Amendment No. 1 to 2006 Annual Year End Report

We are filing this Amendment No. 1 (the “Amendment”) to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission on April 2, 2007, to amend and restate “Item 1. Description of Business - Governmental Regulations” and “Item 1. Description of Business - Risk Factors - Risks Related to Our Business” to clarify the disclosure pertaining to the availability of tax credits with respect to our bio-fuel. In addition, we are refiling Exhibit 31.1, as required by the filing of this amendment. This Amendment, together with the Annual Report on Form 10-KSB previously filed for the year ended December 31, 2006, constitutes our Annual Report on Form 10-KSB for the year ended December 31, 2006.

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. Important factors that may cause actual results to differ from projections include:

All statements, other than statements of historical facts, included in these offering materials or otherwise provided by us regarding our strategy, future 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 forward-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, intentions and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, these plans, intentions or expectations may not be achieved.

We are 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 (the “Territory”) 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 for power generation, heavy equipment, marine use and as heating fuel (the “H2Diesel Bio-fuel”). We acquired H2Diesel on October 20, 2006 in a so-called “reverse merger” transaction (such merger, the “Merger”). As a result of the Merger, 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 we 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”). Following the Merger we changed the name of our company to “H2Diesel Holdings, Inc.” and our trading symbol on the OTC Bulletin Board was changed to “HTWO.OB”.

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”). Shortly before the closing of the Merger, H2Diesel completed a private offering (the “Private Placement”) to accredited investors 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.

Pursuant to a Purchase and Repayment Agreement, dated October 20, 2006 (the “Purchase and Repayment Agreement”) between the Company and Joseph Hess, the former chief executive officer of the Company, 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 issued in the Merger. We currently intend to carry on H2Diesel’s business as our sole line of business.

H2Diesel’s rights to the Technology were acquired pursuant to an Exclusive License Agreement dated March 20, 2006, with Ferdinando Petrucci (the “Inventor”), as amended (the “License Agreement”). Under the License Agreement, H2Diesel has been granted a perpetual exclusive license to make, use and exploit a chemical additive (the “Additive”) for use in making the H2Diesel Bio-fuel and related know how in the Territory. Additionally, H2Diesel has a right of first offer for any other territories (other than Italy and Paraguay).

Under the License Agreement, we are required to make a $600,000 payment to the Inventor on or before July 31, 2007, and an additional $1.5 million payment on October 31, 2007. In addition, we are required to pay another $7 million in fees to the Inventor over the following seven years. To the extent we default on any of these payments or breach any other material provisions of our license, the Inventor may be able to terminate the License Agreement, which is our principal asset. The License Agreement also provides that the Inventor may terminate the License Agreement if H2Diesel suffers certain bankruptcy events.

We intend to market the H2Diesel Bio-fuel as a new class of bio-fuel or fuel additive for power generation, heavy equipment, marine use and as heating fuel. We have evaluated whether the H2Diesel Bio-fuel can be formulated to comply with U.S. Environmental Protection Agency (“EPA”) standards to be classified as “Bio-diesel” for vehicular use. EPA standards mandate that “bio-diesel” comply with the specifications of the American Society for Testing and Materials (ASTM) 6751. In particular, ASTM 6751 requires that the fuel be comprised of “mono-alkyl esters of long chain fatty acids.” The H2Diesel Bio-fuel does not comply with this specific requirement of ATSM 6751, and consequently, it is not compliant with EPA standards. However, we are currently investigating whether the ASTM standard can be broadened to include our fuel. Additionally, we are evaluating the regulatory requirements for using our fuel in motor vehicle applications in our territory outside of the United States.

H2Diesel believes that its Technology, as compared to current methods used in the production of bio-diesel fuel, is a substantially less complex process and thus offers important advantages. Conventional bio-diesel is made utilizing a chemical reaction known as transesterification. A vegetable oil reacts with an esterifying agent, usually an alcohol such as methanol or ethanol to form two principal products: a methyl ester product, which is the bio-diesel product, and glycerin. The reaction can be undertaken with or without a catalyst, typically with the input of additional energy and at atmospheric pressure. H2Diesel’s Technology instead combines water with the Additive to produce a mixture. The mixture is then combined with a vegetable oil (waste or commodity) feedstock to produce H2Diesel Bio-fuel. Glycerin is not a by-product of the H2Diesel Bio-fuel production process. We believe that there is no other process step other than, possibly, some filtration depending on feedstock and application.

In April, 2006, H2Diesel entered into an initial sublicense agreement with Xethanol Corporation (as amended and restated in June of 2006, the “Sublicense Agreement”) pursuant to which it granted Xethanol a ten year exclusive right, subject to H2Diesel’s retained rights of use, to make and sell H2Diesel Bio-fuel and other chemicals using the Additive (“Products”) in the states of Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania, Delaware, New Jersey, Virginia, West Virginia, North Carolina, South Carolina, Georgia and Florida (collectively, the “Territory”) and a non-exclusive right to sell Products anywhere in the Territory. Under the Sublicense Agreement, we will be obligated to supply Xethanol with the Additive necessary for its production of Products, including bio-diesel fuel, at a purchase price equal to the lesser of our actual cost of the raw materials for the Additive plus 10 percent or the lowest price for the Additive charged to a third party that is not controlled by us.

The Sublicense Agreement also requires Xethanol to pay to us a quarterly royalty per gallon of Product sold directly or indirectly by or through Xethanol, its agents, affiliates, subsidiaries and permitted sub-sublicensees equal to the lesser of (a) $0.10 and (b) the lowest royalty per gallon of Product that is charged as a royalty to any other sublicensed third party that is not controlled by us. In addition, Xethanol is obligated to pay such royalty with respect to a minimum of 20 million gallons of fuel during the first 12 months following the date (the “Trigger Date”) that we inform Xethanol that we are ready to accept orders for the Additive and provide the necessary engineering specifications for a process plant to produce Products, including bio-diesel fuel, using the Technology. Thereafter, the required minimum volume increases by 10 million gallons in each subsequent 12 month period during the term (i.e., 30 million gallons for the first subsequent 12 month period, 40 million gallons for the second subsequent period, etc.). If Xethanol fails to pay the minimum mandatory royalties during the first three years following the Trigger Date, H2Diesel may terminate the Sublicense Agreement or convert it to a non-exclusive basis; provided, that the obligation to pay the minimum royalty is irrevocable in respect of the first year following the Trigger Date. After the first three years following the Trigger Date, a failure to pay the minimum royalties results in the automatic conversion of the Sublicense Agreement to a non-exclusive basis. The Sublicense Agreement will automatically renew at the end of the initial 10 year term for successive one year terms (subject to the right to terminate for default) provided that the rate will adjust in accordance with the GNP Implicit Price Deflator.

Concurrently with the Sublicense Agreement, H2Diesel and Xethanol also entered into a Technology Access Agreement dated June 15, 2006 (the “Technology Agreement”), which provides Xethanol access to the formula and know how to manufacture the Additive if H2Diesel suffers certain bankruptcy events or is involved in a change of control in which the acquiring or resulting entity is a competitor of Xethanol, does not have the financial capacity to perform the obligations of H2Diesel under the Sublicense Agreement or fails to assume in writing such obligations.

Currently, H2Diesel does not own any production facilities either for the Additive or for H2Diesel Bio-fuel. While H2Diesel is exploring possible acquisitions of suitable facilities for such purposes, it has not yet entered into any definitive agreement for a facility. We have, however, recently entered into a Letter of Intent with Twin Rivers Technologies, LP to advance the development of H2Diesel’s first production plant at Twin Rivers’ facility located in Quincy, MA. The Letter of Intent contemplates an exclusive period 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.

The acquisition of manufacturing plants will require us to (i) identify suitable facilities that can be cost-effectively modified for our needs, (ii) conduct due diligence with respect to such facilities, including investigation of environmental risks and permitting, (iii) negotiate acceptable purchase or lease agreements and (iv) finance any such acquisitions and capital improvements. The construction of new facilities would require us to identify appropriate sites to locate plants. In either case, production facilities will need to be engineered and constructed or, in the case of existing plants, appropriate modifications completed. Also, we would have to establish relationships with engineering firms, construction companies and other service providers, as well as supplier relationships to obtain sources of the components of the Additive and, if we manufacture bio-diesel fuel, vegetable oil feed stock.

Plant development, whether acquired or constructed de novo, will necessitate governmental permitting and various regulatory approvals (including environmental, zoning and construction permits), which will likely vary from location to location and may cause delays and add significant costs. Moreover, given our limited operating history, relatively untested technology, experience, management and financial resources, we cannot assure you that we will be able successfully to complete any plant acquisition or construction or that any such plants can be operated profitably.

The market for the manufacture, marketing and sale of bio-diesel, heating and other alternative fuels is highly competitive. According to the National Biodiesel Board (NBB), as of January 31, 2007, there are at least 105 companies that are engaged in the development, manufacture and marketing of bio-diesel fuel, with current production capacity estimated at 864 million gallons per year. The NBB further estimates that another 1.7 billion gallons of annual plant capacity are under development. (Note, the preceding data reflect capacity, not actual production levels or demand.) Such competition could be intense, thus driving up the costs of feedstock, plant construction, attracting and retaining qualified engineers, chemists and other key employees, as well as other operating expenses. Moreover, if production capacity in the industry increases faster than demand for bio-diesel and other alternative fuels, sale prices could be depressed. Falling oil prices would also negatively affect demand and the competitive position of bio fuel. We will also compete with petroleum fuels.

Competition from other alternative fuels will likely increase if prices of energy on the commodities markets, including oil and bio-diesel, rise, as they have in recent years. Additionally, new companies are constantly entering the market, thus increasing the competition. This could also have a negative impact on us or our sublicensees’ ability to obtain additional capital from investors. Larger foreign owned and domestic companies which have been engaged in this business for substantially longer periods of time may have access to greater financial and other resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own fuel manufacturing and marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we or our sublicensees are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operations and financial condition. On the other hand, if petroleum prices fall, competition from such fuels will intensify.

H2Diesel relies on its contractual exclusivity in North America, Central America and the Caribbean with the Inventor under the License Agreement, and on a combination of the Inventor’s know-how and trade secret rights as well as potential patent rights to establish and protect rights in the Technology. On April 27, 2006, H2Diesel filed a U.S. provisional patent application on behalf of the Inventor titled “Biofuel Additive and Method of Producing a Biofuel” directed to the Technology. We plan to file a U.S. nonprovisional patent application and foreign patent applications for the Technology based on the U.S. provisional application prior to the provisional application’s automatic abandonment date which is twelve months after the filing date, i.e., April 27, 2007. In the event we do not file the U.S. nonprovisional patent application and foreign patent applications by such date, we will not be able to claim priority back to the provisional application filing date pursuant to the Paris Convention for Protection of Industrial Property and the effective filing date for subsequent patent applications for the same Technology would be the date that such applications are actually filed with the applicable patent office. This would result in the loss of the right to obtain patent protection for the Technology in the U.S. due to statutory bars to obtaining patent protection in the U.S. becoming applicable based on the Inventor having granted to H2Diesel a license with respect to the Technology more than one year prior to the effective filing date of the nonprovisional patent application. The inability to claim priority back to the provisional patent application filing date could also result in loss of the ability to obtain foreign patent protection depending on applicable foreign laws and the extent of commercialization and disclosure of the Technology prior to the effective filing date of the foreign applications. Until patent protection is granted we must rely on trade secret protection, which requires reasonable steps to preserve secrecy. Therefore, we require that our personnel, contractors and sublicensees not disclose the trade secrets and confidential information pertaining to the Technology. In addition, trade secret protection does not provide any barrier to a third party “reverse engineering” fuel made with the Technology, to the extent that the Technology is readily ascertainable by proper means.

There are no readily apparent U.S. EPA regulatory fuel certification requirements applicable to using the H2Diesel Bio-fuel in a stationary source, such as industrial applications or home heating fuel, or in certain marine applications. There may, however, be requirements applicable to emissions from individual furnaces, boiler, etc. As a practical matter, market acceptance of the H2Diesel Bio-fuel may be limited until we can demonstrate that (i) the H2Diesel Bio-fuel is comparable to conventional fuels, from an energy content and emissions perspective, as well as handling and storage perspectives, and (ii) that the H2Diesel Bio-fuel is compatible with existing heating systems or power generation systems and other combustion systems. To date, we have not demonstrated any of the foregoing in such commercially available systems. In addition, initial testing done on the H2Diesel Bio-fuel in a burner indicated that the H2Diesel Bio-fuel requires further development so that its viscosity is more stable under certain temperature conditions.

We have evaluated whether the H2Diesel Bio-fuel can be formulated to comply with U.S. Environmental Protection Agency (“EPA”) standards to be classified as “Bio-diesel.” EPA standards mandate that “bio-diesel” comply with the specifications of the American Society for Testing and Materials (ASTM) 6751. In particular, ASTM 6751 requires that the fuel be comprised of “mono-alkyl esters of long chain fatty acids.” The H2Diesel Bio-fuel does not comply with this specific requirement of ATSM 6751, and consequently, it is not compliant with EPA standards. However, we are currently evaluating whether the ASTM standard can be broadened to include our fuel.

In order to be legally marketable as a fuel for on-road motor applications, the H2Diesel Bio-fuel must be registered with U.S. EPA and comply with U.S. EPA’s health effects regulations. Under these regulations, a company registering a fuel must either complete a literature review and possibly health effects testing, or submit an application with a group of other companies manufacturing similar fuels. The NBB has completed the required health effects testing on behalf of the bio-diesel industry, and provides the testing data to companies seeking to register their bio-diesel with U.S. EPA. To fit under the NBB umbrella, and be considered “bio-diesel” for marketing purposes, the bio-fuel must meet the ATSM 6751 specifications for bio-diesel described above. European countries use similar standards. ASTM 6751 compliant bio-diesel is already registered with U.S. EPA and also meets the clean diesel standards established by the California Air Resources Board (CARB) and certain other states. As of the date of this report, the current formulation of the H2Diesel Bio-fuel does not comply with ASTM 6751. Because water is a component used in the manufacture of our Bio-fuel, it is unlikely that we will be able to reformulate our fuel to meet this ASTM standard; accordingly, we would need to seek EPA approval as described above for our fuel to be used on on-road motor vehicle applications.

Because our bio-fuel is not “biodiesel,” we are not eligible for the tax credits for biodiesel, agri-biodiesel and renewable diesel found in the Internal Revenue Code of 1986, as amended (the “Code”). We may, however, be eligible for credits as “bio-mass.” In addition, several states also offer state tax incentives for the production of biodiesel and bio-mass. Most of these states define the term “biodiesel” using the same definition as the Code’s. Accordingly, although we believe that the cost of producing our bio-fuel will be significantly lower than the cost of producing biodiesel using conventional technologies, a portion of this cost advantage may be offset by the ability of producers of conventional biodiesel to obtain income tax credits. Unless extended or amended, the current credits for biodiesel, agri-biodiesel and renewable diesel found in the Code will expire on December 31, 2008.

We have 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.

With respect to excise taxes, it is likely that our bio-fuel meets the definition of “alternative fuel” for purposes of credits against the excise tax on the retail sale of diesel fuel and alternative fuel and for purposes of credits against the excise tax on the entry, removal or sale of taxable fuels. These credits against excise tax exceed the amount of the applicable tax by at least $0.256 per gallon, and the excess credits are refundable. It therefore would be beneficial for us to qualify for these excise tax credits; however, we may not be subject to the excise tax on alternative fuel unless and until we engage in the retail sale of our bio-fuel for use as a fuel in a motor vehicle or motorboat. Similarly, we may not be subject to the excise tax on diesel fuel unless and until our bio-fuel is deemed suitable for use in a diesel-powered highway vehicle or diesel-powered train. We will only be able to claim credits against excise taxes to the extent we are subject to those excise taxes.

Although we are not entitled to any credits against excise taxes, we believe that mixing our bio-fuel with diesel or kerosene could result in an “alternative fuel mixture” as that term is used in the Code. If that were the case, we could be entitled to a payment form the Internal Revenue Service equal to $0.50 per gallon of alternative fuel used in such mixture that we produce, even though such fuel is not used in a motor vehicle or motorboat. Generally, the benefit of income tax credits, such as the biodiesel credits for which we are trying to qualify (which may be up to $1 per gallon), are reduced by the amount of any such payments received. As a result, a portion of any income tax credit for which we may qualify could be offset by the $0.50 per gallon payment for alternative fuel mixtures.

We face numerous risks, known and unknown, that may prevent us from achieving our goals, including but not limited to those described below. Additional unknown risks may also impair our financial performance and business operations. Our business, financial condition and/or results of operation may be materially adversely affected by the nature and impact of these risks. In such case, the market value of our securities could be detrimentally affected, and investors may lose part or all of their investment. Please refer to the information contained elsewhere under “Description of Business” in this report for further details pertaining to our business and financial condition.

We are a development stage company that seeks to take advantage of the rights to the Technology to manufacture the Additive and the H2Diesel Bio-fuel that is intended to be marketed as a new class of bio-fuel, bio-mass or fuel additive for power generation, heavy equipment, marine use and as heating fuel. We are also evaluating whether our bio-fuel can be formulated to comply with U.S. Environmental Protection Agency (“EPA”) standards for use in on-road motor vehicle applications. To date, we have not demonstrated such compliance. Additionally, we are evaluating the regulatory requirements for using our fuel in motor vehicle applications in our territory outside of the United States. Even if any necessary approvals are obtained, there can be no assurance that the H2Diesel Bio-fuel will gain market acceptance, either from distributors or consumers.

H2Diesel acquired these rights pursuant to the License Agreement with the Inventor of the Technology. Following the Merger, we have been engaged in organizational activities, including developing a strategic operating plan and entering into contracts. We currently only have three employees, our Chairman, our Chief Executive Officer and our Chief Technology Officer. Other than limited testing activities with respect to our H2Diesel Bio-fuel, we have not conducted any operations. We have not generated any revenues. Accordingly, we have limited relevant operating history upon which an evaluation of our performance and prospects can be made. Our prospects must be considered in light of inherent risks, expenses and difficulties encountered by companies in the early stage of development, particularly companies in new and evolving markets. Such risks include, but are not limited to, risks of unforeseen capital requirements, unforeseen technical problems, failure of market acceptance, failure to establish business relationships and competitive disadvantages against larger and more established companies.

H2Diesel has incurred a net loss of $5,392,074 and negative cash flows from operating activities of $1,415,124 since inception. As of March 26, 2007, we had $535,000 of available cash, but had approximately $197,871 of accounts payable. In addition, under the License Agreement we are required to make a $600,000 payment to the Inventor on or before July 31, 2007, and an additional $1.5 million payment on October 31, 2007. We have financed our operations to date primarily through the sale of our common 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 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 you may lose your entire investment in our company.

Our exclusive perpetual license allows us to exploit the Technology in North America, Central America and the Caribbean. Our business plan currently consists of developing two revenue streams: (a) direct sales from manufacturing plants that we may build or acquire in order to process, market and sell Additive and H2Diesel Bio-fuel and (b) the collection of royalties through sublicensing our Technology (which may include the sale of the Additive to sub-licensees). To date, we have only entered into the Sublicense Agreement with Xethanol Corporation. Although we intend to enter into additional sublicense agreements, we can give no assurance that we will be able to do so. We have not however commenced the design, engineering, development or construction of any Additive or bio-fuel manufacturing plants.

Our success will depend, in part, on the Technology being viable for commercialization and on the strength of the intellectual property rights relating to the Technology. The Technology is not patented and the only intellectual property rights that exist at present, if any, are trade secret rights. However, trade secrets are difficult to protect and others could independently develop substantially equivalent technology, otherwise gain access to trade secrets relating to the Technology, including through analysis or “reverse engineering” of the Additive or H2Diesel Bio-fuel made with the Technology. Accordingly, we may not be able to protect the rights to our trade secrets. In addition, our agreements with our employees, consultants, advisors, sublicensees and strategic partners restricting the disclosure and use of trade secrets, inventions and confidential information relating to the Technology may not provide meaningful protection in the event of unauthorized use or disclosure.

While H2Diesel recently filed a U.S. provisional patent application for the Technology on behalf of the Inventor and we intend to file a U.S. nonprovisional patent application as well as foreign patent applications on behalf of the Inventor prior to the provisional application’s automatic abandonment date which is twelve months after the filing date, i.e., April 27, 2007. In the event we do not file the U.S. nonprovisional patent application and foreign patent applications by such date, we will not be able to claim priority back to the provisional application filing date pursuant to the Paris Convention for Protection of Industrial Property and the effective filing date for subsequent patent applications for the same Technology would be the date that such applications are actually filed with the applicable patent office. This would result in the loss of the right to obtain patent protection for the Technology in the U.S. due to statutory bars to obtaining patent protection in the U.S. becoming applicable based on the Inventor having granted to H2Diesel a license with respect to the Technology more than one year prior to the effective filing date of the nonprovisional patent application. The inability to claim priority back to the provisional patent application filing date could also result in loss of the ability to obtain foreign patent protection depending on applicable foreign laws and the extent of commercialization and disclosure of the Technology prior to the effective filing date of the foreign applications.

Third parties may assert that the Technology, or the products we or our sub-licensees commercialize using the Technology, infringes upon their proprietary rights. We have yet to complete an infringement analysis and, even if such an analysis were available at the current time, it is virtually impossible for us to be certain that no infringement exists, particularly in our case where our products have not yet been fully developed. Further, because we have licensed the Technology from foreign and previously unknown third parties, there are additional inherent uncertainties about the origin and ownership of the intellectual property that could contribute to our infringement exposure.

We could incur substantial costs in defending ourselves in suits brought against us for alleged infringement of another party’s intellectual property rights as well as in enforcing our rights against others, and if we are found to infringe, the manufacture, sale and use of our or our sub-licensees’ products could be enjoined. Any claims against us, with or without merit, would likely be time-consuming, requiring our management team to dedicate substantial time to addressing the issues presented. Furthermore, many of the parties bringing claims may have greater resources than we do.

We have substantial near-term obligations under the License Agreement. Specifically, we are required to make a $600,000 payment to the Inventor on or before July 31, 2007, and $8.5 million in additional payments over the following eight years. To the extent we default on any of these payments or breach any other material provisions of our license, the Inventor would be able to terminate the License Agreement, which is our principal asset. The License Agreement also provides that the Inventor may terminate the License Agreement in the event an insolvency or bankruptcy petition is filed against us and is not dismissed within 90 days.

In addition, several states also offer state tax incentives for the production of biodiesel. However, most of these states define the term “biodiesel” using the same definition as the Code’s. Accordingly, although we believe that the cost of producing our bio-fuel will be significantly lower than the cost of producing biodiesel using conventional technologies, a portion of this cost advantage may be substantially offset by the ability of producers of conventional biodiesel to obtain income tax credits. Unless extended or amended, the current credits for biodiesel, agri-biodiesel and renewable diesel found in the Code will expire on December 31, 2008.

Although we are not entitled to any credits against excise taxes, we believe that mixing our bio-fuel with diesel or kerosene could result in an “alternative fuel mixture” as that term is used in the Code. If that were the case, we could be entitled to a payment from the Internal Revenue Service equal to $0.50 per gallon of alternative fuel used in such mixture that we produce, even though such fuel is not used in a motor vehicle or motorboat. Generally, the benefit of income tax credits, such as the biodiesel credits for which we are trying to qualify (which may be up to $1 per gallon), are reduced by the amount of any such payments received. As a result, a portion of any income tax credit for which we may qualify could be offset by the $0.50 per gallon payment for alternative fuel mixtures.

We have not generated any revenue and we do not expect to generate any material revenues until after we or our sublicensees have successfully operated bio-fuel manufacturing plants (including facilities for the manufacture of the Additive) and commenced commercial sales, which we do not currently anticipate to occur at least until late 2007. Any start-up delays due to problems with the physical plant, staffing, permitting or other operational issues would negatively impact us. Any planned manufacturing plants may not achieve projected capacity. Companies to which we grant sublicenses may not be able to produce, market and sell enough bio-diesel to pay us our projected royalty fees beyond required minimum amounts or they may default on the payment of royalties. We may not be able to achieve profitable operations from the collection of royalties from the sublicensing of the Technology and/or the production of Additive or H2Diesel Bio-fuel.

Our cash flow will depend on our and our sublicensees ability to timely design, construct and complete Additive and bio-fuel manufacturing plants. If engineering and construction operations are disrupted and/or the economic integrity of these projects is threatened for unexpected reasons (including, but not limited to, technical difficulties, poor weather conditions, and business interruptions due to terrorism or otherwise) our business may experience a substantial setback. As a development stage company, we are particularly vulnerable to events such as these.

While production of bio-fuel from vegetable oils or animal fats is a relatively mature technology, the technologies being pursued by us for H2Diesel Bio-fuel production have never been utilized on a commercial basis. The H2Diesel Bio-fuel we produce using our Technology, while intended as a new class of bio-fuel or fuel additive for power generation, heavy equipment, marine use and as a heating fuel, is in fact a new bio-fuel that may never achieve technical or commercial viability. All of the tests conducted to date by us with respect to the Technology have been performed in a limited scale environment and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis. We have never utilized the Technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. The Technology, when used, may require further research, development, regulatory approvals, environmental permits, design and testing prior to commercialization. Accordingly, the Technology or the H2Diesel Bio-fuel may not perform successfully on a commercial basis and they may never generate any revenues or be profitable.

To develop our business, we will use the business relationships of our management team (including those of any future management we retain) and those of our sublicensees in order to form strategic relationships. These relationships may take the form of joint ventures with other private parties or local government bodies or contractual arrangements with other bio-diesel and alternative fuel companies. There can be no assurances that we will be able to establish these strategic relationships, or, if established, that these relationships will be maintained, particularly if members of our management team leave. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake in order to fulfill our obligations to these partners or maintain these relationships. If we do not successfully establish or maintain strategic relationships, our business may be negatively impacted.

We currently have only three employees. Our success will depend in large measure on the abilities, expertise, judgment, discretion, integrity, and good faith of our management, and on other personnel we may hire. The loss of a key individual by us or the inability to attract suitably qualified replacements or additional staff could adversely impact our business. Our success depends on the ability of management and employees to interpret market and technical data correctly, as well as respond to economic, market, and other conditions and to manage effectively the production, marketing and sale of Additive and H2Diesel Bio-fuel fuel using our Technology. Furthermore, no assurance can be given that our key personnel will continue their employment with us, or that replacement personnel with comparable skills will be found. If we are unable to attract and retain key personnel, our business may be adversely affected.

The market for the manufacture, marketing and sale of bio-fuels (such as bio-diesel) and other alternative fuels is believed to be highly competitive. According to the National Bio-diesel Board (NBB), as of January 31, 2007, there are at least 105 companies that are engaged in the development, manufacture and marketing of bio-diesel fuel, with current production capacity estimated at 864 million gallons per year. The NBB further estimates that another 1.7 billion gallons of annual plant capacity are under development. Such competition could be intense thus driving up the costs of feedstock, plant construction, attracting and retaining qualified engineers, chemists and other key employees, as well as other operating expenses. Moreover, if production capacity in the industry increases faster than demand for bio-fuels (including bio-diesel), sale prices could be depressed. Falling oil prices would also negatively affect demand for and the competitive position of alternative fuels such as our bio-fuel. We will also compete with petroleum fuels.

Competition from alternative fuels will likely increase as prices of energy on the commodities market, including oil and bio-diesel, rise, as they have in recent years. Additionally, new companies are constantly entering the market, thus increasing the competition. This could also have a negative impact on us or our sublicensees’ ability to obtain additional capital from investors. Larger foreign owned and domestic companies which have been engaged in this business for substantially longer periods of time may have access to greater financial and other resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own fuel manufacturing and marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we or our sublicensees are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operation and financial condition.

Any manufacturing plants that we or our sublicensees build or acquire may not be capable of production levels that are sufficient for commercial viability. On a long-term basis, we or our sublicensees will be dependent upon the ability to acquire feedstocks at reasonable prices, and to develop viable outlets for the sale of bio-fuel production. Our future will depend on our or our sublicensees’ ability to engineer, construct and operate future manufacturing plants, and successfully sell the Additive and fuel produced from these manufacturing plants.

Completion of manufacturing plants does not assure a profit on the investment or recovery of construction costs and/or operating costs. Also, environmental damage may greatly increase the cost of operations, and various other field operating conditions may adversely affect the construction of bio-fuel manufacturing plants. These conditions include, but are not limited to, delays in obtaining governmental approvals or consents, shut-downs of operations and plant infrastructure resulting from extreme weather conditions, problems in storage, distribution of fuel, attracting and retaining qualified employees, labor relations and adverse geological and mechanical conditions. Therefore, these uncertainties are likely to have some adverse effect on our revenue and cash flow levels to varying degrees, and may result in the impairment of our business.

The price of bio-fuels is determined based on world demand, supply and other factors both with respect to bio-fuels (including bio-diesel) as well as conventional and other alternative fuels, all of which are beyond our control. World prices for bio-diesel fuel have fluctuated widely in recent years and we expect that prices will continue to fluctuate. Price fluctuations will have a significant impact upon our revenue, results of operations and on our general financial condition. Price fluctuations for bio-diesel and other fuel may also impact the investment market, and our ability to raise investor capital. Future decreases in the price of bio-diesel and competing fuels may have a material adverse effect on our financial condition and future results of operations. In addition, in the United States, demand for bio-fuels is affected by certain federal and state tax benefits. The applicability, reduction or repeal of such tax benefits could adversely affect our business. Moreover, the H2Diesel Bio-fuel may not be eligible for tax incentives provided to the bio-diesel industry. See “Because our fuel is not biodiesel, we are not eligible for the tax credit for biodiesel, agri-biodiesel and renewable diesel found in the Internal Revenue Code of 1986, as amended” on Page 12 above.

Engineering, constructing and operating the Additive and bio-fuel manufacturing plants involve a high degree of risk particularly when new technology such as ours is involved. These risks are more acute in the earlier stages of development. Our expenditures in developing manufacturing plants may not result in commercially viable projects. We cannot project the costs of constructing and operating manufacturing plants due to the inherent uncertainties of future feedstock prices, and the future pricing of oil, diesel fuel, bio-diesel fuel, heating fuel, fuel additives and other alternative fuels, the costs associated with encountering unknown obstacles, and changes in market demands. If construction costs exceed our or our sublicensees’ estimates or if our or our sublicensees’ efforts do not produce results which meet our expectations, our business may not be commercially successful, which would have a material adverse effect on our results of operations and financial condition.

To be competitive in the bio-fuel industry, we may be required to continually enhance and update our Technology. The costs of doing so may be substantial, and may be higher than the costs that we anticipate for technology maintenance and development. If we are unable to maintain the efficacy of our Technology, our ability to manage our business and to compete may be negatively impaired. The impact of technical shortcomings could have a material adverse effect on our prospects, business, financial condition, and results of operations.

Our business is subject to environmental risks and hazards and we are subject to environmental regulation implemented and/or imposed by a variety of international conventions as well as federal, state, provincial, and municipal laws and regulations. Environmental laws restrict and prohibit spills, discharges and emissions of various substances produced in association with our Additive and H2Diesel Bio-fuel manufacturing operations. Environmental laws also require that manufacturing plants are operated, maintained and closed in such a way that satisfies applicable regulatory authorities.

In order to be legally marketable as a fuel for on-road motor applications, the H2Diesel Bio-fuel must be registered with U.S. EPA and comply with U.S. EPA’s rigorous health effects regulations. Under these regulations, a company registering a fuel must either complete a literature review and possibly health effects testing, or submit an application with a group of other companies manufacturing similar fuels. The NBB has completed the required health effects testing on behalf of the bio-diesel industry, and provides the testing data to companies seeking to register their bio-diesel with U.S. EPA. To fit under the NBB umbrella, and be considered “bio-diesel” for marketing purposes, the bio-fuel must meet the American Society for Testing and Materials (ASTM) D 6751 specifications for bio-diesel. European countries use similar standards. ASTM-D6751 compliant bio-diesel is already registered with U.S. EPA and also meets the clean diesel standards established by the California Air Resources Board (CARB) and certain other states. As of the date of this report, the current formulation of the H2Diesel Bio-fuel does not comply with ASTM 6751. Because water is a component used in the manufacture of our Bio-fuel, it is unlikely that we will be able to reformulate our fuel to meet this ASTM standard; accordingly, we would need to seek EPA approval as described above for our fuel to be used on on-road motor vehicle applications.

There are no readily apparent U.S. EPA regulatory fuel certification requirements applicable to using the H2Diesel Bio-fuel in a stationary source, such as industrial applications or home heating fuel, or in certain marine applications. There may, however, be requirements applicable to emissions from individual furnaces, boilers, etc. As a practical matter, market acceptance of the H2Diesel Bio-fuel may be limited until we can demonstrate that (i) the H2Diesel Bio-fuel is comparable to conventional fuels, from an energy content and emissions perspective, as well as handling and storage perspectives, and (ii) that the H2Diesel Bio-fuel is compatible with existing heating systems or power generation systems and other combustion systems. To date, we have not demonstrated any of the foregoing in such commercially available systems. In addition, initial testing done on the H2Diesel Bio-fuel in a burner indicated that the H2Diesel Bio-fuel may require further development so that its viscosity is more stable under certain temperature conditions.

Compliance with environmental laws can require significant expenditures and a violation may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner we expect may result in stricter standards and enforcement, larger fines and liability, as well as potentially increased capital expenditures and operating costs. Compliance with environmental laws may cause us to limit our production, significantly increase the costs of our operations and activities, or otherwise adversely affect our financial condition, results of operations, and/or prospects.

Our manufacturing plant operations, if any, may cause us to have liability for pollution, property damage, personal injury, or other hazards. Even if we obtain insurance to address such risks, insurance policies have limitations on liability that may not be sufficient to cover the full extent of our liabilities. Also some of our risks may not be insurable. If we suffer a significant event or occurrence that is not fully covered by insurance, or if the insurer of such event is not solvent, this could result in a material adverse effect on our results of operations or financial condition.

Although a trading market for our common stock exists, the trading volume has historically been insignificant, and an active trading market for our common stock may never develop. There currently is no analyst coverage of our business. Very few shares of our common stock are currently outstanding, and the amount of shares in our public “float” will continue to be limited. As a result of the thin trading market for our common stock, and the lack of analyst coverage, the market price for our shares may continue to fluctuate significantly, and will likely fluctuate more than the stock market as a whole. There may be a limited demand for shares of the our common stock due to the reluctance or inability of certain investors to buy stocks quoted for trading on the OTCBB, lack of analyst coverage of our common stock, and a negative perception by investors of stocks traded on the OTCBB; as a result, even if prices appear favorable, there may not be sufficient demand in order to complete a stockholder’s sell order.

Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock. Upon registration for resale pursuant to the registration rights agreement we entered into in connection with the Private Placement and the Merger, an additional 3,808,750 shares of our Common Stock will be available for trading in the public market, which could decrease the price of our Common Stock. In addition, the Company assumed options and warrants of H2Diesel exercisable for up to an additional 5,571,500 shares of our common stock. Subject to certain securities law considerations, we may also include in such registration certain shares issuable upon the exercise of such options and warrants. In addition, upon registration for distribution pursuant to the registration rights agreement we entered into with Xethanol, which may occur as early as six months following the effectiveness of the registration statement discussed above, 5,850,000 additional shares of our Common Stock will be available for trading in the public market, which could further decrease the price of our Common Stock.

Pursuant to the terms of the registration rights agreement we entered into in connection with the Private Placement, because we did not file the registration statement prior to November 20, 2006 (the “Filing Deadline”), we are required to issue additional shares of Company 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 we file the registration statement, up to a maximum of 6% of the shares sold in the Private Placement.

Some or all of these shares of common stock may be offered from time to time in the open market pursuant to such Registration Statement or Rule 144, and these sales may have a depressive effect on the market for the shares of our common stock. In general, a person who has held for a period of one year, restricted shares of an OTC Bulletin Board listed company may, upon filing with the SEC a notification on Form 144, sell into the market common stock in an amount up to 1% of the outstanding shares. Such sales may be repeated once every three months, and any of the restricted shares may be sold by a non-affiliate after they have been held two years.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. To the extent the market price of our publicly traded common stock is less than $5.00 per share, it may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.

Historically, the SEC and stock exchanges have not generally favored transactions in which a privately-held company merges into a largely inactive company with publicly traded stock, and there is a significant risk that we may encounter difficulties in obtaining the regulatory approvals necessary to conduct future financing or acquisition transactions, or to eventually achieve a listing of shares on the a national securities market. On June 29, 2005, the SEC adopted rules dealing with private company mergers into dormant or inactive public companies. As a result, it is likely that we will be scrutinized carefully by the SEC and possibly by any national securities market on which we may seek to list our shares in the future, which could result in difficulties or delays in achieving SEC clearance of any future registration statements or other SEC filings that we may pursue, in attracting broker-dealers to serve as market-makers in our stock, or in achieving admission to any national securities market. As a consequence, our financial condition and the value and liquidity of your shares may be negatively impacted.

As of March 26, 2007, Xethanol owned approximately 34% of our outstanding common stock. Accordingly, Xethanol will be able to exercise significant influence over the outcome of substantially all matters required to be submitted to our stockholders for approval, including decisions relating to the election of our board of directors. In addition, Xethanol would be able to exercise significant influence over the outcome of any proposed merger or consolidation of our company. Xethanol’s ownership interest in our company may discourage third parties from seeking to acquire control of our company which may adversely affect the market price of our common stock.

Florida	26-0067474
(State of incorporation)	(I.R.S. Employer Identification No.)

11111 Katy Freeway, Suite 910 Houston, Texas	77079
(Address of principal executive offices)	(Zip Code)

	H2Diesel Holdings, Inc

	By: /s/ David A. Gillespie
	David A. Gillespie President and Chief Executive Officer

	Date: May 15, 2007

Exhibit No.	Exhibit Description
31.1	Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002
32.1	Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002