UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
  **FORM
        10-QSB**
 
 **xQUARTERLY
        REPORT UNDER
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
 For the quarterly period ended June 30, 2007
 
 **oTRANSITION
        REPORT UNDER
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
 For the transition period from _______ to _______
  COMMISSION
        FILE NUMBER 000-28015
  **ALTERNATE
        ENERGY CORP.**
 (Exact
        name of small business issuer as specified in its charter)
   **Nevada**
              
              **86-0884116**(State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer
                Identification
                  No.)
 
 3325
                  North Service Rd, Suite 105
                Burlington,
                  Ontario
                Canada
                  L7N 3G2
                (Address
                  of principal executive offices)
                
                905.332.3110
                (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 registrant was required to file such reports) and (2) has been subject
        to such filing requirements for the past 90 days. Yes x No o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes o No x
  State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date: 134,969,019 shares as of May 7,
        2007.
 
 Transitional
        Small Business Disclosure Format (Check one): Yes o No x
  
  **ALTERNATE
        ENERGY CORP.**
 **(A
        Development Stage Company)**
  **QUARTERLY
        REPORT ON FORM 10-QSB**
 **FOR
        THE QUARTER ENDED JUNE 30, 2007**
  **INDEX**
  **PART
        I**
  **FINANCIAL
        INFORMATION**
  The
        accompanying financial statements for the period ended June 30, 2007 included
        in
        this document have not been reviewed by the Registrant’s independent
        auditors.
  Item
                  1 - Consolidated Balance Sheets as of
                  June 30, 2007 (Unaudited)
              F-1Consolidated
                Statements of Operations for the Three and Six Months
                Ended
                  June 30, 2007 and 2006 (Unaudited)
              F-2Consolidated
                Statements of Cash Flows for the Six Months
                Ended
                  June 30, 2007 and 2006 (Unaudited)
              F-3Notes to the Unaudited Consolidated
                Financial
                Statements
              F-4 - F-6Item
                  2 -Management's Discussion and Analysis
                  or Plan of Operation
              1-11Item
                  3 -Controls and
                  Procedures
              11
  **PART
        II - OTHER INFORMATION**
  Item
                  1 - Legal Proceedings
              11-12Item
                  2 -Unregistered
                  Sales of Equity Securities and Use of Proceeds
              12Item
                  3 -Defaults
                  Upon Senior Securities
              12Item
                  4 -Submission of Matters to a Vote of
                  Security Holders
              12Item
                  5 -Other Information
              12Item
                  6 - Exhibits and Reports on Form 8-K
              12
  
 
 **PART
        I**
 **FINANCIAL
        INFORMATION**
  **ITEM
        1. FINANCIAL STATEMENTS.**
 
 **ALTERNATE
                  ENERGY CORP.****(A
                  Development Stage Company)****Consolidated
                  Balance Sheets****June
                  30, 2007**
                ***unaudited***
              
              **December
                  31,**
                **2006****ASSETS****Current**Cash
              
              
              
              
              $
              21,146
              
              $
              97,443Prepaid
                  expenses and sundry assets
              
              
              
              
              
              54,624
              
              
              62,245Marketable
                  securities
              
              
              
              
              
              68,848
              
              
              114,934144,618
              
              
              274,622**Other**Property
                  and equipment, net
              
              
              
              
              
              252,510
              
              
              210,343Patents
                  and technology
              
              
              
              
              
              -
              
              
              -$
              397,128
              
              $
              484,965**LIABILITIES****Current**Accounts
                  payable
              
              
              
              
              $
              257,722
              
              $
              174,842Accrued
                  liabilities
              
              
              
              
              
              221,016
              
              
              168,591Due
                  to directors and officers
              
              
              
              
              
              559,709
              
              
              399,1621,038,447
              
              
              742,595**SHAREHOLDERS
                  EQUITY****Capital
                  stock**
              
              
              
              
              
              141,281
              
              
              133,949**Additional
                  paid in capital**
              
              
              
              
              
              29,546,016
              
              
              29,119,777**Prepaid
                  expenses paid with common stock**
              
              
              
              
              
              (142,401
              )
              
              (101,606
              )**Accumulated
                  other comprehensive income**
              
              
              
              
              
              (195,857
              )
              
              (271,344
              )**(Deficit)
                  Accumulated during development stage**
              
              
              
              
              
              (29,990,358
              )
              
              (29,138,406
              )(641,319
              )
              
              (257,630
              )$
              397,128
              
              $
              484,965{See
                  accompanying notes to the financial
                  statements.}
 F-1
 
 **ALTERNATE
                  ENERGY CORP.****(A
                  Development Stage Company)****Consolidated
                  Statements of Operations****Unaudited****Three
                  Months Ending**
              
              **Three
                  Months Ending**
              
              **Six
                  Months Ending**
              
              **Six
                  Months Ending**
              
              **Inception
                  To****June
                  30, 2007**
              
              **June
                  30, 2006**
              
              **June
                  30, 2007**
              
              **June
                  30, 2006**
              
              **Date****REVENUE**
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -**EXPENSES**Administrative
              
              
              
              
              
              48,898
              
              
              329,945
              
              
              144,647
              
              
              372,057
              
              
              1,610,509Consulting
                  fees
              
              
              
              
              
              157,475
              
              
              330,888
              
              
              354,157
              
              
              1,287,223
              
              
              14,079,424Professional
                  fees
              
              
              
              
              
              16,958
              
              
              150,301
              
              
              164,657
              
              
              208,542
              
              
              1,485,936Research
                  and development
              
              
              
              
              
              100,744
              
              
              49,513
              
              
              164,294
              
              
              86,893
              
              
              506,255Financing
                  expense
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              50,386
              
              
              559,714Impairment
                  of intangible assets
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,165,458Management
                  fee
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              240,000Recovery
                  of loan
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (202,000
              )Depreciation
              
              
              
              
              
              11,394
              
              
              17,251
              
              
              24,198
              
              
              34,319
              
              
              214,476**NET
                  (LOSS) FROM OPERATIONS**
              
              
              
              
              
              (335,468
              )
              
              (877,898
              )
              
              (851,952
              )
              
              (2,039,420
              )
              
              (20,659,771
              )**OTHER
                  INCOME (EXPENSES)**Other
                  income
              
              
              
              
              
              -
              
              
              463,021
              
              
              -
              
              
              463,021
              
              
              4,217Gain
                  on settlement
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              167,427
              
              
              461,909Gain
                  on adjustment on derivative / warrant liability to fair value of
                  underlying securities
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,075,339**NET
                  (LOSS) FOR THE PERIOD**
              $
              (335,468
              )
              $
              (414,877
              )
              $
              (851,952
              )
              $
              (1,408,972
              )
              $
              (19,118,306
              )**NET
                  (LOSS) PER SHARE**
              $
              (0.00
              )
              $
              (0.01
              )
              $
              (0.01
              )
              $
              (0.02
              )**WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARES
                  OUTSTANDING**
              
              
              
              
              
              139,269,217
              
              
              122,504,948
              
              
              137,378,931
              
              
              119,803,127{See
                  accompanying notes to the financial
                  statements.}
  F-2
 **ALTERNATE
                  ENERGY CORP.****(A
                  Development Stage Company)****Consolidated
                  Statements of Cash Flows*****Unaudited***Six
                  months Ending June 30,
              
              **2007**
              
              **2006**
              
              **Inception
                  To Date****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  (loss)
              
              $
                  (851,952)
              
              $
                  (1,408,972)
              
              $
                  (19,118,306)Adjustments
                  to reconcile net loss from operations to net cash used in operating
                  activities:Stock
                  based expenses
              
              367,776
              
              1,490,615
              
              13,366,286Impairment
                  of intangible assets
              -
              
              -
              
              2,165,458Depreciation
                  and amortization
              24,198
              
              34,319
              
              214,476Accretion
                  of principal related to convertible debt
              -
              
              50,386
              
              494,715(Gain)
                  loss on derivatives related to warrants
              -
              
              (167,427)
              
              (1,075,339)(Gain)
                  Loss on sale of marketable securities
              7,200
              
              (6,099)
              
              165,358(Gain)
                  Loss on settlement
              -
              
              -
              
              (376,909)Changes
                  in operating assets and liabilitiesDecrease
                  (increase) in prepaid expenses and sundry assets
              7,621
              
              19,518
              
              (191,533)Decrease
                  (increase) in deferred consulting expense
              -
              
              -
              
              -Increase
                  (decrease) accounts payable and accrued liabilities
              135,305
              
              205,579
              
              258,949Increase
                  (decrease) in due to directors and officers
              -
              
              -
              
              264,000Net
                  cash (used in ) operating activities
              (309,852)
              
              (154,990)
              
              (3,832,845)**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of property and equipment
              (66,365)
              
              (5,271)
              
              (494,980)Purchase
                  of patents and technology
              -
              
              -
              
              (154,373)Proceeds
                  from (investment in) marketable securities
              -
              
              17,349
              
              (152,840)Net
                  cash provided by (used in) investing activities
              (66,365)
              
              (12,078)
              
              (802,193)**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Issue
                  of common shares for cash
              25,000
              
              174,875
              
              3,481,875Principal
                  received from notes payable
              -
              
              -
              
              500,000Advances
                  from directors and officers
              160,547
              
              59,546
              
              595,709Net
                  cash provided by (used in) financing activities
              185,547
              
              234,421
              
              4,577,584**EFFECT
                  OF FOREIGN EXCHANGE RATES**
              114,373
              
              -
              
              78,600**NET
                  INCREASE (DECREASE) IN CASH DURING PERIOD**
              (76,297)
              
              91,509
              
              21,146**CASH,
                  BEGINNING OF THE PERIOD**
              97,443
              
              135,881
              
              -**CASH,
                  END OF THE PERIOD**
              
              $
                  21,146
              
              $
                  227,390
              
              $
                  21,146Non-cash
                  activitiesCommon
                  shares issued for patents and technology (net)
              -
              
              -
              
              1,970,000Issuance
                  of common stock for note conversion
              -
              
              9,032,082
              
              494,715Issuance
                  of common stock for satisfaction of accrued liabilities due to
                  related
                  parties
              -
              
              200,000
              
              300,000{See
                  accompanying notes to the financial
                  statements.}
 F-3
 **ALTERNATE
        ENERGY CORP.**
 **(A
        Development Stage Company)**
 **NOTES
        TO THE (UNAUDITED) CONDENSED FINANCIAL STATEMENTS**
 **SIX
        MONTHS ENDED June 30, 2007**
 
 1.
        GENERAL
  The
        unaudited condensed financial statements have been prepared on the same basis
        as
        the audited financial statements and, in the opinion of management, include
        all
        adjustments (consisting of normal recurring adjustments) necessary for a
        fair
        presentation for each of the periods presented and to make the financial
        statements not misleading. The results of operations for interim statements
        are
        not necessarily indicative of results to be achieved for full fiscal years.
  As
        contemplated by the Securities and Exchange Commission (the “SEC”) under Rule
        10-01 of Regulation S-X, the accompanying financial statements and related
        footnotes have been condensed and do not contain certain information that
        is
        included in the Company’s annual financial statements and footnotes thereto. For
        further information, refer to the financial statements and related footnotes
        for
        the year ended December 31, 2006 included in the Company’s Annual Report on Form
        10-KSB.
  2.
        BACKGROUND INFORMATION
  Alternate
        Energy Corporation (the “Company”), formerly known as COI Solutions, Inc., was
        incorporated in the State of Nevada on August 1, 1997. The Company commenced
        active business operations on June 1, 2003 and is considered to be a development
        stage company under SFAS 7. Since 2003, the Company has had the objective
        of
        producing a clean, on demand hydrogen technology that would have global,
        multiple market applications on both a small and large scale. The Company’s
        hydrogen production system leverages a non-toxic proprietary chemical reaction
        that yields high quality hydrogen along with a number of globally valuable
        chemical compounds. The Company’s process is entirely chemical, not requiring
        electrolysis or any external source of electrical power.
  In
        February 2004, the Company incorporated a wholly-owned subsidiary, 2040412
        Ontario Inc. in the Province of Ontario, Canada. The subsidiary holds title
        to
        certain property and equipment reflected in the Company’s accounts.
  3.  LIQUIDITY
  During
        the
        six months ended June 30, 2007 and 2006, the Company incurred losses of $851,952
        and $1,408,972, respectively and cash used in operations was $309,852 and
        $154,990, respectively. The Company financed its operations using sales of
        its
        common stock, the exercise of share purchase warrants, vendor credit, debt
        financing and convertible notes.
  While
        the
        Company believes that it will have sufficient cash to meet its short-term
        capital requirements through the third quarter of 2007, there are no assurances
        that the Company will be able to raise sufficient funds to meet its long-term
        capital needs. The Company may also seek alternative sources of financing,
        including more conventional sources such as bank loans and credit lines,
        although no assurances in this regard can be made. Further, the availability
        of
        any future financing may not be on terms that are satisfactory to the Company.
        Accordingly, the Company will continue to seek additional financing through
        issuance of debt and/or equity securities.
  4.
        MARKETABLE SECURITIES
  As
        of June
        30, 2007, the Company holds 800,000 restricted shares of common stock of
        Astris
        Energi Inc. and the rights to purchase 1,500,000 warrants at $0.19 for a
        period
        of three years with an unrealized loss of $300,861. On the Over-The Counter
        Bulletin Board, the reported sale price of Astris Energi’s common stock was
        $0.03 as of June 30, 2007
 F-4
 5.
        PROPERTY AND EQUIPMENT
  Property
        and equipment at June 30, 2007 consists of the following:
 
 Automobile
              
              $
              90,465Computer
                hardware
              
              
              36,652Computer
                software
              
              
              6,945Equipment
              
              
              242,043Telephone
              
              
              2,402Office
                equipment
              
              
              4,385Office
                furniture
              
              
              245VOIP
                system
              
              
              1,814Software
                other
              
              
              2,234387,184Less
                accumulated depreciation
              
              
              (118,665
              )$
              268,519
  6.
        RELATED
        PARTY TRANSACTIONS
  As
        of June
        30, 2007, the Company was indebted $595,195 (as of December 31, 2006 - $399,162)
        to a director, Blaine Froats. The amount of $537,100 is pursuant to a
        non-interest bearing demand note. The agreement was put in writing and executed
        on January 1, 2005 and amended on January 1, 2006 and January 2, 2007 to
        reflect
        the outstanding amount owed. The amount of $ 537,100 does not represent a
        one-time lump sum but rather a series of transactions between January 2003
        and
        June 2007.
  The
        Company is indebted to Marilyn Froats, spouse of Blaine Froats, $147,583
        (as of
        December 31, 2006 - $99,802) in consulting fees for the services rendered
        during
        the period between July 1, 2005 to June 30, 2007.
  7.
        CAPITAL
        STOCK
  The
        Company is authorized under its charter to issue 250,000,000 shares of common
        stock, par value 0.001 per share.
  The
        Company issued 3,975,000 shares of common stock during the six months ending
        June 30, 2007. The amount issued consisted of 487,979 shares of common stock
        for
        expenses totaling $28,301 or $0.06 per share (weighted average price), 500,000
        shares of common stock for the exercise of options and 2,987,021 were to
        consultants for services performed for the Company totaling $169,480 or $0.06
        per share (weighted average price).
  At
        June
        30, 2007 and December 31, 2006, there were 141,280,591, and 133,948,877 shares
        of common stock issued and outstanding, respectively.
  8.
        DEFERRED CONSULTING COSTS
  We
        have
        issued shares to service providers and consultants over the terms of their
        contracts which range from three months to three years. We recorded shares
        at
        the fair value at date issued and the expense is recorded as services are
        rendered.
  All
        deferred assets are recorded at fair market value at the time of share issuance
        and are systematically reduced based on the terms of each agreement. Each
        party
        providing services had either positive working references or had previously
        provided services to us and had performed their duties as per their contractual
        terms.
 
 9.
        STOCK
        OPTIONS AND WARRANTS
  On
        May 22,
        2003 the Company adopted a stock option plan that is accounted for based
        on SFAS
        No. 123 (R) and related interpretations. The plan allows the Company to grant
        options to persons employed or associated with the Company, including, without
        limitation, any employee, director, general partner, officer, attorney,
        accountant, consultant or advisor up to an aggregate of 5,000,000 common
        shares.
 F-5
 The
        options have a term of expiration to be set by the Compensation Committee
        of the
        Board of Directors but will not exceed ten (10) years after the grant date.
        The
        options vest immediately. The exercise price for each option is chosen at
        the
        discretion of the Compensation Committee. On February 24, 2004 the Company
        increased the number of shares to be issued under the plan to 15,000,000.
  In
        December 2006, 2,000,000 options were exercised. These common shares were
        issued
        in January 2007 as reflected in the Company’s financial statements.
  At
        June
        30, 2007 and December 31, 2006, there were 7,780,000 and 7,780,000 options
        to
        purchase shares of common stock, respectively. There were no other exercised,
        expired or issued options during the three month period.
  The
        total
        amount of warrants outstanding at June 30, 2007 was 10,166,676. There were
        no
        issued warrants and 3,720,556 warrants expired during the six month
        period.
 
 10.
        NET
        INCOME (LOSS) PER COMMON SHARE
  The
        Company computes net income (loss) per common share in accordance with SFAS
        No.
        128, “Earnings per Share”, SEC Staff Accounting Bulletin No. 98 (“SAB 98”) and
        Emerging Issues Task Force No. 04-8 “The Effect of Contingently Convertible
        Instruments on Diluted EPS”. Under the provisions of SFAS 128 and SAB 98, basic
        net income (loss) per common share (“Basic EPS”) is computed dividing net income
        (loss) available to common stockholders by the weighted average number of
        common
        shares outstanding. Diluted net income (loss) per common share (“Diluted EPS”)
        is computed by dividing net income (loss) adjusted for interest expense and
        amortization of debt issuance costs associated with the Convertible Debentures,
        by the weighted average number of common shares and dilutive potential common
        share equivalents then outstanding. Potential common shares consist of shares
        issuable upon the exercise of stock options and convertible securities such
        as
        Convertible Debentures. The calculation of diluted net loss per share does
        not
        include potential shares of common stock equivalents for the three and six
        months ended June 30, 2007 and 2006 respectively, as their impact on net
        loss
        per share would be antidilutive.
 F-6
 **ITEM.
        2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION.**
  The
        following Management’s Discussion and Analysis and Plan of Operation should be
        read in conjunction with the financial statements, and the notes thereto
        included herein.
  Forward-Looking
        Statements
  This
        Quarterly Report on Form 10-QSB contains forward-looking statements. These
        statements involve known and unknown risks, uncertainties and other factors
        that
        may cause our actual results, performance or achievements to differ, perhaps
        materially, from any future results, performance or achievements expressed
        or
        implied by forward-looking statements. Forward-looking statements include,
        but
        are not limited to, statements about:
  ·
            Our
                product development efforts;  ·
            The
                commercialization of our products;  ·
            Anticipated
                operating losses and capital
                expenditures;  ·
            Our
                estimates regarding our needs for additional
                financing;  ·
            Our
                estimates for future revenues and profitability;
                and  ·
            Sources
                of revenues and anticipated revenues, including contributions from
                corporate collaborations, license agreements and other collaborative
                efforts for the development and commercialization of our product
                candidates, and the continued viability and duration of those agreements
                and efforts.  In
        some
        cases, you can identify forward-looking statements by terms such as “may,”
“will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “project,” “predict,” “intend,” “potential” and similar expressions
        intended to identify forward-looking statements. These statements reflect
        our
        current views with respect to future events and are based on assumptions
        and
        subject to risks and uncertainties. Given these uncertainties, you should
        not
        place undue reliance on these forward-looking statements. Any forward-looking
        statements, speak only as of the date on which they are made, and we do not
        undertake any obligation to update any forward-looking statement to reflect
        events or circumstances after the date of this Form 10-QSB, except as required
        by law.
  Background
  We
        are a
        development stage company. We have not earned revenues from our technology
        through March 31, 2007. We are currently developing our core technology which
        is
        focused on production of on-demand, pure, safe hydrogen. Hydrogen has numerous
        applications, such as a fuel to power internal combustion engines and fuel
        cells, and in bulk form, as a process ingredient in the food, pharmaceutical,
        oil refining, glass production and several other major manufacturing industries.
        Our hydrogen production process is designed to overcome three major industry
        obstacles: affordability, storage and safety. Our hydrogen production system
        leverages a chemical process that yields fuel-cell quality hydrogen with
        no
        known harmful by-products. Our hydrogen-maker can be scaled according to
        application and designed to directly supply almost any application on an
        as-needed basis, eliminating the need to store hydrogen in a compressed state.
  Since
        2003, our objective has been to create a clean, on-demand hydrogen technology
        that has multiple market applications. Our hydrogen production system leverages
        a non-toxic proprietary chemical reaction that yields high quality hydrogen
        and
        potentially valuable chemical compounds as by-products. Our unique production
        method yields no waste or emissions and does not require the use of fossil
        fuels
        or electricity. It is also environmentally friendly because it produces hydrogen
        without utilizing any toxic ingredients or producing harmful emissions.
 1
 The
        process of making hydrogen produces a number of chemical by-products. These
        chemicals have many applications. If we can produce these by-products in
        significant volume, we believe we could generate revenues from their sales
        which
        could subsidize the cost of producing the hydrogen gas. We believe this
‘subsidized model’ approach to producing bulk hydrogen is unique in the
        alternate energy industry and we believe it will make us more competitive
        because we can offer hydrogen at a lower cost than our competitors.
  Our
        hydrogen production process is designed to overcome three major industry
        obstacles: affordability, storage and safety. Our hydrogen-maker can be scaled
        according to application and designed to directly supply almost any application
        on an as-needed basis, eliminating the need to store hydrogen in a compressed
        state.
  We
        are
        currently negotiating with Brasil Óleo de Mamona Ltda, known as BOM, a world
        leader in castor oil production, to build a pilot plant supplying their company
        with hydrogen to fuel their hydrogenation process. We believe completion
        of this
        plant would achieve a number of objectives including testing and refining
        of BOM
        Brazil’s process technology, selling its hydrogen and requisite chemicals
        through BOM related sales channels and revenue generation by 2008. We are
        currently seeking private investment to complete the first steps required
        for
        the pilot plant operations in Brazil.
  We
        believe
        our hydrogen production technology could have immediate application in the
        areas
        of existing hydrogen industries such as hydrogenation of food oils and
        petro-chemicals, as well as emergent power uses including: back-up and, in
        some
        cases, primary power for commercial, industrial and military purposes;
        stationary and portable fuel cell power applications, in fuel cell-driven
        and
        internal combustion engine vehicles; and residential and commercial applications
        for users wishing to gain independence from the existing electrical grid.
        The
        chemical by-products produced by our hydrogen production process, via any
        one of
        the aforementioned hydrogen applications, are environmentally safe, meet
        applicable industry standards and possess wide, established global markets
        in
        the food products and pharmaceutical industries.
  Basis
        of Presentation
  These
        consolidated financial statements present the accounts of Alternate Energy
        and
        its wholly-owned subsidiary, 2040412 Ontario, Inc. All significant intercompany
        accounts and transactions have been eliminated.
  **CRITICAL
        ACCOUNTING POLICIES, ESTIMATES AND NEW ACCOUNTING PRONOUNCEMENTS**
  Management's
        discussion and analysis of its financial condition and plan of operations
        is
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States
        of
        America. The preparation of these financial statements requires that we make
        estimates and judgments that affect the reported amounts of assets, liabilities,
        revenues and expenses, and related disclosure of contingent assets and
        liabilities. At each balance sheet date, management evaluates its estimates.
        We
        base our estimates on historical experience and on various other assumptions
        that are believed to be reasonable under the circumstances. Actual results
        may
        differ from these estimates under different assumptions or conditions. The
        estimates and critical accounting policies that are most important in fully
        understanding and evaluating our financial condition and results of operations
        include those stated in our financial statements and those listed below:
  Going
        Concern
  These
        financial statements have been prepared on a going concern basis and do not
        include any adjustments to the measurement and classification of the recorded
        asset amounts and classification of liabilities that might be necessary should
        we be unable to continue as a going concern. We have experienced losses in
        the
        period and there is negative working capital. Our ability to realize our
        assets
        and discharge our liabilities in the normal course of business is dependent
        upon
        continued support. We are currently attempting to obtain additional financing
        from its existing shareholders and other strategic investors to continue
        operations. However, there can be no assurance that we will obtain sufficient
        additional funds from these sources.
 2
 These
        conditions cause substantial doubt about our ability to continue as a going
        concern. A failure to continue as a going concern would require that stated
        amounts of assets and liabilities be reflected on a liquidation basis that
        could
        differ from the going concern basis.
  Accounting
        Principles
  Our
        accounting and reporting policies conform to generally accepted accounting
        principles and industry practice in the United States. The financial statements
        are prepared in United States dollars.
  *Risks
        and Uncertainties*
  We
        operate
        in an emerging industry that is subject to market acceptance and technological
        change. Our operations are subject to significant risks and uncertainties,
        including financial, operational, technological and other risks associated
        with
        operating an emerging business, including the potential risk of business
        failure.
  *Financial
        Instruments and Risk Concentrations*
  Our
        estimate of the fair value of cash, accounts payable and accrued liabilities,
        warrant liability, convertible notes and due to directors and officers
        approximates carrying value due to the short-term nature of these instruments.
        Marketable securities are stated at fair value.
  Our
        operations are in Canada and virtually all of our assets and liabilities
        give
        rise to significant exposure to market risks from changes in foreign currency
        rates arising from fluctuations in foreign exchange rates and the degree
        of
        volatility of these rates. Currently, we do not use derivative instruments
        to
        reduce its exposure to foreign currency risk. We may not be able to effectively
        protect our intellectual property rights, which form the foundation of the
        business. The business exposes us to potential product liability claims that
        are
        inherent in hydrogen and products that use hydrogen. We have not obtained
        insurance coverage on acceptable terms.
  *Deferred
        Consulting Costs*
  We
        have
        issued shares to service providers and consultants over the terms of their
        contracts which range from three months to three years. We recorded shares
        at
        the fair value at date issued and the expense is recorded as services are
        rendered.
  All
        deferred assets are recorded at fair market value at the time of share issuance
        and are systematically reduced based on the terms of each agreement. Each
        party
        providing services had either positive working references or had previously
        provided services to us and had performed their duties as per their contractual
        terms.
  *Marketable
        Securities*
  Marketable
        securities are classified as current, are available for sale and are stated
        at
        fair value. Unrealized gains and losses, net of tax, are included in Accumulated
        Other Comprehensive Income (Loss) on the Balance Sheet.
  *Patents
        and Technology*
  In
        accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which was
        adopted in its entirety on May 22, 2003, we evaluate the carrying value of
        other
        intangible assets annually as of December 31 and between annual evaluations
        if
        events occur or circumstances change that would more likely than not reduce
        the
        fair value of the reporting unit below its carrying amount. When evaluating
        whether or not an asset is impaired, we compare the fair value of the reporting
        unit to which the asset is assigned to its carrying amount. If the carrying
        amount of a reporting unit exceeds its fair value, the amount of the impairment
        loss must be measured. The impairment loss is calculated by comparing the
        implied fair value of the reporting unit to its carrying amount.
 3
 We
        performed our periodic review of our intangible assets for impairment as
        of
        December 31, 2005 and identified asset impairment as a result of the review
        of
        $1,906,373.
  We
        purchased technology during the 2004 fiscal year for $218,000 and had filed
        for
        provisional patents covering the newly acquired technology. This technology
        showed no impairment during the fiscal year ended December 31, 2005.
  As
        a
        result of change in technology in the third quarter ending September 30,
        2006,
        we concluded that the technology is no longer functional, deemed inadequate
        to
        the needs of the business at this future time, and does not fit into our
        business plan as set out in relation to the requirements for a competitive
        margin needed for our targeted markets. We performed our periodic review
        of our
        intangible assets for impairment as of December 31, 2006 and identified asset
        impairment as a result of the review of approximately $218,000.
  As
        a
        result, we withdrew two provisional patents through our patent attorneys,
        and
        recorded the impairment as shown in the chart below.
  Through
        our own extensive research and development, we have developed our own
        proprietary process for producing hydrogen. We believe this process has improved
        hydrogen production significantly, with the added creation of valuable
        by-products. Since these by-products have a much higher value to weight ratio
        than the hydrogen itself, subsidization of the hydrogen’s selling price via the
        sale of this product will allow for this process to be more price competitive
        with current gasoline, diesel and hydrogen prices.
  It
        is with
        this newly developed technology that we will continue our business strategy
        which may allow for the realization of better revenue opportunities to arise
        in
        the future. We will continue in the development and refinement of our hydrogen
        production systems.
  *Income
        Taxes*
  We
        account
        for our income taxes under the asset and liability method specified by SFAS
        No.
        109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are
        determined based on the difference between the financial statement and tax
        bases
        of assets and liabilities as measured by the effective tax rates which will
        be
        in effect when these differences as expected to reverse. Deferred tax assets
        are
        reduced by a valuation allowance when, in the opinion of management, it is
        more
        than likely than not that some portion or all of the deferred tax assets
        will
        not be realized.
  *Property
        and Equipment*
  Property
        and equipment are recorded at cost less accumulated depreciation. Depreciation
        is provided annually on a declining-basis over the estimated useful lives
        of the
        assets, except for current year additions on which 1⁄2 of the rates are
        applicable. The declining balance rates are as follows:
 Automobile
                  30%
                      declining balanceComputer
                      hardware
                  30%
                      declining balanceComputer
                      software
                  100%
                      declining balanceEquipment
                  20%
                      declining balanceTelephone
                  30%
                      declining balanceOffice
                      equipment
                  30%
                      declining balance
 4
 *Comprehensive
          Income*
  We
        adopted
        SFAS No. 130, “Reporting Comprehensive Income”, which establishes standards for
        the reporting of comprehensive income, its components and accumulated balances.
        Comprehensive income is defined to include all changes in equity except those
        resulting from investments by owners or distributions to owners. Among other
        disclosures, SFAS No. 130 requires that all items that are required to be
        recognized under the current accounting standards as a component of
        comprehensive income be reported in a financial statement that is displayed
        with
        the same prominence as other financial statements. Comprehensive income is
        displayed in the statement of shareholders’ equity and in the balance sheet as a
        component of shareholders’ equity.
  *Use
        of Estimates*
  The
        preparation of financial statements in conformity with United States generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting periods. Actual results could differ from those
        estimates.
  *Stock
        Option Plans and Stock-Based Compensation*
  We
        apply
        the fair-value-based method of accounting prescribed by SFAS No. 123 (R),
        “Accounting for Stock-Based Compensation,” ** in
        accounting for its stock options granted to employees and stock granted to
        non-employees. As such, compensation expense for employees is recorded on
        the
        date of the grant, which vests immediately based on the fair market value
        of the
        stock and is expensed in the period in which the option was granted.
        Compensation cost for non-employees is recognized when services are received
        using the fair value of our equity instruments at those dates.
  *Earnings
        per Share*
  We
        compute
        net income (loss) per common share in accordance with SFAS No. 128, “Earnings
        per Share,” SEC Staff Accounting Bulletin No. 98 (“SAB 98”) and Emerging Issues
        Task Force No. 04-8 “The Effect of Contingently Convertible Instruments on
        Diluted EPS.” Under the provisions of SFAS 128 and SAB 98, basic net income
        (loss) per common share (“Basic EPS”) is computed by dividing net income (loss)
        available to common stockholders by the weighted average number of common
        shares
        outstanding. Diluted net income (loss) per common share (“Diluted EPS”) is
        computed by dividing net income (loss) adjusted for interest expense and
        amortization of debt issuance costs associated with our Convertible Debentures
        by the weighted average number of common shares and dilutive potential common
        share equivalents then outstanding. Potential common shares comprise shares
        issuable upon the exercise of stock options and convertible securities such
        as
        Convertible Debentures.
  *Foreign
        Currency Translation*
  We
        consider the functional currency to be the Canadian dollar and, accordingly,
        financial information is translated into U.S. dollars using exchange rates
        in
        effect at year-end for assets and liabilities and average exchange rates
        during
        each reporting period for the results of operations.
  *Revenue
        Recognition*
  Revenues
        are recognized when all of the following criteria have been met: persuasive
        evidence for an arrangement exists; delivery has occurred; the fee is fixed
        or
        determinable; and, collection is reasonably assured. Upfront contract payments
        received from the sale of services not yet earned are initially recorded
        as
        deferred revenue on the balance sheet.
  5
  Revenue
        from time and material service contracts is recognized as the services are
        provided. Revenue from fixed price, long-term service or development contracts
        is recognized over the contract term based on the percentage of services
        that
        are provided during the reporting period compared with the total estimated
        services to be provided over the entire contract. Losses on fixed price
        contracts are recognized during the reporting period in which the loss first
        becomes apparent. Payment terms vary by contract.
  *Advertising*
  We
        expense
        the cost of advertising when incurred. Advertising expenses are included
        in
        general and administrative expenses in the consolidated statements of
        operations.
  *Recently
        Adopted Accounting Standards*
  In
        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
        No. 87, 88, 106 and 132(R).” (SFAS 158”) SFAS 158 requires an employer that
        sponsors one or more single-employer defined benefit plans to (a) recognize
        the
        overfunded or underfunded status of a benefit plan in its statement of financial
        position, (b) recognize as a component of other comprehensive income, net
        of
        tax, the gains or losses and prior service costs or credits that arise during
        the year but are not recognized as components of net periodic benefit cost
        pursuant to SFAS 87, “Employers’ Accounting for Pensions”, or SFAS 106,
“Employers’ Accounting for Postretirement Benefits Other Than Pensions”, (c)
        measure defined benefit plan assets and obligations as of the date of the
        employer’s fiscal year-end, and (d) disclose in the notes to financial
        statements additional information about certain effects on net periodic benefit
        cost for the next fiscal year that arise from delayed recognition of the
        gains
        or losses, prior service costs or credits, and transition asset or obligation.
        SFAS 158 is effective for our fiscal year ending September 30, 2007. We do
        not
        expect the adoption of SFAS 158 to have a material impact on our financial
        position, results of operation or cash flows.
  In
        September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement.” ("SFAS
        157") The Statement provides guidance for using fair value to measure assets
        and
        liabilities. The Statement also expands disclosures about the extent to which
        companies measure assets and liabilities at fair value, the information used
        to
        measure fair value, and the effect of fair value measurement on earnings.
        This
        Statement applies under other accounting pronouncements that require or permit
        fair value measurements. This Statement does not expand the use of fair value
        measurements in any new circumstances. Under this Statement, fair value refers
        to the price that would be received to sell an asset or paid to transfer
        a
        liability in an orderly transaction between market participants in the market
        in
        which the entity transacts. SFAS 157 is effective for fair value measurements
        and disclosures made by us in our fiscal year beginning on October 1, 2008.
        We
        do not expect the adoption of SFAS 157 to have a material impact on our
        financial position, results of operation or cash flows.
  In
        July
        2006, the FASB issued FIN. 48, “Accounting for Uncertainty in Income Taxes (an
        interpretation of FASB Statement No. 109), *(* “FIN
        48”)
        which is effective for fiscal years beginning after December 15, 2006. This
        interpretation was issued to clarify the accounting for uncertainty in income
        taxes recognized in the financial statements by prescribing a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of a tax position taken or expected to be taken in a tax return.
        We
        are currently evaluating the potential impact of FIN 48, but it is not expected
        to have a material impact on our financial position, results of operations
        or
        cash flows.
  In
        March
        2006, the FASB issued Statement of Financial Accounting Standards No. 156,
        Accounting for Servicing of Financial Assets (“SFAS No. 156”), which amends FASB
        Statement No. 140 (“SFAS No. 140”). SFAS 156 may be adopted as early as January
        1, 2006, for calendar year-end entities, provided that no interim financial
        statements have been issued. Those not choosing to early adopt are required
        to
        apply the provisions as of the beginning of the first fiscal year that begins
        after September 15, 2006 (e.g., January 1, 2007, for calendar year-end
        entities).  The intention of the new statement is to simplify accounting
        for separately recognized servicing assets and liabilities, such as those
        common
        with mortgage securitization activities, as well as to simplify efforts to
        obtain hedge-like accounting.  Specifically, the FASB said FAS No. 156
        permits a servicer using derivative financial instruments to report both
        the
        derivative financial instrument and related servicing asset or liability
        by
        using a consistent measurement attribute, or fair value.  We do not expect
        the adoption of SFAS 156 to have a material impact on our financial
        position, results of operations or cash flows.
  6
  **RESULTS
        OF OPERATIONS**
  **FOR
        QUARTER ENDED JUNE 30, 2007,**
 **COMPARED
        TO THE QUARTER ENDED JUNE 30, 2006**
 **REVENUES**
  For
        the
        quarter ended June 30, 2007 and for the quarter ended June 30, 2006 we had
        no
        revenues. As a development stage company we are working diligently to progress
        our technology into realized revenue. We are continuing with our exploration
        of
        our dual phase business strategy that may allow for the realization of revenue
        opportunities sooner as we continue the development and refinement of our
        hydrogen production systems as well as our sales and marketing strategies.
  **OTHER
        INCOME**
  For
        the
        quarter ended June 30, 2007, we had no other income.
  **EXPENSES**
  We
        had
        total expenses of $335,468 and $877,898 in the quarter ended June 30, 2007
        and
        2006, respectively. Our expenses for the quarter ended June 30, 2007 and
        2006
        consisted of $48,898 and $329,945 in administrative expenses, respectively,
        $157,475 and $330,888 in consulting fees, $16,958 and $150,301 in professional
        fees, respectively, $100,744 and $49,513 for research and development,
        respectively, $0 and $50,386 for financing expense, respectively, and $11,394
        and $17,251 in depreciation, respectively. During the quarter ended June
        30,
        2007, our expenses were 62% lower than in quarter ended June 30, 2006, mostly
        due to reduction in administrative expenses and consulting fees.
  Administrative
        expenses decreased by $281,047 in the quarter ending June 30, 2007 as compared
        to the quarter ending June 30, 2006. The decreased is attributed to a one
        time
        bonus in the prior year’s period which did not recur in the current period nor
        do we anticipate incurring such bonus in the fiscal year 2007.
  Consulting
        fee expenses decreased by $173,413 in the quarter ending June 30, 2007 as
        compared to the quarter ending June 30, 2006. The decrease is mainly attributed
        to the non issuance of stock options of $115,343 in the prior year’s quarter to
        our core consultants which we do not anticipate recurring such expense for
        the
        current fiscal year.
  Professional
        fees decreased by $133,343 in the quarter ending June 30, 2007 as compared
        to
        the quarter ending June 30, 2006. The decrease is attributed to reduction
        in
        legal expenses which in the prior year was incurred due to patent filings
        and
        litigations which we do not anticipate incurring such level of expenses in
        fiscal year 2007.
  Research
        and development expenses increased by $51,231 in the quarter ending June
        30,
        2007 as compared to the quarter ending June, 2006 as we continue on our course
        of action with testing and development of our hydrogen production systems
        as
        well as our valuable byproducts. We anticipate our research and development
        expenses to continue at the current levels for fiscal year 2007.
  Over
        the
        next 12 months, we anticipate that our expenses will remain at same current
        levels as experienced in the quarter period ended June 30, 2007, however,
        decrease comparatively to fiscal year 2006. In the event significant financing
        is obtained, we would expect that expenses will only increase in proportion with
        the amount of funds received as a result of any such financing. We will continue
        as planned in the goals set for the continued development, sales and marketing
        of our hydrogen production system and sale of by-products.
 7
 **NET
        LOSS**
 
 We
        had a
        net loss of $335,468 in the quarter ended June 30, 2007, compared with a
        net
        loss of $877,898 in the quarter ended June 30, 2006. The decrease of $542,430
        in
        the net loss in the 2007 quarter compared to the 2006 quarter to aforementioned
        explanations. We believe that, for the fiscal year ending December 31, 2007,
        we
        will continue to incur losses at the rate experienced during the second quarter.
        In 2007, we believe we would only be able to slow our losses if we can create
        and sustain significant revenues from our hydrogen production system and
        byproducts.
  **LIQUIDITY
        AND CAPITAL RESOURCES**
  Our
        financial statements have been prepared on a going concern basis that
        contemplates the realization of assets and the settlement of liabilities
        and
        commitments in the normal course of business. We incurred a net loss of $516,830
        and $994,095 for the quarters ended March
        31,
        2007 and March
        31,
        2006 ,
        respectively, and have an accumulated deficit of $29,655,236 at March
        31,
        2007 .
        We had
        $39,450 in cash on hand as of March
        31,
        2007 .
        Management may obtain additional capital principally through the sale of
        equity
        securities. The realization of assets and satisfaction of liabilities in
        the
        normal course of business is dependent upon our ultimately obtaining profitable
        operations. We may not be successful in these activities. Should any of these
        events not occur, the accompanying financial statements will be materially
        affected.
  While
        the
        Company believes that it will have sufficient cash to meet its short-term
        capital requirements through the third and fourth quarter of 2007, there
        are no
        assurances that the Company will be able to raise sufficient funds to meet
        its
        long-term capital needs. Due to no
        cash generated from operations, we currently do not have internally generated
        cash sufficient to pay all of our incurred expenses and other liabilities.
        As a
        result, we are dependent on investor capital and loans to meet our expenses
        and
        obligations. Although investor funds have allowed us to meet our obligations
        in
        the recent past, there can be no assurances that our present methods of
        generating cash flow will be sufficient to meet future obligations.
        Historically, we have, from time to time, been able to raise additional capital,
        but there can be no assurances that we will be able to raise additional capital
        in this manner.
  Net
        cash
        used in operating activities was $309,852 for the six month period ended June
        30,
        2007 ,
        compared
        with $154,990 for the six month period ended June
        30,
        2006 .
        The net
        cash used for this period resulted mainly from consulting fees and liabilities
        to continue the ongoing movement towards our development, marketing and
        operations. The consulting fees were paid in shares of our common
        stock.
  Net
        cash
        obtained from financing activities was $185,547 for the six month period
        ended June
        30,
        2007 ,
        compared
        with $234,421 for the six month period ended June
        30,
        2006 .
        In the
        six month period ended June
        30,
        2007 ,
        we
        received advances from one of our directors.
  Net
        cash
        used in investing activities for the six month period ended June
        30,
        2007 was
        $66,365, compared with net cash provided of $12,078 for the six months ended
        June 30, 2006. The net cash used for this period resulted primarily in purchases
        of new property and equipment.
  On
        April
        28, 2006, we sold 1,600,000 shares of common stock at a price of $0.10 per
        share, for a total of $160,000, to certain accredited investors.
  On
        April
        1, 2006 we entered into a lease agreement with Astris Energi, Inc. We will
        lease
        certain equipment to Astris over a 48 month period.
  In
        March
        2005, we entered into a convertible debenture agreement which is described
        below. The initial closing for $500,000 and its conversion features triggered
        the anti-dilution clause included in our private placement agreements with
        certain accredited investors. As such, an additional 2,811,429 shares of
        common
        stock will need to be issued to these investors. At June 30, 2006,
        324,857 **** shares
        of
        common stock were issued with 2,486,572 shares remaining to be issued.
 8
 On
        March
        2, 2005, we entered into a private placement with certain institutional
        accredited investors whereby these investors agreed to purchase up to $1,500,000
        in Convertible Notes, with Class A Warrants to purchase a number of shares
        equal
        to the number of shares to which the Notes are convertible, at a price of
        $0.40
        per share expiring in 3 years, Class B Warrants to purchase up to three times
        the amount of Notes purchased at the initial closing at an exercise price
        equal
        to 70% of the volume weighted average price for the five days preceding the
        closing ($0.2875 per share) exercisable until 90 days after a resale
        registration statement is declared effective, and Class C Warrants to purchase
        400,000 shares at $0.40 per share and 600,000 shares at $1.00 per share,
        exercisable for 3 years from the date of the closing. The Notes were initially
        convertible into shares of our common stock at 70% of the average closing
        bid
        price for the 5 days preceding the notice to convert with an initial ceiling
        of
        $0.35 per share and floor of $0.15 per share. Under the terms of the Notes,
        the
        floor is no longer effective. The Notes carry an interest rate of 6%, payable
        quarterly in arrears in either cash or our stock, at our discretion.
  **** As of
        June 30, 2006, we have received $500,000 **** in
        proceeds from the investors and have issued warrants to purchase a total
        of
        8,054,674 shares of common stock. Of this total there were 2,563,668 Class
        A
        warrants, 5,291,005 Class B warrants and 200,000 Class C warrants issued,
        all of
        which have been converted to shares of common stock.
  In
        January
        2004, we entered into a private placement with institutional and accredited
        investors in which we sold a total of 5,500,000 shares of common stock at
        a
        price of $0.50 per share and warrants to purchase a total of 2,750,000 shares
        of
        common stock at an exercise price of $0.85 per share. The warrants have a
        three
        year term. We received gross proceeds of $2,750,000 from this transaction.
  In
        November 2004, we cancelled 30,000,000 shares that were returned to us by
        AEC 1,
        Inc as part of an agreement that we divest certain non-core technology. Under
        the terms of the agreement, to return certain patents and technology to their
        original owner, we transferred these patents and technology to our parent
        company, AEC 1, Inc. In consideration for this transfer of the patents and
        technology, we received 30,000,000 of our own shares from AEC 1,
        Inc. **** which
        were
        subsequently cancelled.
  Though
        these technologies possessed market potential, our final analysis concluded
        that
        their development required an extremely high outlay of capital and would
        produce
        only marginal profitability. Management therefore decided to divest and focus
        on
        its hydrogen production units. On November 1, 2004, we agreed to release
        these
        non-core technologies in order to facilitate and reacquire 30,000,000 shares
        of
        our common stock from AEC 1, Inc.
  We
        held
        1,000,000 shares of Astris Energi Inc. as of December 31, 2004, which comprised
        an ownership interest in Astris Energi of 2.65%. These shares were purchased
        for
        the sum of $300,000 at the value of $0.30 per share and adjusted as per market
        value for that period. We sold all 1,000,000 shares of the Astris Energi
        securities between September 1, 2005 and March 31, 2006, incurring a loss
        on the
        investment, which is reflected in the consolidated statements of cash flows.
  During
        the
        fiscal quarter ended June 30, 2006, our contract with Astris Energi was amended
        and we received 800,000 restricted shares of common stock of Astris Energi
        Inc,
        $85,000 in cash and the rights to purchase 1,500,000 warrants at $0.19 for
        a
        period of three years. On the Over-The Counter Bulletin Board, the last reported
        sale price of Astris Energi’s common stock was $0.071 as of November 9,
        2006.
  While
        we
        believe that we will have sufficient cash to meet our short-term capital
        requirements, we may not be able to raise sufficient funds to meet long-term
        capital needs as management estimates that we will require several million
        dollars towards the end of fiscal year 2007 to continue towards the goals
        set
        forth in our business strategy as stated in our annual report on form 10-KSB
        for
        the fiscal year ended December 31, 2006. We may also seek alternative sources
        of
        financing, including from more conventional sources such as bank loans and
        credit lines, although no assurances in this regard can be made. Further,
        the
        availability of any future financing may not be on terms that are satisfactory
        to us.
  From
        time
        to time, we may evaluate potential acquisitions involving complementary
        businesses, content, products or technologies. We have no present agreements
        or
        understanding with respect to any such acquisition. Our future capital
        requirements will depend on many factors, including growth of our business,
        the
        success of our operations, economic conditions and other factors including
        the
        results of future operations.
 9
 **PLAN
        OF OPERATION**
  Over
        the
        next twelve months we will be working on the following initiatives:
  Revenue
        Generation
  We
        are
        currently in negotiations with BOM Brasil, a world-leader in castor oil
        production, to build a pilot plant supplying their company with hydrogen
        to fuel
        their hydrogenation process. Completion of a plant is expected to achieve
        a
        number of our objectives including testing and refining of our process
        technology, selling our hydrogen and requisite chemicals through BOM-related
        sales channels and/or through other possible distributors, and revenue
        generation by 2008. Upon the successful completion and operation of the BOM
        pilot plant, we plan to build fully-operational hydrogen and chemical plants
        at
        appropriate sites worldwide.
  We
        are now
        working towards securing a five-year contract to supply BOM with on-site
        hydrogen at an extremely competitive price to what BOM is presently paying.
        We
        believe this will save BOM considerable expenses related to its cost of
        hydrogen, since it is currently trucked-in on a daily basis. We intend to
        design
        and build a hydrogen production facility on their site in Salvador, Brazil,
        which will produce a pre-determined volume of hydrogen, as mutually agreed
        upon
        by the contract. We expect to retain all rights to the by-product.
  Contingent
        on securing a signed contract, we anticipate a contract with a reputable
        engineering firm in the designing and project management relating to the
        construction of this turn-key operation. We believe that the financing of
        the
        facility and equipment, together with the related capital requirements can
        be
        found on a project financing basis, and therefore we do not expect to be
        required to provide this funding. Assuming the completion of contractual
        requirements and project financing by August 1, 2007, we estimates a turn-key
        plant could be completed by June 1, 2008. We would expect revenues of hydrogen
        and by-product to commence thereafter.
  Other
        revenue opportunities are being considered to supply hydrogen and by-products
        to
        a variety of industries and applications in traditional and emerging
        markets.
  Research
        and Development
  In
        addition to refining the hydrogen production process and developing new
        by-products, we expect to continue process optimization of current by-products
        with our principal technical team and external Labs. New research has been
        initiated by the University of Waterloo Co-op chemical engineering students
        to
        minimize raw material costs for the by-product processes, as well to identify
        the future development of innovative, hydrogen-yielding chemical
        reactions.
  Over
        the
        next 12 months, we intend to continue with this business strategy which may
        allow for the realization of better revenue opportunities to arise in the
        future.
  In
        order
        to accomplish and continue with these steps, management estimates that we
        will
        require up to seven million dollars towards the end of fiscal year ended
        2007.
        As we do not have any current revenue, we believe these funds will come from
        loans from officers and private placements of our common stock.
  **Changes
        In and Disagreements with Accountants on Accounting and Financial Disclosure**
  None.
 10
 **ITEM
        3. CONTROLS AND PROCEDURES.**
  Our
        management evaluated, with the participation of our Chief Executive Officer
        and
        our Principal Financial Officer, the effectiveness of our disclosure controls
        and procedures as of the end of the period covered by this Quarterly Report
        on
        Form 10-QSB. Based on this evaluation, our Chief Executive Officer and our
        Principal Financial Officer have concluded that our disclosure controls and
        procedures are effective to ensure that information we are required to disclose
        in reports that we file or submit under the Securities Exchange Act of 1934
        (i)
        is recorded, processed, summarized and reported within the time periods
        specified in Securities and Exchange Commission rules and forms, and (ii)
        is
        accumulated and communicated to our management, including our Chief Executive
        Officer, as appropriate to allow timely decisions regarding required disclosure.
        Our disclosure controls and procedures are designed to provide reasonable
        assurance that such information is accumulated and communicated to our
        management. Our disclosure controls and procedures include components of
        our
        internal control over financial reporting. Management’s assessment of the
        effectiveness of our internal control over financial reporting is expressed
        at
        the level of reasonable assurance that the control system, no matter how
        well
        designed and operated, can provide only reasonable, but not absolute, assurance
        that the control system’s objectives will be met. There was no change in our
        internal control over financial reporting that occurred during the last fiscal
        quarter that materially affected, or is reasonably likely to affect, our
        internal control over financial reporting.
  **PART
        II**
 **OTHER
        INFORMATION**
  **ITEM
        1. LEGAL PROCEEDINGS.**
  ****  On
        October
        22, 2004, we instituted proceedings against Russell Rothman in the Ontario
        Superior Court of Justice (Case No. 04-CV-277760CM2). We are seeking the
        rescission of agreements between us and Mr. Rothman, return of shares paid
        to
        him, and the return of money paid. We had entered into an agreement with
        Mr.
        Rothman for the purchase of certain technology related to the production
        of
        hydrogen gas, for which he represented that he owned all right and title.
        On
        January 4, 2005 Rothman filed a countersuit against the Company in the Ontario
        Supreme Court of Justice for breach of contract in the amount of $2 billion
        and
        is asking for punitive damages in the amount of $10 million. On December
        9,
        2005, the Ontario Supreme Court of Justice ordered that Mr. Rothman’s pleadings
        be struck, that he issue new pleadings by January 9, 2006 and that he appear
        in
        court on February 9, 2006.
  On
        January
        9, 2006, Mr. Rothman substantially amended his claim, and is now seeking
        $12
        million for breach of contract and punitive damages in the amount of $250,000.
        We continue to believe that the counterclaim has no merit and while it is
        too
        early to determine the outcome of such allegations, we intend to vigorously
        defend against Mr. Rothman’s counterclaim. This litigation has not progressed
        beyond the pleading stage and is ongoing as of May 7, 2007.
  In
        2002,
        the SEC brought suit against COI Solutions Inc., our predecessor company,
        and
        one of our former Chief Executive Officers, Robert Wilder, in the United
        States
        District Court for the Southern District of Florida. Subsequent to our
        acquisition of the assets of Alternate Energy Corporation in 2003 and complete
        management change, the SEC agreed to settle the litigation. We neither admitted
        nor denied the allegations of the SEC's complaint as part of the settlement.
        The
        settlement was entered by the District Court and included an injunction
        enjoining the company, its officers, and directors from violating securities
        laws in the future.
  On
        February 17, 2005, the Court entered judgments of permanent injunction and
        other
        relief against defendants COI Solutions, Inc. and Mel Levine, a COI fundraiser,
        from violating Section 10(b) of the Securities Exchange Act of 1934, and
        Rule
        10b-5 promulgated thereunder. In addition to injunctive relief, the judgment
        against Mr. Levine provided for the imposition of a civil penalty. On March
        30,
        2005, the United States District Court for the Southern District of Florida
        entered a default judgment of permanent injunction against Robert Wilder.
        The
        Court found that Mr. Wilder violated Section 10(b) of the Securities Exchange
        Act of 1934, and Rule 10b-5, thereunder. In addition to injunctive relief,
        the
        judgment provided for the imposition of a civil penalty to be paid by Mr.
        Wilder, which was set in the amount of $110,000 on June 30, 2005.
 11
 We
        may be
        involved from time to time in ordinary litigation, negotiation and settlement
        matters that will not have a material effect on our operations or finances.
        Other than the litigation described above, we are not aware of any pending
        or
        threatened litigation against us or our officers and directors in their capacity
        as such that could have a material impact on our operations or
        finances.
  **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**
  During
        April 2007, the Company issued 100,000 shares of common stock to a consultant
        for services valued at $5,800 or $0.058 per share.
  The
        Company issued the securities in the referenced transactions in reliance
        on the
        exemption contained in Section 4(2) of the Securities Act of 1933, as amended.
        There were no underwriters or placement agents employed in connection with
        the
        transactions described in this Item 2.
  **ITEM
        3. DEFAULTS UPON SENIOR SECURITIES.**
  None
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
  None.
  **ITEM
        5. OTHER INFORMATION.**
  None
  **ITEM
        6. EXHIBITS AND REPORTS ON FORM 8-K.**
  Exhibit
                  No.
              Description
                  of Exhibit3.1
              Articles
                  of Incorporation, as filed August 1, 1997 (included as Exhibit
                  3.1 to the
                  Form 10-SB12G filed November 10, 1999, and incorporated herein
                  by
                  reference).3.2
              Bylaws
                  (included as Exhibit 3.2 to the Form 10-SB12G filed November 10,
                  1999, and
                  incorporated herein by reference).3.3
              Articles
                  of Amendment to the Articles of Incorporation, as filed August
                  23, 1997
                  (included as Exhibit 3.3 to the Form 10-SB12G filed November 10,
                  1999, and
                  incorporated herein by reference).3.4
              Articles
                  of Amendment to the Articles of Incorporation, as filed November
                  20, 1998
                  (included as Exhibit 3.4 to the Form 10-SB12G filed November 10,
                  1999, and
                  incorporated herein by reference).3.5
              Articles
                  of Amendment to the Articles of Incorporation, as filed May 16,
                  2003
                  (included as Exhibit 3.5 to the Form 10-SB12G filed November 10,
                  1999, and
                  incorporated herein by reference).4.1
              2003
                  Stock Benefit Plan, dated July, 1, 2003 (included as Exhibit 4.1
                  to the
                  Form S-8 filed July 23, 2003, and incorporated herein by reference).4.2
              Form
                  of Class A Warrant (included as Exhibit 4 to the Form 8-K filed
                  March 15,
                  2005, and incorporated herein by reference).4.3
              Form
                  of Class B Warrant(included
                  as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated
                  herein
                  by reference).4.4
              Form
                  of Class C Warrant(included
                  as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated
                  herein
                  by reference).4.5
              Subscription
                  Agreement between the Company and various subscribers (included
                  as Exhibit
                  10.1 to the Form SB-2/A filed September 14, 2005, and incorporated
                  herein
                  by reference).
 12
 4.6
              Subscription
                  Agreement between the Company and various subscribers (included
                  as Exhibit
                  4 to the Form 8-K filed March 15, 2005, and incorporated herein
                  by
                  reference).10.1
              Asset
                  Purchase Agreement between the Company and AEC1, Inc., formerly
                  known as
                  Alternate Energy Corporation, dated February 20, 2003 (included
                  as Exhibit
                  10.1 to the Form 8-K filed June 5, 2003, and incorporated herein
                  by
                  reference).10.2
              Form
                  of Securities Purchase Agreement between the Company and various
                  purchasers (included as Exhibit 10.1 to the Form 10-KSB filed March
                  16,
                  2004, and incorporated herein by reference).10.3
              Form
                  of Registration Rights Agreement between the Company and various
                  purchasers (included as Exhibit 10.2 to the Form 10-KSB filed March
                  16,
                  2004, and incorporated herein by reference).10.4
              Form
                  of Common Stock Purchase Warrant between the Company and various
                  purchasers (included as Exhibit 10.3 to the Form 10-KSB filed March
                  16,
                  2004, and incorporated herein by reference).10.5
              Securities
                  Purchase Agreement between the Company and Feldman Weinstein, LLP
                  (included as Exhibit 10.4 to the Form 10-KSB filed March 16, 2004,
                  and
                  incorporated herein by reference).10.6
              Form
                  of Common Stock Purchase Warrant between the Company and various
                  purchasers (included as Exhibit 10.5 to the Form 10-KSB filed March
                  16,
                  2004, and incorporated herein by reference).10.7
              Addendum
                  to Securities Purchase Agreement between the Company and various
                  purchasers (included as Exhibit 10.6 to the Form 10-KSB filed March
                  16,
                  2004, and incorporated herein by reference).10.8
              Addendum
                  to Registration Rights Agreement between the Company and various
                  purchasers (included as Exhibit 10.7 to the Form 10-KSB filed March
                  16,
                  2004, and incorporated herein by reference).10.9
              Letter
                  of Engagement for Marketing Communications and Manufacturing Consulting
                  Management Services between the Company and Velocity Product Solutions
                  Inc., dated September 25, 2003 (included as Exhibit 10.8 to the
                  Form
                  10-KSB filed March 16, 2004, and incorporated herein by
                  reference).10.10
              Letter
                  of Engagement for Expanded Executive Management Services among
                  the
                  Company, Corbee Dutchburn and Lyle Goodis, dated October 30, 2003
                  (included as Exhibit 10.9 to the Form 10-KSB filed March 16, 2004,
                  and
                  incorporated herein by reference).10.11
              Addendum
                  to October 30, 2003 Letter of Engagement for Expanded Executive
                  Management
                  Services among the Company, Corbee Dutchburn, and Lyle Goodis,
                  dated
                  December 5, 2003 (included as Exhibit 10.10 to the Form 10-KSB
                  filed March
                  16, 2004, and incorporated herein by reference).10.12
              Funds
                  Escrow Agreement between the Company and various subscribers (included
                  as
                  Exhibit 10.10 to the Form SB-2/A filed September 14, 2005, and
                  incorporated herein by reference).10.13
              Security
                  Agreement between the Company and Blaine Froats, dated January
                  1, 2005
                  (included as Exhibit 10.12 to the Form SB/2-A filed January 19,
                  2006, and
                  incorporated herein by reference).14.1
              Corporate
                  Code of Ethics (included as Exhibit 14 to From 10-KSB filed March
                  16,
                  2004, and incorporated herein by reference).21.1
              Subsidiaries
                  of the registrant (filed herewith).31.1
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.31.2
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1
              Certification
                  of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of 2002.
 
 **SIGNATURES**
   In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly authorized.
  **Alternate
                  Energy Corp.**Date:
                  August 14, 2007
              By:*/s/
                  Blaine Froats*Blaine
                  FroatsChief
                  Executive Officer
 13
 
 **Alternate
                  Energy Corp.**Date:
                  August 14, 2007
              By:*/s/
                  Jack Wasserman*Jack
                  WassermanTreasurer
                  and Principal Accounting Officer
  14