**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**


**FORM
      10-QSB**




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




For
      the
      quarterly period ended March 31, 2007




£
            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




**H2DIESEL
      HOLDINGS, INC.**


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




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




11111
      Katy Freeway, Suite 910


Houston,
      Texas 77079


(Address
      of principal executive offices)




(713)
      973-5720


(Issuer's
      telephone number)




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




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 May 15, 2007: 17,091,250 shares of common stock outstanding, $0.001 par
      value per share.




Transitional
      Small Business Disclosure Format. Yes [ ]   No [x]












**INDEX**








**PART
      I. FINANCIAL INFORMATION**




Item
                1.
            Financial
                StatementsConsolidated
                balance sheets as of March 31, 2007 (Unaudited) and December 31,
                2006.
            1Consolidated
                statements of operations for the three months ended March 31, 2007
                (Unaudited), for the period from February 28, 2006 (Inception) through
                March 31, 2006 (Unaudited), and for the period from February 28,
                2006
                (Inception) through March 31, 2007 (Unaudited)
            2Consolidated
                statement of stockholders’ equity for the three months ended March 31,
                2007 (Unaudited)
            3Consolidated
                statements of cash flows for the three months ended March 31, 2007
                (Unaudited), for the period from February 28, 2006 (Inception) through
                March 31, 2006 (Unaudited), and for the period from February 28,
                2006
                (Inception) through March 31, 2007 (Unaudited)
            4Notes
                to consolidated financial statements
            5-10Item
                2.
            Plan
                of Operation
            11-15Item
                3.
            Controls
                and Procedures
            15**PART
                II. OTHER INFORMATION**Item
                6.
            Exhibits
            16Signatures
            
            17Exhibit
              Index
            
            18








**H2DIESEL
                  HOLDINGS, INC.****(A
                  Development Stage Enterprise)****Consolidated
                  Balance Sheets********March
                  31,**
              
              **December
                  31,********2007**
              
              **2006****(Unaudited)**ASSETSCurrent
                  assets:Cash
              
              $
              533,768
              
              $
              1,031,923Prepaid
                  and deferred expenses
              
              
              100,933
              
              
              70,275Total
                  current assets
              
              
              634,701
              
              
              1,102,198License
                  agreement
              
              
              8,061,300
              
              
              8,061,300TOTAL
                  ASSETS
              
              $
              8,696,001
              
              $
              9,163,498LIABILITIES
                  AND STOCKHOLDER'S EQUITYCurrent
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              335,393
              
              $
              190,504Loan
                  payable-related party
              
              
              50,000
              
              
              50,000License
                  agreement payable-current portion(net
                  of unamortized discount of $691,412 and $650,698)
              
              
              2,408,588
              
              
              1,449,302Liability
                  under registration rights agreement
              
              
              1,128,105
              
              
              -Total
                  current liabilities
              
              
              3,922,086
              
              
              1,689,806License
                  agreement payable(net
                  of unamortized discount of $1,960,720 and $2,195,117)
              
              
              4,039,280
              
              
              4,804,883Total
                  Liabilities
              
              
              7,961,366
              
              
              6,494,689Stockholders'
                  equity:Common
                  stock, $0.001 par value, 100,000,000 sharesauthorized;
                  17,091,250 shares issued and outstanding
              
              
              17,091
              
              
              17,091Additional
                  paid-in-capital
              
              
              7,080,436
              
              
              8,043,792Deficit
                  accumulated during the development stage
              
              
              (6,362,892
              )
              
              (5,392,074
              )Total
                  stockholders' equity
              
              
              734,635
              
              
              2,668,809TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              8,696,001
              
              $
              9,163,498












1




**H2DIESEL
                  HOLDINGS, INC.****(A
                  Development Stage Enterprise)****Consolidated
                  Statements of Operations****(Unaudited)**For
                  the Three Months ended March 31, 2007
              
              For
                  the Period from February 28, 2006 (Inception) to March 31, 2006
              
              For
                  the Period from February 28, 2006 (Inception) to March 31, 2007Operating
                  expenses:Research
                  and development expenses
              
              
              103,282
              
              
              30,902
              
              
              187,391Merger
                  expenses
              
              
              -
              
              
              -
              
              
              340,000General
                  and administrative expenses
              
              
              1,119,848
              
              
              74,540
              
              
              5,449,180Total
                  operating expenses
              
              
              1,223,130
              
              
              105,442
              
              
              5,976,571Net
                  loss from operations
              
              
              (1,223,130
              )
              
              (105,442
              )
              
              (5,976,571
              )Interest
                  expense
              
              
              (193,683
              )
              
              -
              
              
              (832,316
              )Gain
                  on fair value adjustment
              
              
              445,995
              
              
              -
              
              
              445,995Net
                  loss
              
              $
              (970,818
              )
              $
              (105,442
              )
              $
              (6,362,892
              )Basic
                  and diluted net loss per share
              
              $
              (0.06
              )
              $
              (0.02
              )Weighted
                  average number of shares outstanding
              
              
              17,091,250
              
              
              4,226,573
















2




**H2DIESEL
                  HOLDINGS, INC****(A
                  Development Stage Enterprise)**Consolidated
                  Statement of Changes in Stockholders' EquityFor
                  the Three Months Ended March 31, 2007**Deficit****Accumulated****Additional**
              
              **During
                  the****Common
                  Stock**
              
              **Paid-in-**
              
              **Development****Shares**
              
              **Amount**
              
              **Capital**
              
              **Stage**
              
              **Total**Balance
                  at January 1, 2007
              
              
              17,091,250
              
              $
              17,091
              
              $
              8,043,792
              
              $
              (5,392,074
              )
              $
              2,668,809Cumulative
                  effect of change in accounting principle
              
              
              -
              
              
              -
              
              
              (1,574,100
              )
              
              -
              
              
              (1,574,100
              )Compensation
                  expense associated with options
              
              
              -
              
              
              -
              
              
              610,744
              
              
              -
              
              
              610,744Net
                  loss for the three months ended March 31, 2007
              
              
              -
              
              
              -
              
              
              -
              
              
              (970,818
              )
              
              (970,818
              )Balance
                  at March 31, 2007 (Unaudited)
              
              
              17,091,250
              
              $
              17,091
              
              $
              7,080,436
              
              $
              (6,362,892
              )
              $
              734,635












3




**H2DIESEL
                  HOLDINGS, INC.****(A
                  Development Stage Enterprise)****Consolidated
                  Statement of Cash Flows****(Unaudited)**For
                  the Three Months ended March 31, 2007
              
              For
                  the Period from February 28, 2006(Inception) to March 31, 2006
              
              For
                  the Period from February 28, 2006(Inception) to March 31, 2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (970,818
              )
              $
              (105,442
              )
              $
              (6,362,892
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Amortization
                  of discount
              
              
              193,683
              
              
              -
              
              
              832,316Compensation
                  expense associated with stock options
              
              
              610,744
              
              
              -
              
              
              2,040,087Issuance
                  of common stock, options and warrants forservices
                  rendered
              
              
              -
              
              
              
              
              
              1,788,745Gain
                  on fair value adjustment
              
              
              (445,995
              )
              
              -
              
              
              (445,995
              )Changes
                  in operating assets and liabilities:Prepaid
                  and deferred expenses
              
              
              (30,658
              )
              
              (23,163
              )
              
              (100,933
              )Accounts
                  payable and accrued expenses
              
              
              144,889
              
              
              97,845
              
              
              335,393Net
                  cash used in operating activities
              
              
              (498,155
              )
              
              (30,760
              )
              
              (1,913,279
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of License Agreement
              
              
              -
              
              
              (1,500,000
              )
              
              (1,900,000
              )Cash
                  used in investing activities
              
              
              -
              
              
              (1,500,000
              )
              
              (1,900,000
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from issuance of founders' shares
              
              
              -
              
              
              -
              
              
              554Proceeds
                  from private offerings issuance of common stock, net of
                  costs
              
              
              -
              
              
              1,776,698
              
              
              3,531,493Proceeds
                  from convertible note payable
              
              
              -
              
              
              -
              
              
              765,000Proceeds
                  from loan payable-related party
              
              
              -
              
              
              -
              
              
              50,000Cash
                  provided by financing activities
              
              
              -
              
              
              1,776,698
              
              
              4,347,047Net
                  (decrease) increase in cash and cash equivalents
              
              
              (498,155
              )
              
              245,938
              
              
              533,768Cash
                  and cash equivalents - beginning of period
              
              
              1,031,923
              
              
              -
              
              
              -Cash
                  and cash equivalents - end of period
              
              $
              533,768
              
              $
              245,938
              
              $
              533,768Supplemental
                  Disclosure of Non-Cash Investing and Financing
                  ActivitiesPayable
                  for License Agreement (net of discount)
              
              $
              -
              
              $
              5,615,552
              
              $
              5,615,552License
                  Agreement acquired in exchange for issuance of common
                  stock
              
              $
              -
              
              $
              545,747
              
              $
              545,747












4




**H2Diesel
        Holdings, Inc.**
 **(A
        Development Stage Enterprise)**
 **Notes
        to Condensed Consolidated Financial Statements**


Note
      1  -  DESCRIPTION
      OF BUSINESS AND BASIS OF PRESENTATION




H2Diesel
      Holdings, Inc. (the “Company”) is a development stage company that, through our
      wholly owned subsidiary, H2Diesel Inc., a Delaware corporation (“H2Diesel”),
      holds an exclusive license for North America, Central America and the Caribbean
      to exploit proprietary technology (the “Technology”) to manufacture bio-fuel
      that is intended to be marketed as a new class of bio-fuel or fuel additive
      (the
“Additive”) for power generation, heavy equipment, marine use and as heating
      fuel (the “H2Diesel Bio-fuel”).




The
      accompanying consolidated financial statements and related footnotes should
      be
      read in conjunction with the consolidated financial statements and related
      footnotes contained in the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2006 filed with the U.S. Securities and Exchange Commission
      on April 2, 2007.




The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiary. All significant intercompany accounts and transactions
      have been eliminated in consolidation.




The
      consolidated financial statements have been prepared in accordance with the
      rules and regulations of the U.S. Securities and Exchange Commission related
      to
      interim statements. The financial information contained herein is unaudited;
      however, in the opinion of management, all adjustments necessary for a fair
      presentation of such financial information have been included. All such
      adjustments are of a normal recurring nature. The results of operations for
      the
      three months ended March 31, 2007 (unaudited) are not necessarily indicative
      of
      the results expected for the full year. The balance sheet presentation as of
      December 31, 2006 is derived from audited financial statements. Certain amounts
      for 2006 have been reclassified to conform to the 2007
      presentation.




Use
      of
      Estimates




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets, liabilities,
      revenues and expenses and related disclosure of contingent assets and
      liabilities. The Company’s most significant estimate is the value of its
      exclusive license. Other significant estimates include the valuation of shares,
      warrants or options issued for services and the estimated useful life of the
      exclusive license used to calculate amortization. The Company evaluates its
      estimates on an ongoing basis. Actual results could differ significantly,
      especially as to the estimated value of its exclusive license from those
      estimates under different assumptions or conditions.




Loss
      per Common Share




Loss
      per
      share (“EPS”) is computed based on the weighted average number of common shares
      outstanding and excludes any potential dilution. Diluted EPS reflects the
      potential dilution that could occur if securities or other contracts to issue
      common stock were exercised or converted into common stock or resulted in the
      issuance of common stock, which would then share in the earnings of the
      Company. The
      shares issuable upon the exercise of stock options and warrants are excluded
      from the calculation of net loss per share as their effect would be
      antidilutive . For
      the
      three months ended March 31, 2007 and for the period from February 28, 2006
      (Inception) through March 31, 2006 , there
      were 5,771,500 (including
      4,200,000 options and 1,571,500 warrants) and 2,080,000 (warrants)  shares
      of
      common stock equivalents ,
      respectively **,** 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.




5


**H2Diesel
        Holdings, Inc.**
 **(A
        Development Stage Enterprise)**
 **Notes
        to Condensed Consolidated Financial Statements**




Recently
      Issued Accounting Standards




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, Fair Value Measurements (“SFAS 157”), which clarifies that fair value is
      the amount that would be exchanged to sell an asset or transfer a liability
      in
      an orderly transaction between market participants. Further, the standard
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands certain disclosures about fair value
      investments. SFAS 157 is effective for fiscal years beginning after November
      15,
      2007. The Company does not expect the adoption of SFAS 157 to have a material
      impact on its consolidated financial position, results of operations or cash
      flows.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
      entities to choose to measure many financial instruments and certain other
      items
      at fair value. SFAS 159 is effective for fiscal years beginning after November
      15, 2007. The Company does not expect the adoption of SFAS 159 to have a
      material impact on its consolidated financial position, results of operations
      or
      cash flows.




In
      December 2006, the FASB issued FASB Staff Positions (FSP) EITF 00-19-2
“Accounting for Registration Payment Arrangements”. Under this pronouncement,
      contingently payable registration payment arrangements are accounted for
      separately from and do not affect the classification of the underlying shares,
      warrants or other financial instruments subject to the registration payment
      provisions. This was accomplished by amending SFAS No. 133 and No. 150 to
      include scope exceptions for registration payment arrangements. A liability
      for
      a registration payment arrangement should be recognized when payment is probable
      and the amount is reasonably estimable (whether at inception or during the
      life
      of the arrangement) in accordance with SFAS No. 5, “Accounting for
      Contingencies.” The FSP is effective for registration payment arrangements and
      the financial instruments subject to such arrangements that are entered into
      or
      modified after December 21, 2006. For registration payment arrangements and
      financial instruments subject to those arrangements that were entered into
      before December 22, 2006, companies are required to account for transitioning
      to
      the FSP through a cumulative-effect adjustment to the opening balance of
      accumulated deficit or retained earnings in fiscal years beginning after
      December 15, 2006. The Company implemented this FSP effective January 1, 2007
      and recorded a $1,574,100 contingent liability.






6


**H2Diesel
        Holdings, Inc.**
 **(A
        Development Stage Enterprise)**
 **Notes
        to Condensed Consolidated Financial Statements**


Note
      2 ****  -  GOING
      CONCERN




The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. The Company is in the development
      stage and has not generated any revenues. As a result, the Company has incurred
      a net loss of $6,362,892 and negative cash flows from operating activities
      of
      $1,913,279 since Inception. The Company is obligated to pay $9.1 million in
      additional payments under the exclusive license, including $2.1 million during
      2007 and $1.0 million during March 2008. These matters raise substantial doubt
      about the Company’s ability to continue as a going concern. The Company’s
      consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty. The Company’s continued existence
      is dependent upon several factors, including obtaining additional debt or equity
      financing, production of its products, developing a market for its products,
      and
      achieving certain levels of sales volume and profitability from the sale of
      its
      products and sublicenses of its technology. Management is investigating various
      sources of debt or equity financing and is developing marketing and production
      plans for its products.




Note
      3  -  OPTIONS




The
      following table summarizes information about the stock options outstanding
      at
      March 31, 2007:




Weighted
                Average Exercise Price
            $1.86Expected
                Life
            5
                yearsVolatility
            100.0%Dividend
                Yield
            0%Risk-free
                interest rate
            4.72%




A
      summary
      of the status of the Company’s options outstanding as of March 31, 2007 and the
      changes during the year ending on that date is presented below:




Number
                of Shares
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual Life (Years)
            
            Aggregate
                Intrinsic ValueOptions
                outstanding at December 31, 2006
            
            
            4,100,000
            
            $
            1.65
            
            
            9.45Granted
            
            
            100,000
            
            $
            10.50
            
            
            9.88Options
                outstanding at March 31, 2007
            
            
            4,200,000
            
            $
            1.86
            
            
            9.46Vested
                and expected to vest - March 31, 2007
            
            
            3,000,000
            
            $
            2.00
            
            
            9.42
            
            $
            13,860,000Options
                exercisable at March 31, 2007
            
            
            1,900,000
            
            $
            1.62
            
            
            9.20
            
            $
            8,910,000









7


**H2Diesel
        Holdings, Inc.**
 **(A
        Development Stage Enterprise)**
 **Notes
        to Condensed Consolidated Financial Statements**




Options
      outstanding at March 31, 2007 have an exercise price of $1.50 to $10.50 per
      share. Options exercisable at March 31, 2007 do not include 1,200,000
      performance based options.




The
      aggregate intrinsic value in the table above represents the total intrinsic
      value (the difference between the Company’s closing stock price on March 31,
      2007 and the exercise price, multiplied by the number of in-the-money options)
      that would have been received by the option holders had vested option holders
      exercised their options on March 31, 2007. This amount changes based upon
      changes in the fair market value of the Company’s stock. As of March 31, 2007
      $1,015,817 of the total unrecognized compensation costs related to stock options
      is expected to be recognized over a period of approximately 2 years and six
      months.




Note
      4 ****  -  COMMITMENTS
      AND CONTINGENCIES




The
      Company entered into a Registration Rights Agreement dated October 17, 2006
      with
      the purchasers of its common stock in the Company’s October 2006 private
      placement. Under the Registration Rights Agreement, the Company is required
      to
      file a “resale” registration statement with the SEC covering 2,915,000 shares of
      common stock issued in the Private Placement. The Company is obligated to
      maintain the effectiveness of the “resale” registration statement from the
      effective date through and until October 20, 2007 unless all securities
      registered under the registration statement have been sold or are otherwise
      able
      to be sold without restrictions. The Company agreed to use its best efforts
      to
      have the “resale” registration statement declared effective by the SEC as soon
      possible after the initial filing, but by no later than April 20, 2007 (180
      days
      after the closing of the Merger). Because the Company did not file the
      registration statement prior to November 20, 2006 (the “Filing Deadline”), the
      Company is required to issue additional shares of common stock to the purchasers
      in the Private Placement, in an amount equal to 1% of the shares sold in the
      Private Placement for each 30 day period following the Filing Deadline until
      the
      registration statement is filed up to a maximum of 6% of the shares sold in
      the
      Private Placement.




On
      January 1, 2007, the Company implemented EITF 00-19-2, which requires a company
      to recognize a liability for registration rights payments when they are probable
      and the amount is reasonably estimable. The Company recorded a $1,574,100
      contingent liability at January 1, 2007 based on the Company’s stock price at
      that date. At March 31, 2007 the Company recorded a gain on fair value
      adjustment of $445,995 related to this liability as the Company’s stock price
      declined during this quarter.




Note
      5  -  SUBSEQUENT
      EVENTS




In
      April
      2007, the Company entered into a one year consulting services agreement with
      eBarton LLC, a renewable energy finance and transaction structuring company
      (“eBarton”), to assist the Company in marketing its alternative bio-fuel to
      utilities and independent power producers in North America. The Company is
      obligated to pay to eBarton a monthly retainer fee of $5,000. In
      addition, the Company entered into a stock option agreement with Kim Johnson,
      the President of eBarton, under which the Company granted to Ms. Johnson an
      option exercisable for up 1,500,000 shares of common stock at an exercise price
      of $6.00 per share. All of the options have a ten year term and expire in April
      2012. The vesting of the options is performance based. Any unvested options
      expire in April 2010.






8


**H2Diesel
        Holdings, Inc.**
 **(A
        Development Stage Enterprise)**
 **Notes
        to Condensed Consolidated Financial Statements**






On
      May 9,
      2007, the Company, completed the offering (the “Offering”) of 27,950 shares of
      the Company’s newly issued Series A Cumulative Convertible Preferred Stock, par
      value $0.001 per share (the “Preferred Stock”) at price of $100.00 per share to
      persons who qualify as “accredited investors” under the Securities Act of 1933,
      as amended (the “Securities Act”). The gross proceeds from the offering were
      $2,795,000. The Preferred Stock is convertible at the election of the holders
      into shares of Common Stock, par value $.001 per share, of the Company (the
      “Common Stock”), at an initial conversion price of $4.00 per share. Each share
      of Preferred Stock will accrue cumulative dividends on a quarterly basis at
      a
      rate of 8% per annum. All dividends will be paid in shares of Common Stock
      having a fair market value at the time of issuance equal to the amount of
      dividends to be paid, provided that to the extent the shares of Common Stock
      to
      be issued are not then registered under the registration rights agreement
      described below, dividends shall cumulate but shall remain unpaid until such
      time as the shares are registered and issued. The Company may elect to pay
      any
      dividends in cash in lieu of issuing shares of Common Stock.




The
      Preferred Stock shall also participate on an as-converted basis with all
      dividends paid on the shares of Common Stock. Upon any liquidation of the
      Company, the holders of the Preferred Stock will be entitled to be paid, prior
      to the Common Stock or any other securities that by their terms are junior
      to
      the Preferred Stock (collectively with the common stock, “Junior Securities”),
      the original issue price of the Preferred Stock plus all accrued and unpaid
      dividends (collectively, the “Liquidation Preference”). To the extent the
      proceeds of liquidation are insufficient to pay such amounts in full, the
      proceeds available will be allocated pro rata among the shares of Preferred
      Stock. Any shares of Preferred Stock outstanding on the third anniversary of
      the
      Offering shall automatically convert into a number of shares of Common Stock
      determined by dividing the Liquidation Preference by the Conversion Price of
      the
      Preferred Stock then in effect.




Each
      investor in the Offering will also receive a warrant (the “Warrants” and
      together with the Preferred Stock, the “Securities”) exercisable for a number of
      shares of Common Stock equal to 50% of the number of shares of Common Stock
      into
      which the Preferred Stock purchased by such investor is initially convertible.
      The initial Exercise Price of the Warrants is $6.00 per share. At any time
      following the first anniversary of the Closing Date and provided that the shares
      of Common Stock issuable upon exercise of the Warrants are not then registered
      for resale pursuant to an effective registration statement under the Securities
      Act, the Warrants may also be exercised by means of a “cashless exercise.”




Under
      the
      terms of the Offering, each investor has the option until the 30 th day
      following the Closing of the Offering, to purchase a number of additional
      Securities up to each investor’s initial subscription, on the same terms as
      those for the Offering (the “Option”).






9


**H2Diesel
        Holdings, Inc.**
 **(A
        Development Stage Enterprise)**
 **Notes
        to Condensed Consolidated Financial Statements**


In
        connection with the Offering, the Company agreed to register the resale of
        the
        shares of Common Stock issuable (i) upon conversion of the Preferred Stock,
        (ii)
        as dividends on the Preferred Stock, and (iii) upon exercise of the Warrants
        (collectively, the “Registrable Shares”), all in accordance with a Registration
        Rights Agreement dated May 9, 2007 among the Company and each of the investors
        in the Offering (the “2007 Registration Rights Agreement”). Under the 2007
        Registration Rights Agreement, the
        Company is required
        to file the “resale” registration statement with the SEC covering such shares on
        or before the 60 th day
        following the closing of the Offering. The
        Company is obligated to maintain the effectiveness of the “resale” registration statement
        from the effective date through and until 13 months after the date of closing
        of
        the Offering, 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 the
        Company complies with our
        reporting obligations. The
        Company agreed
        to use its 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 210
        days
        after the closing of the Offering. The
        Company may be
        required to issue additional shares of Company Common Stock to purchasers
        in the
        Offering, in an amount not to exceed 6.0% of the Registrable Shares if the
        Company fails to meet
        certain registration rights obligations.


In
      connection with the Offering, Empire Financial Group received a cash commission
      of $204,500, which represents 10% of the consideration paid by investors
      introduced by it in connection with the Offering, and also will receive a
      warrant exercisable for 34,083 shares of Common Stock. The number of shares
      of
      common stock issuable upon exercise of the warrant will be proportionately
      increased to reflect any exercises of the Option. The warrant is otherwise
      on
      terms substantially similar to the terms of the Warrants issued in the Offering.




The
      Company recently entered into a Letter of Intent with Twin Rivers Technologies,
      LP with respect to the potential development of the Company’s first production
      plant at Twin Rivers’ facility located in Quincy, MA. The Letter of Intent
      contemplates an exclusive period through August 31, 2007 during which Twin
      Rivers will negotiate with the Company regarding definitive agreements covering
      the siting, construction, operation and management of the Company’s proposed
      initial 25 million gallon per year production facility, the supply of vegetable
      oils and other commodity feedstocks and the off take of finished bio-fuel by
      Twin rivers from the facility. There can be no assurance that definitive
      agreements will be entered into.




On
      May 1,
      2007, the Company entered into a Test Burn Agreement with Dynegy Oakland, LLC,
      a
      Delaware limited liability company and an affiliate of Dynegy Inc. (“Dynegy”)
      for the purpose of evaluating the Company’s proprietary biofuel technology in
      power generation applications. The Agreement requires the Company to supply
      our
      biofuel for a test program that will be performed at Dynegy’s Oakland Power
      Plant combustion turbine facility. The test program will include the evaluation
      of both technical and environmental performance characteristics of our biofuel.
      The agreement also requires the Company to pay 50% of all costs of environmental
      emissions testing conducted in connection with the test program, provided that
      our aggregate obligation with respect to such expenses shall not exceed
      $150,000. Dynegy
      is
      entitled to all revenue arising from sales of electricity generated during
      the
      testing. The parties have agreed to negotiate with respect to a mutually
      agreeable purchase agreement for our biofuel in the event testing is
      successful.






10









**ITEM
      2. PLAN OF OPERATION**




**Cautionary
      Statement Regarding Forward-Looking Statements**




This
      report contains “forward-looking statements” within the meaning of the Private
      Securities Litigation Reform Act of 1995 that involve risks and
      uncertainties, many of which are beyond our control. Our actual results could
      differ materially and adversely from those anticipated in such forward-looking
      statements as a result of certain factors, including those set forth below
      and
      elsewhere in this report and under the heading “Risk Factors” in our Form 10-KSB
      for the year ended December 31, 2006. Important factors that may cause
      actual results to differ from projections include:




·
            our
                lack of operating history;




·
            our
                dependence
                on additional financing;




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




·
            our
                inability to enter into acceptable sublicensing agreements with respect
                to
                our technology or the inability of any sublicensee to successfully
                manufacture, market or sell bio-fuel utilizing our licensed
                technology;




·
            competition;




·
            governmental
                regulation and oversight, including whether or not we are able to
                obtainthegovernmental approvals necessary to allowour bio-fuel to be marketed as “bio-diesel,” a fuel additive, or,
                alternatively, to be marketed as a new class of
                bio-fuel;




·
            market
                acceptance of our bio-fuel;




·
            unexpected
                costs and operating deficits, and lower than expected revenues;
                and




·
            adverse
                results of any legal proceedings.




All
      statements, other than statements of historical facts, included in these
      offering materials or otherwise provided by us regarding our
      strategy, fut ure
      operations, financial position, estimated revenue
      or losses, projected costs, prospects and plans and objectives of management
      are
      forward-looking statements. When used in this report, the words “will,” “may,” “believe,”
“anticipate,” “intend,” “estimate,” “expect,” “project,” “plan” and similar
      expressions are intended to identify forward-looking statements, although not
      all forward-looking statements contain such identifying words. All
      for ward-looking
      statements speak only as of their respective dates. We do not undertake any
      obligation to update any forward-looking statements or other information contained in this report. You should not place undue reliance on
      these forward-looking statements. Although we believe that our plans,
      int entions
      and expectations reflected in or suggested by the forward-looking statements
      in
      this report are reasonable, these plans, intentions or expectations ay not
      be achieved.






11




As
      used
      in this report, the terms “company” “us,” and “our” refers to H2Diesel Holdings,
      Inc., a Florida corporation, and the term “H2Diesel” refers to H2Diesel, Inc., a
      Delaware corporation, our wholly owned subsidiary, unless the context requires
      otherwise.




**Plan
      of Operations**




We
      are a
      development stage company which to date has not generated any revenues. The
      operation and development of our business will require substantial additional
      capital during 2007 to fund, among other things, our operations, payments due
      under the exclusive license, the acquisition or development of manufacturing
      plants, research and development, and the financing of future acquisitions
      and
      investments.




We
      have
      incurred a net loss of $6,362,892 and negative cash flows from operating
      activities of $1,913,279 since inception. As of May 11, 2007, we had
      approximately $2.7 million of available cash, and had approximately $175,000
      of
      accounts payable. Based on our current plans and projected levels of
      expenditures, we expect this to last through September 2007. In addition, under
      the exclusive license we are required to make a $600,000 payment to the Inventor
      on or before July 31, 2007, $1.5 million on or before October 31, 2007,
      $1.0 million on or before March 20, 2008 and $6.0 million in additional payments
      over the following six years.




We
      have
      financed our operations to date primarily through the sale of our common and
      preferred stock and warrants in privately-negotiated transactions with
      accredited investors. We are unlikely to be able to continue as a going concern
      unless we are able to obtain additional financing. Future capital requirements
      could vary significantly and will depend on certain factors, many of which
      are
      not within our control. These include, among others, the ongoing development
      and
      testing of the Technology, the nature and timing of licensing and sublicensing
      activities, plant 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, if any,
      could be dilutive to then existing 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 unless we obtain additional financing. If such
      additional financing is not available our shareholders may lose their entire
      investment in our company.




In
      May
      2007, we received approximately $2,500,000 in net proceeds from the sale of
      27,950 shares of 8% Series A Cumulative Convertible Preferred Stock (the
“Preferred Stock”), at a price of $100 per share, to accredited investors in a
      Private Offering. Each investor will also receive a warrant exercisable for
      a
      number of shares of common stock, par value $0.001 per share, equal to 50%
      of
      the number of shares of common stock into which the Preferred Stock acquired
      by
      such investor is initially convertible. The Preferred Stock is initially
      convertible at a conversion price of $4.00 per share. The initial exercise
      price
      of each warrant is $6.00 per share. At any time after the first year after
      the
      closing date, the warrants can be exercised by means of a “cashless exercise”.
      Each share of Preferred Stock will accrue cumulative dividends on a quarterly
      basis at a rate of 8% per annum.




12


Dividends
      will be payable in shares of common stock at a fair market value equal to the
      amount of dividends due. The Company may elect to pay the dividends in cash
      in
      lieu of common stock. The Preferred Stock is convertible at the election of
      the
      holder any time into shares of Common Stock, and will automatically convert
      into
      common stock, if outstanding, on the third anniversary of the closing date
      of
      this transaction. The Preferred Stock is not redeemable.




We
      believe that we will need approximately $5,000,000 to $10,000,000 to implement
      our short-term plan for growth in 2007. This plan 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; (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.




Our
      need
      for additional financing raises substantial doubt about our ability to continue
      as a going concern. See Note 2 to our Consolidated Financial
      Statements.




We
      recently entered into a Letter of Intent with Twin Rivers Technologies, LP
      with
      respect to the potential development of H2Diesel’s first production plant at
      Twin Rivers’ facility located in Quincy, MA. The Letter of Intent contemplates
      an exclusive period through August 31, 2007 during which Twin Rivers will
      negotiate with H2Diesel regarding definitive agreements covering the siting,
      construction, operation and management of H2Diesel’s proposed initial 25 million
      gallon per year production facility, the supply of vegetable oils and other
      commodity feedstocks and the off take of finished bio-fuel by Twin Rivers from
      the facility.  There can be no assurance that definitive agreements will be
      entered into.




We
      also
      recently commenced an effort to obtain a change in the Code’s definition of
      biodiesel so that it would include our bio-fuel, and to have the benefit of
      such
      a change extend beyond the current expiration date of December 31, 2008. We
      anticipate, however, that this effort will likely be subject to numerous
      obstacles and there can be no assurance that we will be successful in our
      efforts. In order to position ourselves for tax credit qualification in the
      event of a beneficial change in the law, we have already initiated the necessary
      registration and approval process with the Internal Revenue Service. This
      application and approval process could require significant lead time and there
      can be no assurance that such approval would be obtained.




On
      May 1,
      2007, we entered into a Test Burn Agreement with Dynegy Oakland, LLC, a Delaware
      limited liability company and an affiliate of Dynegy Inc. (“Dynegy”) for the
      purpose of evaluating our proprietary biofuel technology in power generation
      applications. The Agreement requires us to supply our biofuel for a test program
      that will be performed at Dynegy’s Oakland Power Plant combustion turbine
      facility. The test program will include the evaluation of both technical and
      environmental performance characteristics of our biofuel. The
      agreement also requires us to pay 50% of all costs of environmental emissions
      testing conducted in connection with the test program, provided that our
      aggregate obligation with respect to such expenses shall not exceed $150,000.
      Dynegy is entitled to all revenue arising from sales of electricity generated
      during the testing. The parties have agreed to negotiate with respect to a
      mutually agreeable purchase agreement for our biofuel in the event testing
      is
      successful.




13








In
      May
      2007 Connie Lausten, P.E. joined H2Diesel as VP of Legislative and Regulatory
      Affairs. Ms. Lausten will be responsible for working with senior management
      to formulate and implement corporate regulatory and legislative affairs policies
      and leading interactions with regulatory bodies, governmental agencies, and
      trade groups. She will help identify grant and public/private partnership
      opportunities and work to advance H2Diesel’s strategic objectives.




We
      also
      recently entered into an agreement with eBartonLLC, a renewable energy finance
      and transaction structuring company, to assist H2Diesel in marketing its
      alternative bio-fuel to utilities and independent power producers in North
      America. See Note 5 to our Consolidated Financial Statements for additional
      disclosure regarding recent events with respect to our Company.




We
      intend
      to develop 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. We believe the
                  power
                  generation heavy equipment, marine and heating fuel markets represent
                  immediate opportunities for us to sell H2Diesel Bio-fuel.****In
                  addition, subject to our ability to reformulate our bio-fuel and
                  receipt
                  of the necessary regulatory approvals, we believe fleet operators
                  of
                  trucks and other diesel powered vehicles represent a potential
                  opportunity
                  for 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.·
              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.






14




·
              Seeking
                  qualified, experienced and motivated professionals to allow us
                  to
                  internalize our management team.·
              Performing
                  product application testing to gain market acceptance of H2Diesel
                  Bio-fuel
                  by customers and equipment
                  manufacturers.




**ITEM
      3. CONTROLS AND PROCEDURES**




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed in Company reports filed or
      submitted under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the Securities and Exchange Commission’s
      rules and forms. Disclosure controls and procedures include, without limitation,
      controls and procedures designed to ensure that information required to be
      disclosed in Company reports filed under the Exchange Act, is accumulated and
      communicated to management, including the Company’s principal executive officer
      and principal financial officer, as appropriate, to allow timely decisions
      regarding required disclosure.




As
      required by Rule 13a-15 under the Exchange Act, the Company is required to
      carry
      out an evaluation of the effectiveness of the design and operation of the
      Company’s disclosure controls and procedures as of the end of the period covered
      by this report. This evaluation was carried out with the participation of the
      Company’s principal executive officer and principal financial officer. Based
      upon that evaluation, Company’s principal executive officer and principal
      financial officer concluded that the Company’s disclosure controls and
      procedures are effective at the reasonable assurance level such that the
      information relating to us and our consolidated subsidiary required to be
      disclosed in our Exchange Act reports (i) is recorded, processed, summarized
      and
      reported within the time periods specified in the SEC’s rules and forms, and
      (ii) is accumulated and communicated to our management, including our principal
      executive officer and principal financial officer, as appropriate to allow
      timely decisions regarding required disclosure.




There
      were no changes in the Company’s internal controls over financial reporting that
      occurred during the quarter ended March 31, 2007 that have materially affected,
      or are reasonably likely to materially affect, the internal control over
      financial reporting.









15







**PART
      II OTHER INFORMATION**




**ITEM
      6. EXHIBITS**


The
      following exhibits, which are furnished with this Quarterly Report or
      incorporated herein by reference, are filed as part of this Quarterly Report.


**Number**
              **Description**4.1
              Form
                of Preferred Stock Offering Warrant10.1
              Stock
                  Option Agreement between Kim Johnson and the Company10.2
              Test
                  Burn Agreement dated May 1, 2007 between Dynegy Oakland, LLC and the
                  Company10.3
              Form
                  of Registration Rights Agreement entered into among the Company
                  and each
                  of the Preferred Stock investors31.1
              Certification
                  of the Principal Executive Officer 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 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












16




**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 15 th day of
      May 2007.








Date:
                May 15, 2007
            By:/s/
                David A. GillespieDavid
                A. GillespiePresident
                and Chief Executive Officer(Principal executive and principal financial officer of the
                Company)








17


**EXHIBIT
      INDEX**


**Number**
                **Description**4.1
                Form
                  of Preferred Stock Offering Warrant10.1
                Stock
                    Option Agreement between Kim Johnson and the Company10.2
                Test
                    Burn Agreement dated May 1, 2007 between Dynegy Oakland, LLC and the
                    Company10.3
                Form
                    of Registration Rights Agreement entered into among the Company
                    and each
                    of the Preferred Stock investors31.1
                Certification
                    of the Principal Executive Officer 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 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
 
 18