stage
        Enterprises.”
  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. Significant estimates include the valuation of shares, warrants
        or
        options issued for services and the valuation of its Master License and its
        estimated useful life to calculate amortization. The Company evaluates its
        estimates on an ongoing basis. Actual results could differ from those estimates
        under different assumptions or conditions.
  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.
   9
 Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
  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 September 30, 2006, there were 2,420,000 shares of common
        stock equivalents 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.
  Concentration
        of Credit Risk
  The
        Company may, from time to time, maintain cash balances with a major financial
        institution which is not insured by the Federal Deposit Insurance Corporation.
  Costs
        Associated with Issuance of Stock
  Investment
        banking fees and related costs directly associated with the sale of stock
        are
        charged to stockholders’ equity.
  Share-Based
        Compensation
  In
        accordance with SFAS 123R “Share-Based Payment”, the Company records
        compensation expense for all share-based payment awards made to employees
        based
        on the estimated fair value.
  Stock
        Issued for Non-Cash Consideration
  Stock
        issued for services has been valued based on the estimated fair value of
        the
        shares at the time they were issued.
  License
        Agreements
  In
        accordance with SFAS 142 “Goodwill and Other Intangible Assets”, the Company has
        capitalized its Master License and has estimated its useful life to be
        indefinite. The value of the Master License will be tested for impairment
        on an
        annual basis.
  Revenue
        Recognition
  The
        Company records revenues pursuant to the Company’s Amended Sublicense Agreement
        (as defined below) based on the greater of minimum royalties or a royalty
        per
        gallon of product sold directly or indirectly by the Company’s licensee (See
        Note 3). Minimum royalty revenue is recognized on a straight-line basis over
        each period, as defined, in the Amended Sublicense Agreement. Royalties
        exceeding the defined minimum amounts are recognized as income during the
        period
        corresponding to product sales. Minimum royalties are not due until the Company
        has met certain product specifications and other requirements of the
        sub-licensee. Accordingly, no revenue has been recorded for the period from
        Inception through September 30, 2006.
   10
 
 Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
  Research
        and Development
  Research
        and development costs are expensed as incurred. For the three months ended
        September 30, 2006, and for the period from February 28, 2006 (inception)
        through September 30, 2006, the Company incurred research and development
        expense of $30,132 and $61,034, respectively.
  Income
        Taxes
  Deferred
        tax assets and liabilities are computed based on the difference between the
        book
        and income tax bases of assets and liabilities using the enacted marginal
        tax
        rate. Deferred income tax expenses or credits are based on changes in the
        assets
        and liabilities from period to period. These differences arise primarily
        from
        the Company’s net operating loss. Valuation allowances are established when
        necessary to reduce deferred tax assets to the amount expected to be realized.
        No deferred taxes were recorded due to the uncertainty of future
        income.
  Fair
        Value of Financial Instruments
  The
        carrying amount of cash, accounts payable and accrued expenses approximate
        fair
        value because of the short-term nature of these instruments. License Agreement
        payable approximates fair value of amounts due under the Master License as
        it
        has been recorded in accordance with Accounting Principles Board Opinion
        No.
        21.
  Note
        3 - INVESTMENT AGREEMENT, MANAGEMENT AGREEMENT AND SUBLICENSE
        AGREEMENT
  Effective
        April 14, 2006, the Company entered into an Investment Agreement (the
“Agreement”) with two institutional investors (the “Investors”) and Xethanol
        Corporation (“Xethanol”). The Agreement was amended on May 17, 2006, effective
        as of April 14, 2006 (the “Amended Agreement”).
  On
        March
        20, 2006, in exchange for gross proceeds of Two Million Dollars ($2,000,000)
        from the Investors, the Company issued to the Investors 3,250,000 shares
        of the
        Company’s common stock and stock options to purchase 2,000,000 shares of the
        Company’s common stock for $2.50 per share (the “Investor Option”). The Investor
        Option was exercisable up to 60 days after the Company provided notice of
        certain test results (the “Test Notice”) with respect to its technology (the
“Exercise Period”). The Investor Option has a fair value of $15,463 based on the
        Black-Scholes option-pricing model.
  11
  Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
 Costs
        associated with the investment amounted to $254,789 resulting in net proceeds
        to
        the Company of $1,745,211. The Company issued 80,000 warrants to purchase
        shares
        of the Company’s common stock at an exercise price of $2.50 per share as
        compensation for investment banking services associated with raising the
        equity.
        The warrants have a fair value of $17,420 based on the Black-Scholes option
        pricing model. The warrants are considered a cost of raising the capital.
  The
        Company issued to Xethanol a total of 2,600,000 shares of the Company’s common
        stock, granted Xethanol the right to purchase up to an additional 2,000,000
        shares of the Company’s common stock at $1.80 per share (the “Xethanol Option”),
        and Xethanol granted the Investors the right to require Xethanol to purchase
        the
        shares of the Company’s common stock owned by the Investors in exchange for
        500,000 shares of Xethanol common stock (the “Put Right”). The Xethanol Option
        was exercisable during the Exercise Period. The Xethanol Option has a fair
        value
        of $41,410 based on the Black-Scholes option pricing model. The Xethanol
        Option
        has been charged to operations during the period. Of the 2,600,000 shares
        issued
        to Xethanol, 1,300,000 shares were issued to Xethanol as an inducement to
        enter
        into the Put Right. The fair value of these shares was $793,815, based on
        a
        share price of approximately $0.61. These shares were charged to expense
        during
        the period. On April 14, 2006, the Investors exercised their respective Put
        Rights, and Xethanol purchased the Investors’ 3,250,000 shares of the Company’s
        common stock in exchange for 500,000 shares of Xethanol common stock. As
        of June
        30, 2006, Xethanol owned 5,850,000 shares of the Company’s common stock which
        represented as of such date a 45% ownership interest in the
        Company.
  On
        June
        15, 2006 the Company sent the Test Notice and on August 15, 2006, the Company
        agreed to extend the Exercise Period to August 21, 2006. As of August 21,
        2006,
        the Investor Option and the Xethanol Option expired.
  In
        connection with the Agreement, Xethanol and the Company entered into a
        Management Agreement and Sublicense Agreement, each of which is dated April
        14,
        2006. The Sublicense Agreement was amended and restated on June 15, 2006,
        effective April 14, 2006, in an Amended and Restated Sublicense Agreement
        (the
“Amended Sublicense Agreement”).
  Under
        the
        Management Agreement, Xethanol agreed to manage the business of the Company.
        The
        Company issued 1,300,000 shares of the Company’s common stock to Xethanol
        pursuant to the Amended Agreement as a non-refundable fee for its services
        under
        the Management Agreement. The shares have a fair value of $793,815, based
        on a
        share price of approximately $0.61 per share and were recorded as a deferred
        expense. On August 25, 2006, the Company notified Xethanol of the Company’s
        election to terminate the Management Agreement. As a result the Management
        Agreement terminated on September 25, 2006. Accordingly, the Company has
        recorded management fee expense of $626,353 for the three months ended September
        30, 2006 and $793,815 from Inception through September 30, 2006,
        respectively.
   12
 Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
 Under
        the
        Amended Sublicense Agreement, Xethanol was granted a ten year sublicense
        to
        produce and sell bio-fuel and other products (“Products”) incorporating the
        Company’s proprietary additive (the “Additive”) and know how exclusively in Maine,
        Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island, New York,
        Pennsylvania, Delaware, New Jersey, Virginia, West Virginia, North Carolina,
        South Carolina, Georgia and Florida  and
        a
        non-exclusive license to sell those Products anywhere within North America,
        Central America and the Caribbean. Additional territories may be added by
        written agreement of the parties. The Company believes that the Additive
        facilitates, simplifies and reduces the cost of producing bio-fuel based
        on
        vegetable oil and is based upon a formula and certain proprietary technology
        (the “Technology”) that the Company has licensed under the Master
        License.
  Under
        the
        Amended Sublicense Agreement, the Company must sell Xethanol sufficient Additive
        to meet its requirements for the production of Product at the lower of its
        actual cost plus 10% or the price at which the Company sells Additive to
        unrelated third parties or at such other price as Xethanol and the Company
        may
        agree. Xethanol is obligated to pay certain royalties to the Company based
        on
        sales of Products by them or their sublicensees. Xethanol is obligated to
        pay to
        the Company a royalty (the “Royalty”) per gallon of Product that it or its
        distributors sell equal to the lesser of $.10 per gallon or the lowest per
        gallon royalty that the Company charges to unrelated entities. During the
        first
        royalty period, which begins on the date the Company first notifies Xethanol
        that the Company can produce and deliver Additive in sufficient quantities
        to
        meet Xethanol’s requirements, is able to do so and provides them with the
        technical and engineering specifications necessary for a plant to produce
        the
        Products (the “Trigger Date”) and ends 12 months later, Xethanol must pay a
        minimum Royalty amount that would be payable based upon sales of 20,000,000
        gallons of Product (the “Minimum Sales Amount”), regardless of whether such
        sales actually occur. The Minimum Sales Amount increases by 10,000,000 gallons
        for each succeeding 12-month period during the initial term of the Amended
        Sublicense Agreement, which ends 10 years from the Trigger Date. If Xethanol
        does not meet the Minimum Sales Amount, or fails to pay the Royalty that
        would
        have been payable had they met the Minimum Sales Amount, in any 12-month
        period,
        its rights may become non-exclusive or the agreement may be subject to
        termination. The Amended Sublicense Agreement automatically renews for
        successive one-year periods provided there are no existing defaults at the
        time
        of renewal. As of September 30, 2006, the Trigger Date had not yet occurred
        and
        accordingly, no royalty income has been recorded by the Company pursuant
        to the
        Amended Sublicense Agreement.
   13
 Wireless
        Holdings, Inc.
 (A
        Development Stage Enterprise)
 Notes
        to
        Consolidated Financial Statements
 September
        30, 2006 (Unaudited)
   Also
        on
        June 15, 2006, Xethanol entered into a Technology Access Agreement with the
        Company, pursuant to which the Company will deliver to Xethanol the Additive
        formula and all know-how in the Company’s possession, under the Company’s
        control or available from the inventor of the Technology that relates to
        the
        manufacture of the Additive. The Company is required to continue to provide
        Xethanol with information regarding modifications to that formula or know-how.
        Xethanol has no right to use the formula or the know-how except as set forth
        in
        the Amended Sublicense Agreement so long as the Company is not in default
        of its
        obligations under the Amended Sublicense Agreement. After an event of default
        by
        the Company, Xethanol has the right to use the formula and know-how to produce
        Additive to meet its needs to sell Product under the Amended Sublicense
        Agreement. Xethanol must pay the Company the royalties that it would otherwise
        have paid in connection with sales of Product, but may offset the amount
        by
        which the cost it incurs in manufacturing the Product itself exceeds the
        price
        that it would otherwise have paid to the Company. Xethanol has retained the
        right to seek damages from the Company for any excess cost of the
        Additive.
  Note
        4  -  COMMON
        STOCK PURCHASE WARRANTS AND OPTIONS
  In
        April
        2006, the Company issued a warrant to purchase 340,000 shares of the Company’s
        common stock at a weighted average exercise price of $1.80 per share, to
        an
        independent contractor of the Company for services rendered. None of these
        shares have been exercised as of September 30, 2006.
  The
        fair
        value of this warrant was $87,953 based on the Black-Scholes option pricing
        model. Significant assumptions used in the model were 4.85% as the risk-free
        rate based on U.S. Treasury yield curve for a 5 year maturity, warrant life
        of 3
        years, dividend yield of 0% and 100% for expected volatility.
  During
        September 2006, the Company modified the exercise price of the warrant from
        $1.80 per share to $1.50 per share. Based
        on
        this modification, the fair value of the warrant, based on the Black-Scholes
        option pricing model is $95,460, and $7,507 and $95,460 of such amount was
        charged to operations for the three months ended September 30, 2006 and for
        the
        period from Inception through September 30, 2006, respectively.
  On
        April
        1, 2006 (the “Grant Date”), the Company granted to its Chief Technology Officer,
        an option to purchase 500,000 shares of the Company’s common stock at an
        exercise price of $3.75 per share, of which 100,000 shares vested on the
        Grant
        Date, 200,000 shares shall vest on the first anniversary of the Grant Date
        and
        200,000 shares shall vest upon the second anniversary of the Grant Date.
        The
        option shall expire on the tenth anniversary of the Grant Date. None of these
        shares have been exercised as of September 30, 2006.
  The
        fair
        value of this option is $151,113 based on the Black-Scholes option pricing
        model. Significant assumptions used in the model were 4.85% as the risk-free
        rate based on U.S. Treasury yield curve for a 5 year maturity, option life
        of 5
        years, dividend yield of 0% and 100% for expected volatility.
  14
 Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
  On
        September 19, 2006 the option issued to the Company’s Chief Technology Officer
        were modified. The exercise price of the option to purchase 500,000 shares
        of
        the Company’s stock was decreased from $3.75 per share to $1.50 per share, the
        grant date was changed to September 16, 2006 and the expiration date was
        changed
        to September 16, 2016. All other terms of the option agreement remained the
        same. The fair value of the modified option is $195,743 based on the
        Black-Scholes option pricing model, and $32,963 and $78,297 of such amount
        was
        charged to operations for the three months ended September 30, 2006 and for
        the
        period from Inception through September 30, 2006, respectively.
 
 Note
        5 ****  -  MASTER
        LICENSE AGREEMENT
  On
        March
        20, 2006 (the “Effective Date”), the Company entered into an agreement (“Master
        License”) with Ferdinando Petrucci, the inventor of the Additive (“Licensor”),
        to obtain an exclusive license to make, use and sell the Product in the
        territory comprising North America, Central America and Caribbean as well
        as
        other regions that may be added by mutual agreement of the parties. The Company
        has agreed to pay $11.0 million to the Licensor which shall be payable as
        follows: $1.5 million paid upon the Effective Date, $1.0 million within 180
        days
        after the Effective Date, $1.5 million within one year after the Effective
        Date
        and $1.0 million on each subsequent anniversary of the Effective Date for
        the
        seven years thereafter. The Company also has the option, to add South America,
        excluding Paraguay, to its licensed territories within six months after the
        Effective Date of the agreement for an additional $10 million which would
        be
        payable over a six year period as follows: $1.5 million upon exercise of
        option,
        $1.5 million within 180 days after exercise and $1.0 million on or before
        each
        subsequent anniversary of the exercise date for seven years thereafter. The
        Company also issued 893,750 shares of its common stock to the Licensor as
        additional compensation for the Master License. As of September 30, 2006,
        the
        Company has recorded an intangible asset of $8,061,300 for the fair value
        of the
        Master License. The Company has recorded the payable for $9.5 million of
        remaining payments under the Master License with a discount based on an imputed
        interest rate of 14%. The Company has recorded interest expense of $212,274
        and
        $447,622 representing amortization of the discount for the three months ended
        September 30, 2006 and for the period from Inception through September 30,
        2006,
        respectively.
  The
        Company issued an aggregate of 715,000 shares of the Company’s common stock to
        two consultants (one of whom is now the Company’s Chief Technology Officer’s
        (see note 6)) upon the Effective Date as compensation for their services
        rendered in introducing the inventor to the Company and their assistance
        in
        negotiating the terms of the Master License. The fair market value of the
        common
        stock issued to the consultants amounted to $436,598, based on a share price
        of
        approximately $0.61, and was recorded as consulting expense during the period
        from Inception through September 30, 2006.
  On
        September 11, 2006, the Master License Agreement was amended to extend the
        due
        date of the $1.0 million payment that was due on September 20, 2006, the
        expiration of the option to add South America, excluding Paraguay to the
        covered
        territory, and the deadline to file a registration statement with the SEC
        with
        respect to the Company’s securities, to December 31, 2006.
   
 15
  Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
  Note
        6 ****  -  RELATED
        PARTY TRANSACTIONS
  On
        June
        30, 2006 the Company received a loan from Xethanol. The loan will bear interest
        at the prime rate and, although could have been credited against the exercise
        price payable to the Company upon Xethanol’s exercise of the Xethanol Option,
        will be repayable in cash.
  On
        April
        14, 2006, the Company issued 1,300,000 shares of the Company’s common stock to
        Xethanol as a non-refundable fee for its services under the Management
        Agreement, issued an additional 1,300,000 shares of the Company’s common stock
        to Xethanol to induce it to grant the Put Right, granted Xethanol the Xethanol
        Option and entered into the Amended Sublicense Agreement with Xethanol (See
        Note
        3).
  On
        March
        20, 2006, the Company issued 357,500 shares of the Company’s common stock to
        Andrea Festuccia, a former consultant to the Company and presently the Company’s
        Chief Technology Officer, for his services in introducing the inventor to
        the
        Company and his assistance in negotiating the terms of the Master License.
        Mr.
        Festuccia became the Company’s Chief Technology Officer on April 1, 2006 (See
        Note 5).
  For
        the
        three months ended September 30, 2006 and for the period from Inception through
        to September 30, 2006, Lee Rosen, a significant shareholder and sole director
        of
        the Company, received $45,000 and $90,000, respectively for consulting
        services.
  On
        September 15, 2006 the Company granted to Lee Rosen an option to purchase
        1,500,000 shares of the Company’s common stock at an exercise price of $1.50 as
        a result of the increased duties as a result of the termination of the
        management agreement and the successful negotiations of the amendment to
        the
        Master License. The option vested immediately.
  The
        fair
        market value of the option is $785,863 based on the Black-Scholes option
        pricing
        model and was charged to operations during the three months ended September
        30,
        2006. Significant assumptions used in the model were 4.61% as the risk-free
        rate
        based on U.S. Treasury yield curve for a 10 year maturity, option life of
        10
        years, dividend yield of 0% and 100% for expected volatility.
   
 16
  Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)
  Note
        7 ****  -  CONVERTIBLE
        PROMISSORY NOTE
  On
        September 11, 2006, the Company issued a $765,000 Convertible Promissory
        Note
        (the “Note”) payable on demand and bearing interest on any overdue amount at 8%
        per annum. The Note is convertible at the Company’s option into shares of the
        Company’s common stock upon the consummation of an offering and sale of the
        Company’s common stock in which the aggregate gross proceeds equals or exceeds
        $2.0 million (including the proceeds from this Note). On October 17, 2006
        the
        Note was converted to 765,000 shares of common stock as part of a Private
        Placement (See Note 8).
 
 Note
        8 ****  -  SUBSEQUENT
        EVENTS
  On
        October 17, 2006, H2Diesel completed the closing of a Private Placement of
        a
        total of 2,915,000 shares of common stock, inclusive of the shares issued
        upon
        conversion of the Note, at a purchase price of $1.00 per share.
  Costs
        associated with the investment amounted to $176,050 resulting in net proceeds
        of
        $2,738,950. The Company issued 251,500 warrants to purchase shares of the
        Company’s common stock at an exercise price of $1.50 per share as compensation
        for investment banking services associated with raising the equity. The warrants
        have a fair value of $141,243 based on the Black-Scholes option pricing model.
        The warrants are considered a cost directly associated with the issuance
        of
        stock.
  Under
        the
        terms of the Private Placement, H2Diesel entered into a Registration Rights
        Agreement dated October 17, 2006 with the purchasers of its common stock.
        In
        connection with the Merger, we assumed H2Diesel’s obligations under the
        Registration Rights Agreement. Under the Registration Rights Agreement, we
        are
        required to file a “resale” registration statement with the SEC covering the
        2,915,000 shares of H2Diesel common stock issued in the Private Placement
        (and
        converted into Company Common Stock in the Merger) on or before November
        20,
        2006 (30 days after the closing of the Merger). We are obligated to maintain
        the
        effectiveness of the “resale” registration statement from the effective date
        through and until 12 months after the date of closing of the Merger, 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 also expect to include on such registration statement an additional 8,326,250
        shares of Company Common Stock issued in the Merger to other stockholders
        of
        H2Diesel and 5,571,500 shares issuable upon exercise of our outstanding warrants
        and options. We agreed to use our best efforts to have the “resale” registration
        statement declared effective by the SEC as soon as possible after the initial
        filing, but by no later than April 20, 2007 (180 days after the closing of
        the
        Merger). 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
        shares sold in the Private Placement if we fail to meet certain registration
        rights obligations .
  17
 Wireless
          Holdings, Inc.
 (A
          Development Stage Enterprise)
 Notes
          to
          Consolidated Financial Statements
 September
          30, 2006 (Unaudited)


In
        consideration of Xethanol Corporation’s (“Xethanol”) execution and delivery of a
        written consent of the stockholders of H2Diesel to the Merger, H2Diesel entered
        into a separate registration rights agreement with Xethanol (the “Xethanol
        Registration Rights Agreement”). In connection with the Merger, we assumed
        H2Diesel’s obligations under the Xethanol Registration Rights Agreement. The
        Xethanol Registration Rights Agreement requires us, upon the written request
        of
        Xethanol, but not prior to six months after the date of effectiveness of
        the
“resale” registration statement discussed above, to file a registration
        statement with the SEC in form and substance sufficient to facilitate the
        spin
        off to Xethanol’s stockholders of the shares of Company Common Stock issued to
        Xethanol in the Merger, and to use our commercially reasonable efforts to
        cause
        such registration statement to be declared effective as soon as practicable
        thereafter.
  On
        October 18, 2006, the Company granted to its new Chief Executive Officer
        an
        option to purchase 800,000 shares of the Company’s common stock at an exercise
        price of $1.50 per share, of which 200,000 vested immediately and the balance
        vest in three annual installments. In addition, the Company granted an option
        to
        purchase 1,200,000 shares of the Company’s common stock at an exercise price of
        $1.50 per share, which vest in three equal annual installments beginning
        on
        December 31, 2007, subject to certain performance targets being achieved
        during
        the preceding annual period.
  On
        October 19, 2006, the Company issued warrants to purchase 400,000 shares
        of the
        Company’s common stock of which 200,000 have an exercise price of $2.00 per
        share and the remaining 200,000 have an exercise price of $3.00 per share
        to an
        independent contractor of the Company providing investor relations services.
  On
        October 20, 2006, the Company issued a warrant to purchase 400,000 shares
        of the
        Company’s common stock of which 200,000 have an exercise price of $2.00 per
        share and the remaining 200,000 have an exercise price of $3.00 per share
        to an
        independent contractor of the Company providing financial public relations
        services.
  On
        October 20, 2006, in consideration of strategic advisory services to be provided
        by an independent contractor to the Company, the Company issued 75,000 shares
        of
        the Company’s common stock.
  
 
 
 
 18
 
 **ITEM
        2. PLAN OF OPERATION**
  **Cautionary
        Statement Regarding Forward-Looking Statements**
  Certain
        statements made in this Quarterly Report on Form 10-QSB, or made by us in
        other
        reports, filings with the Securities and Exchange Commission, press releases,
        conferences or otherwise, are “forward-looking statements” within the meaning of
        the Private Securities Litigation Reform Act of 1995. The forward-looking
        statements include, without limitation, any statement that may predict,
        forecast, indicate or imply future results, performance or achievements,
        and may
        contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,”
“will be,” “will continue,” “will likely result,” “plan,” or words or phrases of
        similar meaning.
  Forward-looking
        statements involve risks, uncertainties or other factors, including those
        set
        forth in the company’s current report on Form 8-K as filed with the Commission
        on October 26, 2006, which may cause actual results to differ materially
        from
        the future results, performance or achievements expressed or implied by the
        forward-looking statements. These statements are based on the Company’s
        management beliefs and assumptions, which in turn are based on currently
        available information.
  Examples
        of forward looking statements in this Quarterly Report on Form 10-QSB include,
        but are not limited to, the Company’s expectations regarding the Company’s
        ability to generate operating cash flows and to fund the Company’s working
        capital and capital expenditure requirements. Important assumptions relating
        to
        the forward-looking statements include, among others, assumptions regarding
        demand for the Company’s products, pricing levels, the timing and cost of
        capital expenditures, competitive conditions and general economic conditions.
        These assumptions could prove inaccurate. Although the Company believes that
        the
        estimates and projections reflected in the forward-looking statements are
        reasonable, the Company’s expectations may prove to be incorrect. Important
        factors that could cause actual results to differ materially from the results
        and events anticipated or implied by such forward-looking statements include:
  ·
              the
                  risks of a development stage
                  company;
   ·
              the
                  availability of additional capital to finance the Company’s
                  development;
   ·
              the
                  Company’s dependence on management and need to recruit additional
                  personnel;
   ·
              the
                  limited trading market for the Company’s Common
                  Stock;
   ·
              advances
                  by the Company’s competitors;
   ·
              other
                  risks, including those described in “Risk Factors” in the Company’s other
                  Securities and Exchange Commission
                  filings.
  The
        Company operates in a very competitive and rapidly changing environment.
        New
        risks emerge from time to time. It is not possible for us to predict all
        of
        those risks, nor can the Company assess the impact of all of those risks
        on the
        Company’s business or the extent to which any factor may cause actual results to
        differ materially from those contained in any forward-looking statement.
        The
        Company believes these forward-looking statements are reasonable. However,
        you
        should not place undue reliance on any forward-looking statements, which
        are
        based on current expectations. Further, forward-looking statements speak
        only as
        of the date they are made, and unless required by law, the Company expressly
        disclaims any obligation or undertaking to update publicly any of them in
        light
        of new information or future events.
   19
 
   In
        this
        Quarterly Report on Form 10-QSB, “Company,” “the Company,” “us,” and “our” refer
        to Wireless Holdings, Inc., a Florida corporation, and the term “H2Diesel”
refers to our wholly-owned subsidiary, H2Diesel, Inc., a Delaware corporation
        unless the context requires otherwise.
 
 **Background**
 
 On
        October 20, 2006, we completed a so-called “reverse merger” transaction, in
        which we caused Wireless Acquisition Holdings Corp., a Delaware corporation
        and
        our newly-created, wholly-owned subsidiary (“ Wireless
        Acquisition ”),
        to be
        merged with and into H2Diesel, Inc., a Delaware corporation (“ H2Diesel ”),
        and
        such merger, the “ Merger ”).
        H2Diesel is a recently formed development stage company that holds an exclusive
        license for North America, Central America and the Caribbean (the “ Territory ”)
        to
        exploit proprietary technology to manufacture bio-fuel that is intended to
        be
        marketed as “bio-diesel” fuel or heating fuel or, alternatively, as a new class
        of bio-fuel or fuel additive. As a result of the Merger, H2Diesel became
        our
        wholly-owned subsidiary, and a change of control occurred as former H2Diesel
        stockholders acquired 93.6% of the outstanding shares of our common stock,
        par
        value $.001 per share (“ Company
        Common Stock ”)
        and
        Wireless Holdings ceased being a “shell company” as such term is defined in Rule
        12b-2 under the Securities and Exchange Act of 1934, as amended (the
“ Exchange
        Act ”).
  The
        Merger was consummated under Delaware law and pursuant to an Agreement of
        Merger
        and Plan of Reorganization, dated October 17, 2006 (the “ Merger
        Agreement ”),
        as
        discussed below. A copy of the Merger Agreement is filed as Exhibit 2.1 to our
        Current Report on form 8-K filed October 18, 2006 and is incorporated herein
        by
        reference. Shortly before the closing of the reverse merger, H2Diesel completed
        a private offering (the “ Private
        Placement ”)
        to
        accredited investors (as defined in Rule 501 of the Securities Act) of 2,915,000
        shares of its common stock, par value $.0001 per share (“ H2
        Common Stock ”),
        and
        received gross proceeds of $2,915,000 at the closing of the Private Placement,
        which includes the conversion of a demand note in the principal amount of
        $765,000 into 765,000 shares of its common stock (the “ Demand
        Note ”)
        at
        price of $1.00 per share.
  In
        connection with the Merger, the Company assumed all of H2Diesel’s obligations
        under its outstanding stock options and warrants. At the time of the Merger,
        H2Diesel had outstanding stock options and warrants to purchase 5,571,500
        shares
        of H2 Common Stock, which outstanding stock options and warrants are now
        options
        and warrants to purchase an equal number of shares of Company Common Stock
        as a
        result of the Merger. The Company did not have any warrants or options to
        purchase shares of its capital stock outstanding immediately prior to the
        closing of the Merger.
  We
        currently intend to carry on H2Diesel’s business as our sole line of business.
        H2Diesel holds an exclusive license in the Territory to make, have made and
        sell
        or sublicense others to make, have made and sell, bio-fuel that is intended
        to
        be marketed as “bio-diesel” fuel or heating fuel, or alternatively, as a new
        class of bio-fuel or fuel additive using a proprietary additive and know
        how
        which we believe simplifies and potentially reduces the cost of the traditional
        bio-diesel manufacturing process. Following the Merger and compliance with
        Section 14(c) of the Exchange Act and Regulation 14C thereunder, we intend
        to
        change the name of the Company to “H2Diesel Holdings, Inc.” or a similar name.
        In addition, we expect to obtain a new trading symbol once our name change
        is
        complete.
  20
  The
        merger is being accounted for as a “reverse merger” (i.e., a recapitalization of
        H2Diesel), since the stockholders of H2Diesel now own a majority of the
        outstanding shares of our common stock immediately following the merger.
        H2Diesel is deemed to be the acquiror in the reverse merger and, consequently,
        the assets and liabilities and the historical operations that will be reflected
        in the financial statements will be those of H2Diesel and will be recorded
        at
        the historical cost basis of H2Diesel. Except as described in this report,
        no
        arrangements or understandings exist among present or former controlling
        stockholders with respect to the election of members of our board of directors
        and, to our knowledge, no other arrangements exist that might result in a
        change
        of control of our company. Further, as a result of the issuance of the
        15,990,000 shares of our common stock, a change in control of our company
        occurred on the date of the consummation of the merger. We will continue
        to be a
“small business issuer,” as defined under the Securities Exchange Act of 1934,
        following the merger.
  H2Diesel
        is a newly formed development stage company which to date has not generated
        any
        revenues.
 
 **Short-Term
        Plan of Operations**
 
 We
        plan
        to pursue H2Diesel’s business as our principal business. For the next twelve
        months our business plan will require us to generate cash flows to satisfy
        operating requirements and we will need to raise additional
        capital.
  Upon
        completion of the Merger, our cash balance was approximately $1,830,000.
        Based
        upon our current plans and projected levels of expenses, we expect this cash
        to
        last until March, 2007. We are obligated under the License Agreement to
        fund $9.5 million of Royalties over the next eight years of which
        $1 million is payable by December 31, 2006 and $1.5 million is due by March
        20, 2007.
  In
        order
        to implement our business plan, our capital expenditures to December 31,
        2007 are expected to be approximately $8 million, which we anticipate to
        be
        funded with a combination of existing available cash and raising additional
        capital.
  Our
        short-term plan for growth in 2006 and 2007 is dependent upon our ability
        to
        manage our cash resources and arrange for financing sufficient to allow us
        to:
        (i) acquire and refurbish or construct a plant for the manufacture of our
        Additive and/or H2Diesel Bio-Fuel using our Technology;
   21
  (ii) arrange
        for the supply of Additive on an outsourced basis; (iii) arrange for long-term
        contracts for the supply of feedstock for any bio-fuel plant that we may
        build
        or acquire; (iv) enter into contracts for the sale of the bio-fuel produced
        from any such plant; and (v) continue our research and development efforts
        consisting of testing and improvement of our H2Diesel Bio-Fuel, Technology
        and
        production methods. We also intend to continue our sublicensing efforts and
        intend to pursue patent protection for our Technology on behalf of the
        Inventor.
  We
        expect
        our general and administrative expenditures to be approximately $100,000
        per
        month. Our executive offices are currently located in Boca Raton, Florida.
        We
        plan to hire additional employees as our business develops, including an
        internal senior management team.
  H2Diesel
        has financed its operations to date primarily through the sale of common
        stock,
        warrants and a promissory note in
        privately-negotiated transactions with accredited investors. We
        will
        require additional financing to continue operations. F uture
        capital requirements could vary significantly and will depend on certain
        factors, many of which are not within our control. These include the ongoing
        development and testing of our proprietary technology, the nature and timing
        of
        licensing and sublicensing activities, plant acquisitions and/or construction,
        commencement of sales, hiring qualified management and employees, responding
        to
        competitive pressures, regulatory requirements, and the availability of
        financing. The expansion of our business will require us to commit significant
        capital resources in amounts substantially in excess of our current financial
        resources. Any needed financing may not be available on acceptable terms.
        In
        addition, future equity financings could be dilutive to our stockholders. In
        the
        event we do not raise sufficient capital to meet our obligations, we are
        likely
        to be unable to continue as a going concern. If such additional financing
        is not
        available you may lose your entire investment in our company.
  **Long-Term
        Plan of Operations**
 
 We
        intend
        to formulate a longer term business plan that could include:
  ·
              Developing
                  Additive and/or H2Diesel Bio-Fuel production capacity through the
                  engineering, construction and operation of domestic bio-diesel
                  plants for
                  our own account either directly or through joint
                  ventures.
  ·
              Continuing
                  efforts to sublicense our Technology throughout our exclusive
                  territory.
  ·
              Finding
                  buyers for H2Diesel Bio-Fuel that we may produce. Because we believe
                  the
                  H2Diesel Bio-Fuel does not require U.S. EPA approval to be used
                  as heating
                  fuel, we believe the heating fuel and power generation segment
                  represents
                  an immediate opportunity for us to sell H2Diesel Bio-Fuel.****In
                  addition, subject to our receipt of the necessary regulatory approvals,
                  we
                  believe fleet operators of trucks and other diesel powered vehicles
                  represent an opportunity for immediate bio-diesel sales due to
                  increased
                  government regulations on emissions, established distribution channels,
                  and current restraints on United States bio-diesel and other alternative
                  fuel production. In addition, governmental agencies present opportunities
                  for sales. For example, according to a press release issued by
                  the NBB on
                  June 13, 2005, the United States military is the largest diesel
                  fuel user
                  in the world. According to the NBB, the United States Post Office,
                  as well
                  as other government agencies, such as the National Parks Service,
                  is
                  expected in the future to be a large consumer of bio-diesel blends
                  in its
                  vehicles.
   22
  ·
              Seeking
                  out strategic joint venture partners domestically as well as in
                  our
                  foreign territory which can provide benefits to us in terms of
                  commitments
                  to buy Additive, sublicense the Technology and capital commitments
                  necessary to engineer, construct and operate Additive and/or bio-fuel
                  plants in the Territory.
  ·
              Entering
                  into feedstock supply and transportation logistics contracts in
                  order to
                  supply any refineries we may build or
                  acquire.
  ·
              Seeking
                  qualified, experienced and motivated professionals to allow us
                  to
                  internalize our management team.
  **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. Under the Sublicense Agreement,
        however, we have committed to provide Xethanol with Additive which will require
        us to acquire or construct a plant or obtain a third party outsourced supply
        of
        Additives
  **ITEM
        3. CONTROLS AND PROCEDURES**
 
  Disclosure
        controls and procedures are our controls and other procedures that are designed
        to ensure that information required to be disclosed by us in the reports
        that we
        file or submit under the Securities Exchange Act of 1934, as amended (the
        "Exchange Act"), is recorded, processed, summarized and reported, within
        the
        time periods specified in the U.S. 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 by us in the reports that we file under the Exchange Act is
        accumulated and communicated to our management, including principal executive
        officer and principal financial officer, as appropriate, to allow timely
        decisions regarding required disclosure.
   Based
        upon the Company's evaluation of the effectiveness of the design and operation
        of its disclosure controls and procedures, the Company's Chief Executive
        Officer
        has concluded that as of the end of the period covered by this Report, our
        disclosure controls and procedures are effective to provide reasonable assurance
        that information required to be disclosed in the Company's reports filed
        under
        the Exchange Act, such as this Report, is recorded, processed, summarized
        and
        reported within the time periods specified in the U.S. Securities and Exchange
        Commission's rules and forms. The Company does not currently have a Chief
        Financial Officer, but is in the process of identifying candidates for such
        position.
   There
        has
        been no change in the Company's internal controls over financial reporting
        during the fiscal quarter ending September 30, 2006 that has materially
        affected, or is reasonably likely to materially affect, the Company's internal
        controls over financial reporting.
   23
 
  **PART
        II OTHER INFORMATION**
   
   **ITEM
        1. LEGAL PROCEEDINGS**
  None
  **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS**
  The
        disclosure contained under Item 3.02 of the Company’s Current Report on Form 8-K
        as filed with the Commission on October 26, 2006, is incorporated herein
        by
        reference.
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  The
        disclosure contained under Item 1.01 “Entry into a Material Definitive
        Agreement-Changes Resulting from the Merger” of the Company’s Current Report on
        Form 8-K as filed with the Commission on October 26, 2006, is incorporated
        herein by reference.
  **ITEM
        5. OTHER INFORMATION**
  As
        described in the Schedule 14f-1 filed on October 27, 2006, in connection
        with the Merger Joseph Hess resigned as our director and David A.
        Gillespie and Phil E. Pearce were appointed as a directors of the Company,
        in
        each case, effective immediately upon the completion of our compliance with
        the
        provisions of Section 14(f) of the Exchange Act and the rules promulgated
        thereunder. We completed our compliance with Section 14(f), and therefore
        the
        resignation of Mr. Hess and the appointment of Messrs. Gillespie and Pearce
        became effective on November 6, 2006. The full board of directors of the
        Company
        now consists of Lee S. Rosen, Mr. Gillespie and Mr. Pearce, with Mr. Rosen
        serving as the chairman of the board of directors.
 
 **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**31.1
              Certification
                  of the Principal Executive and Principal Financial Officer, pursuant
                  to
                  18 U.S.C. Section 1350, as adopted pursuant to Section 302
                  of the Sarbanes-Oxley Act of 200232.1
              Certification
                  of the Principal Executive 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
  
  
 24
 
 **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
        November 2006.
 
 Date:
                    November 14, 2006
                By:/s/David
                    A. GillespieDavid
                    A. GillespiePresident
                    and Chief Executive Officer(Principal
                    executive and principal financial officer of the
                    Company)