**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**











**FORM
      10-Q**





**x**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the quarterly period ended June 30, 2007**





**OR**





**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**000-31083**


**(Commission
      File Number)**





**MILLENNIUM
      CELL INC.**


**(Exact
      Name of Registrant as Specified in Its Charter)**








**Delaware**
            **22-3726792****(State
                or Other Jurisdiction of**
            **(I.R.S.
                Employer****Incorporation
                or Organization)**
            **Identification
                Number)**





**One
      Industrial Way West,**


**Eatontown,
      New Jersey 07724**


**(Address
      of Principal Executive Offices) (Zip Code)**





**(Registrant's
      telephone number, including area code) (732) 542-4000**





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 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 large accelerated filer, an
      accelerated filer, or a non-accelerated filer. (as defined See definition of
      “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the
      Securities Exchange Act of 1934).





Large
                accelerated filer **☐**
            
            Accelerated
                filer **☐**
            
            Non-accelerated
                filer þ







Indicate
      by check mark whether the
      registrant is a shell company (as defined in Rule 12b-2 of the Exchange
      Act).              Yes**☐******No****þ****


Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date: 58,780,879 shares of Common Stock,
      par
      value $.001, were outstanding on August 11, 2007.
















**MILLENNIUM
        CELL INC.**
 **(a
        development stage enterprise)**
 **Index**








**PART
      I - FINANCIAL INFORMATION**





**Page**Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance Sheets – June 30, 2007 and December 31, 2006
            1Consolidated
                Statements of Operations – Three and six months endedJune
                30, 2007 and 2006 and cumulative amounts from inception
            2Consolidated
                Statements of Cash Flows – Six months ended June 30, 2007 and 2006 and
                cumulative amounts from inception
            3Consolidated
                Statements of Stockholders’ Equity – Six months ended June 30,
                2007
            4Notes
                to Consolidated Financial Statements – June 30, 2007
            5Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            13Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            20Item
                4T.
            Controls
                and Procedures
            21**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            22Item
                1A.
            Risk
                Factors
            22Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            22Item
                3.
            Defaults
                Upon Senior Securities
            22Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            22Item
                5.
            Other
                Information
            23Item
                6.
            Exhibits
            23















Unless
      the context otherwise requires, all references to “we,” “us,” “our” and the
“Company” include Millennium Cell Inc., and its wholly-owned subsidiary, Gecko
      Energy Technologies, LLC.





Unless
      the context otherwise requires, all references herein to our Series A Preferred
      Stock or Series A, Series B Preferred Stock or Series B and Series C Preferred
      Stock or Series C are references to our Series A2-0 Convertible Preferred Stock,
      Series A2-1 Convertible Preferred Stock, Series A2-2 Convertible Preferred
      Stock, Series B-1 Convertible Preferred Stock and Series C2 Convertible
      Preferred Stock.





**FORWARD-LOOKING
      STATEMENTS**





This
      report contains forward-looking statements (within the meaning of the Private
      Securities Litigation Reform Act of 1995). These forward-looking statements
      reflect our current view about future events and financial performance and
      are
      subject to risks and uncertainties. Statements contained herein that are not
      statements of historical fact may be deemed to be forward-looking information.
      When we use words such as “plan,” “believe,” “expect,” “anticipate,” “on target”
and “intend” or similar expressions, we are making forward-looking statements.
      Investors should not rely on forward-looking statements because they are subject
      to a variety of risks, uncertainties and other factors that could cause actual
      results to differ materially from our expectations, and we expressly do not
      undertake any duty to update forward-looking statements or to publicly announce
      revisions to any of the forward-looking statements, whether as a result of
      new
      information, future events or otherwise. These factors include, but are not
      limited to, the following: (i) the cost and timing of development and market
      acceptance of, and the availability of components and raw materials required
      by,
      a hydrogen battery technology and hydrogen delivery system, (ii) the cost and
      the commercial availability of the quantities of raw materials required by
      the
      hydrogen fuel storage and delivery systems, (iii) competition from current,
      improving and alternate power technologies, (iv) our ability to raise capital
      at
      the times, in the amounts and at costs and terms that are acceptable to fund
      the
      development and commercialization of our hydrogen battery technology and
      hydrogen delivery system and our business plan, (v) our ability to protect
      our
      intellectual property, (vi) our ability to achieve budgeted revenue and expense
      amounts, (vii) our ability to generate revenues from the sale or license of,
      or
      provision of services related to, our technology, (viii) our ability to enter
      into agreements with collaborators and strategic partners and the failure of
      our
      collaborators and strategic partners to perform under their agreements with
      us,
      (ix) our ability to generate design, engineering or management services revenue
      opportunities in the hydrogen generation or fuel cell markets, (x) our ability
      to secure government funding of our research and development and technology
      demonstration projects, (xi) our ability to meet all applicable NASDAQ Capital
      Market listing requirements, and (xii) other factors discussed under the caption
      “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
      2006.













**PART
        I - FINANCIAL
        INFORMATION**


***Item
      1. Financial Statements (Unaudited)***






**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      BALANCE SHEETS**





**(Unaudited)**




**June
                30,**
            
            
            **December
                31,****Assets**
            
            **2007**
            
            
            **2006**Current
                assets:Cash
                and cash equivalents
            
            $
            6,158,720
            
            
            $
            4,358,040Restricted
                cash
            
            
            237,514
            
            
            
            174,045Accounts
                receivable - trade
            
            
            25,000
            
            
            
            75,000Accounts
                receivable - government
            
            
            588,596
            
            
            
            523,878Prepaid
                expenses
            
            
            90,163
            
            
            
            133,992Deferred
                financing costs
            
            
            153,643
            
            
            
            92,532Total
                current assets
            
            
            7,253,636
            
            
            
            5,357,487Property
                and equipment, net
            
            
            203,943
            
            
            
            307,257Intangibles,
                net
            
            
            3,134,986
            
            
            
            3,280,257Restricted
                cash
            
            
            588,972
            
            
            
            846,767Deferred
                financing costs
            
            
            76,746
            
            
            
            29,407Security
                deposit
            
            
            45,676
            
            
            
            45,676Total
                assets
            
            $
            11,303,959
            
            
            $
            9,866,851**Liabilities
                and stockholders’ equity**Current
                liabilities:Accounts
                payable
            
            $
            357,541
            
            
            $
            352,480Accrued
                expenses
            
            
            1,194,847
            
            
            
            1,016,198Short-term
                portion of refundable grant obligation
            
            
            —
            
            
            
            13,197Deferred
                compensation
            
            
            78,338
            
            
            
            116,273Deferred
                revenue
            
            
            380,962
            
            
            
            113,153Short-term
                portion of redeemable Series C preferred stock, net of
                discount
              (Note
                6)
            
            
            2,047,034
            
            
            
            2,356,375Convertible
                unsecured debentures (Note 6)
            
            
            —
            
            
            
            449,988Total
                current liabilities
            
            
            4,058,722
            
            
            
            4,417,664Redeemable
                Series C preferred stock, net of discount (Note 6)
            
            
            —
            
            
            
            2,356,375Convertible
                unsecured debenture, net of discount (Note 6)
            
            
            4,970,137
            
            
            
            —Debenture
                related liabilities (Note 6)
            
            
            602,088Refundable
                grant obligation
            
            
            143,132
            
            
            
            143,132Commitments
                and contingenciesStockholders
                equity:Series
                A preferred stock, $.001 par value; 1,694,724 authorized shares,
                293,874
                issued and outstanding as of June 30, 2007 and December 31,
                2006
            
            
            4,527,417
            
            
            
            4,527,417Series
                B preferred stock, $.001 par value; 1,539,000 authorized shares,
                71,429
                issued and outstanding as of June 30, 2007 and December 31,
                2006
            
            
            1,074,620
            
            
            
            1,090,773


Common
                stock, $.001 par value; authorized 120,000,000 shares and 56,070,629
                and
                51,401,215 shares issued and outstanding as ofJune
                30, 2007 and December 31, 2006, respectively
            
            
            56,070
            
            
            
            51,401Additional
                paid-in capital
            
            
            109,448,511
            
            
            
            105,486,561Deficit
                accumulated during development stage
            
            
            (113,576,738
            )
            
            
            (108,206,472
            )Total
                stockholders’ equity
            
            
            1,529,880
            
            
            
            2,949,680Total
                liabilities and stockholders’ equity
            
            $
            11,303,959
            
            
            $
            9,866,851







See
      notes
      to financial statements







1






**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**







**Three
                Months**
            
            
            **Three
                Months**
            
            
            **Six
                Months**
            
            
            **Six
                Months**
            
            
            **Cumulative****Ended**
            
            
            **Ended**
            
            
            **Ended**
            
            
            **Ended**
            
            
            **Amounts****June
                30,**
              **2007**
            
            
            **June
                30,**
              **2006**
            
            
            **June
                30,**
              **2007**
            
            
            **June
                30,**
              **2006**
            
            
            **From**
              **Inception**Revenue
            
            $
            —
            
            
            $
            12,222
            
            
            $
            67,700
            
            
            $
            82,104
            
            
            $
            2,091,237Cost
                  of revenue
            
            
            —
            
            
            
            12,222
            
            
            
            61,595
            
            
            
            82,104
            
            
            
            1,959,697Gross
                  margin
            
            
            —
            
            
            
            —
            
            
            
            6,105
            
            
            
            —
            
            
            
            131,540Product
                  development and marketing
            
            
            1,107,903
            
            
            
            829,885
            
            
            
            2,077,621
            
            
            
            1,735,073
            
            
            
            28,632,656General
                  and administrative
            
            
            915,294
            
            
            
            1,035,105
            
            
            
            1,710,310
            
            
            
            2,053,842
            
            
            
            31,217,352Restructuring
                  expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            104,982Non-cash
                  charges (Note 4)
            
            
            264,284
            
            
            
            2,460,055
            
            
            
            481,155
            
            
            
            2,650,641
            
            
            
            32,773,242Depreciation
                  and amortization
            
            
            215,886
            
            
            
            78,138
            
            
            
            441,851
            
            
            
            215,325
            
            
            
            3,926,857Research
                  and development
            
            
            192,202
            
            
            
            26,366
            
            
            
            293,429
            
            
            
            222,349
            
            
            
            10,391,958Total
                  operating expenses
            
            
            2,695,569
            
            
            
            4,429,549
            
            
            
            5,004,366
            
            
            
            6,877,230
            
            
            
            107,047,047Loss
                  from operations
            
            
            (2,695,569
            )
            
            
            (4,429,549
            )
            
            
            (4,998,261
            )
            
            
            (6,877,230
            )
            
            
            (106,915,507
            )Interest
                  (income)expense, net
            
            
            (32,970
            )
            
            
            211,726
            
            
            
            372,005
            
            
            
            373,559
            
            
            
            5,123,958Equity
                  in losses of unconsolidated subsidiary (Note 9)
            
            
            —
            
            
            
            84,107
            
            
            
            —
            
            
            
            137,407
            
            
            
            1,190,900Loss
                  before income taxes
            
            
            (2,662,599
            )
            
            
            (4,725,382
            )
            
            
            (5,370,266
            )
            
            
            (7,388,196
            )
            
            
            (113,230,365
            )Benefit
                  from income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,804,508Net
                  loss
            
            
            (2,662,599
            )
            
            
            (4,725,382
            )
            
            
            (5,370,266
            )
            
            
            (7,388,196
            )
            
            
            (111,425,857
            )Series
                  B Preferred Stock dividends
            
            
            18,750
            
            
            
            6,575
            
            
            
            37,500
            
            
            
            6,575
            
            
            
            81,884Preferred
                  stock amortization
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,150,881
            )Net
                  loss applicable to common stockholders
            
            $
            (2,681,349
            )
            
            $
            (4,731,957
            )
            
            $
            (5,407,766
            )
            
            $
            (7,394,771
            )
            
            $
            (113,658,622
            )Loss
                  per share — basic and diluted
            
            $
            (.05
            )
            
            $
            (.10
            )
            
            $
            (.10
            )
            
            $
            (.16
            )
            
            $
            (3.32
            )Weighted
                  — average number of shares outstanding
            
            
            54,867,421
            
            
            
            48,358,350
            
            
            
            54,038,470
            
            
            
            47,662,882
            
            
            
            34,249,772









See
      notes
      to financial statements












2














**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Six months**
            
            
            **Six months**
            
            
            **Cumulative****Ended**
            
            
            **Ended**
            
            
            **Amounts****June
                30,**
            
            
            **June
                30,**
            
            
            **From****2007**
            
            
            **2006**
            
            
            **Inception****Operating
                activities**Net
                loss
            
            $
            (5,370,266
            )
            
            $
            (7,388,196
            )
            
            $
            (111,425,857
            )Adjustments
                to reconcile net loss to net cash used in operation
                activitiesDepreciation
                and amortization
            
            
            441,851
            
            
            
            215,325
            
            
            
            3,926,857Amortization
                of discount on unsecured debentures and preferred stock
            
            
            392,856
            
            
            
            119,537
            
            
            
            3,181,019Amortization
                of deferred financing costs
            
            
            132,897
            
            
            
            66,635
            
            
            
            1,643,671Non-cash
                interest charges
            
            
            62,495
            
            
            
            213,772
            
            
            
            774,783Beneficial
                conversion feature
            
            
            283,500
            
            
            
            105,000
            
            
            
            2,442,582Losses
                on investment in unconsolidated subsidiary
            
            
            —
            
            
            
            137,407
            
            
            
            1,190,900Non-cash
                charges
            
            
            481,155
            
            
            
            2,650,641
            
            
            
            32,773,242Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (14,718
            )
            
            
            33,714
            
            
            
            (613,596
            )Prepaid
                expenses and other assets
            
            
            43,829
            
            
            
            163,528
            
            
            
            (135,838
            )Accounts
                payable and accrued expenses
            
            
            (670,126
            )
            
            
            (383,589
            )
            
            
            1,755,039Deferred
                revenue
            
            
            267,809
            
            
            
            —
            
            
            
            2,780,950Net
                cash used in operating activities
            
            
            (3,948,718
            )
            
            
            (4,066,226
            )
            
            
            (61,706,248
            )**Investing
                activities**Purchase
                of property and equipment
            
            
            —
            
            
            
            —
            
            
            
            (2,885,446
            )Patent
                registration costs
            
            
            (190,385
            )
            
            
            (82,422
            )
            
            
            (1,292,892
            )Investment
                in affiliate
            
            
            —
            
            
            
            (563,318
            )
            
            
            (1,163,539
            )Acquisition
                of Gecko, net of cash acquired
            
            
            —
            
            
            
            —
            
            
            
            (856,078
            )(Increase)/decrease
                in restricted cash
            
            
            194,326
            
            
            
            256,578
            
            
            
            (826,485
            )Net
                cash used in investing activities
            
            
            3,941
            
            
            
            (389,162
            )
            
            
            (7,024,440
            )**Financing
                activities**Proceeds
                from sale of common stock
            
            
            —
            
            
            
            —
            
            
            
            39,394,207Underwriting
                and other expenses of initial public offering
            
            
            —
            
            
            
            —
            
            
            
            (3,669,613
            )Proceeds
                from issuance of debentures
            
            
            6,000,000
            
            
            
            —
            
            
            
            27,428,806Proceeds
                from redeemable Series C preferred stock
            
            
            —
            
            
            
            —
            
            
            
            10,000,000Proceeds
                from Series B preferred stock
            
            
            —
            
            
            
            1,250,000
            
            
            
            1,250,000Deferred
                financing costs
            
            
            (241,346
            )
            
            
            —
            
            
            
            (1,523,002
            )Capital
                lease obligation payments
            
            
            —
            
            
            
            (6,173
            )
            
            
            (86,184
            )Payments
                from capital contribution
            
            
            —
            
            
            
            —
            
            
            
            (400,000
            )Proceeds
                from capital contribution
            
            
            —
            
            
            
            —
            
            
            
            500,000Payment
                of note payable
            
            
            —
            
            
            
            —
            
            
            
            (250,000
            )Series
                B dividends paid
            
            
            —
            
            
            
            —
            
            
            
            (44,384
            )(Payments)/proceeds
                from grant, net
            
            
            (13,197
            )
            
            
            (49,611
            )
            
            
            143,132Proceeds
                from sale of preferred stock
            
            
            —
            
            
            
            —
            
            
            
            2,146,446Net
                cash provided by financing activities
            
            
            5,745,457
            
            
            
            1,194,216
            
            
            
            74,889,408Net
                increase (decrease) in cash and cash equivalents
            
            
            1,800,680
            
            
            
            (3,261,172
            )
            
            
            6,158,720Cash
                and cash equivalents, beginning of period
            
            
            4,358,040
            
            
            
            11,675,877
            
            
            
            —Cash
                and cash equivalents, end of period
            
            
            6,158,720
            
            
            
            8,414,705
            
            
            
            6,158,720





See
      notes
      to financial statements


Please
      see note 8 for supplemental cash flow information









3


**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**(Unaudited)**





**Additional**
            
            
            
            
            
            
            
            
            
            
            
            **Total****Common
                Stock**
            
            
            **Paid-in**
            
            
            **Series
                A**
            
            
            **Series
                B**
            
            
            **Accumulated**
            
            
            **Stockholders’****Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Preferred**
            
            
            **Preferred**
            
            
            **Deficit**
            
            
            **Equity**Balance
                at December 31, 2006
            
            
            51,401,215
            
            
            $
            51,401
            
            
            $
            105,486,561
            
            
            $
            4,527,417
            
            
            $
            1,090,773
            
            
            $
            (108,206,472
            )
            
            $
            2,949,680Issuance
                of common stock from conversion of debentures and Series C preferred
                stock
            
            
            4,006,101
            
            
            
            4,006
            
            
            
            3,271,994
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,276,000Beneficial
                conversion feature on private placement transactions
            
            
            —
            
            
            
            —
            
            
            
            283,500
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            283,500Issuance
                of stock for BOD compensation
            
            
            4,461
            
            
            
            4
            
            
            
            4,546
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,550Issuance
                of common stock for interest payments
            
            
            67,967
            
            
            
            68
            
            
            
            63,189
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            63,257Issuance
                of common stock for 401(k)
            
            
            99,485
            
            
            
            100
            
            
            
            93,418
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            93,518Issuance
                of restricted stock for merit awards
            
            
            491,400
            
            
            
            491
            
            
            
            (491
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Stock
                based compensation expense
            
            
            —
            
            
            
            —
            
            
            
            262,380
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            262,380Deferred
                compensation plan
            
            
            —
            
            
            
            —
            
            
            
            4,761
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,761Warrant
                adjustment
            
            
            —
            
            
            
            —
            
            
            
            16,153
            
            
            
            —
            
            
            
            (16,153
            )
            
            
            —
            
            
            
            —Series
                B preferred dividends
            
            
            —
            
            
            
            —
            
            
            
            (37,500
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (37,500
            )Net
                loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,370,266
            )
            
            
            (5,370,266
            )Balance
                at June 30, 2007
            
            
            56,070,629
            
            
            $
            56,070
            
            
            $
            109,448,511
            
            
            $
            4,527,417
            
            
            $
            1,074,620
            
            
            $
            (113,576,738
            )
            
            $
            1,529,880











See
      notes
      to financial statements










4








**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**(Unaudited)**








**NOTE
      1—BASIS OF PRESENTATION**





The
      consolidated financial statements include the accounts of Millennium Cell Inc.
      and its wholly owned subsidiary, Gecko Energy Technologies, LLC, (“Gecko”).
      Gecko, a fuel cell technology company, was acquired by Millennium Cell Inc.
      on
      December 29, 2006. All inter-company transactions and accounts have been
      eliminated.





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with U.S. generally accepted accounting principles for interim
      financial information and with the instructions to Form 10-Q and Article 10
      of
      Regulation S-X. Accordingly, they do not include all of the information and
      footnotes required by U.S. generally accepted accounting principles for complete
      financial statements. In the opinion of management, all known adjustments (which
      consist primarily of normal recurring adjustments) considered necessary for
      a
      fair presentation have been included. The interim statements should be read
      in
      conjunction with our Annual Report on Form 10-K for the year ended December
      31,
      2006.





**NOTE 2—NEW
      ACCOUNTING PRONOUNCEMENTS**





In
      September 2006, the Financial Accounting Standards Board  (“FASB”)
      issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
      Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework
      for measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements. SFAS 157 will be applied under other
      accounting principles that require or permit fair value measurements, as this
      is
      a relevant measurement attribute. This statement does not require any new fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. The Company
      does not expect this statement to have a material effect on its consolidated
      financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities – Including an Amendment of FASB
      Statement No.*115 (“SFAS 159”).  This statement permits entities
      to choose to measure many financial instruments and certain other items at
      fair
      value. The objective of FAS 159 is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. Most of the provisions of this statement
      apply only to entities that elect the fair value option. However, the amendment
      to FASB Statement No. 115, *Accounting for Certain Investments in Debt and
      Equity Securities,* applies to all entities with available-for-sale and
      trading securities.  SFAS 159 permits entities to make an irrevocable
      election to carry almost any financial instrument at fair value.  Upon
      adoption of SFAS 159, when an entity elects to apply the fair value option
      to
      specific items, the entity reports the difference between the carrying value
      and
      the fair value of the items as a cumulative-effect adjustment to the opening
      balance of retained earnings.  A business entity will report
      unrealized gains and losses on items for which the fair value option has been
      elected in earnings at each subsequent reporting date.  SFAS 159 is
      effective as of the beginning of an entity’s first fiscal year that begins after
      November 15, 2007, or beginning in fiscal 2008 for the Company.  The
      Company is currently evaluating whether they will elect to apply the fair value
      option to the Company’s assets and liabilities and the impact of the election on
      the consolidated financial statements.









5





**NOTE
      3—EARNINGS PER SHARE**





Basic
      earnings per share (“EPS”) are computed by dividing income available to common
      stockholders by the weighted average number of common shares actually
      outstanding for the period. Diluted EPS reflects the potential dilution that
      could occur if securities or other contracts to issue common stock were
      exercised or converted into common stock or resulted in the issuance of common
      stock that then shared in the earnings of the Company. All such securities
      were
      anti-dilutive for all periods presented.





**NOTE
      4—INCOME TAXES**




The
      Company adopted the provisions of Financial FIN 48 on January 1,
      2007.   FIN 48 is an interpretation of SFAS Statement No. 109,
“Accounting for Income Taxes” (SFAS No. 109), which clarifies the
      accounting for uncertainty in income taxes.  FIN 48 prescribes 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. The interpretation requires that the Company recognize in the
      financial statements the impact of a tax position if that position is more
      likely than not of being sustained on audit, based on the technical merits
      of
      the position. FIN 48 also provides guidance on derecognition of a previously
      recognized tax position, classification, interest and penalties, accounting
      in
      interim periods and disclosures. The provisions of FIN 48 are effective
      beginning January 1, 2007 with the cumulative effect of the change in
      accounting principle recorded as an adjustment to the opening balance of
      retained earnings.




The
      Company currently has a full
      valuation allowance against its net deferred tax assets and has not recognized
      any benefits from tax positions in earnings.  Accordingly, the adoption of
      the provisions of FIN 48 did not have a material impact on the Company’s
      financial statements.





The
      Company will recognize potential interest and penalties related to income tax
      positions as a component of the Provision for Income Taxes (or alternatively
      -
“operating expenses”) on the consolidated statements of income in any future
      periods in which the Company must record a liability related to income tax
      positions. Since the Company has not recorded a liability related to income
      tax
      positions at June 30, 2007, there would be no impact to the Company’s effective
      tax rate. The Company does not anticipate that total unrecognized tax benefits
      will significantly change during the next twelve months.





The
      Company is no longer subject to federal or state income tax examinations for
      years prior to 2003.





**NOTE
      5—STOCK BASED COMPENSATION**





In
      July
      2000, the Company adopted the Amended and Restated 2000 Stock Option Plan and
      reserved 6,000,000 shares of common stock, which includes shares that are
      allotted under the 401(k) plan. The plan provides for the granting of the
      following types of awards: stock options, stock warrants, stock appreciation
      rights, restricted stock awards, performance unit awards and stock bonus awards.
      Stock awards issued under this plan have a life of ten years and generally
      vest
      ratably over three to five years. The specific terms and conditions of awards
      granted under the plan are specified in a written agreement between the Company
      and the participant.




*Stock
      Options*





The
        Company has awarded stock options to certain employees and directors. Stock
        options awarded to directors vest immediately. Stock options awarded to
        employees typically vest over three years. The Company issued 50,000 options
        to
        an officer during the six months ended June 30, 2007.   The fair
        value of the options issued was calculated using the Black-Scholes option
        pricing model with the following assumptions: fair value option price —
$0.65; risk-free interest rate — 5.16%; dividend yield — 0%; expected
        volatility (based on historical volatility) — 75%; and expected life —
10 years.






6





Option
      activity for all outstanding options, vested and nonvested, from January 1,
      2007 through June 30, 2007 was as follows:





**Shares**
            
            
            **Weighted-
                Average Exercise Price**
            
            
            **Weighted-
                Average Remaining Contractual Life (In years)**
            
            
            **Aggregate
                Intrinsic Value**Outstanding
                at December 31,  2006
            
            
            3,911,655
            
            
            $
            3.44
            
            
            
            5.4
            
            
            
            —Granted
            
            
            50,000
            
            
            
            0.65
            
            
            
            10.0
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Forfeited
                and cancelled
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Outstanding
                at June 30, 2007
            
            
            3,961,655
            
            
            $
            3.41
            
            
            
            4.9
            
            
            $
            —Vested
                and expected to vest at June 30, 2007
            
            
            3,763,572
            
            
            $
            3.41
            
            
            
            4.9
            
            
            $
            —Exercisable
                at June 30, 2007
            
            
            3,669,867
            
            
            $
            3.64
            
            
            
            4.8
            
            
            $
            —





The
      aggregate intrinsic value in the table above represents the total intrinsic
      value (the difference between the closing stock price on the last trading day
      of
      the second quarter of 2007 and the exercise price, multiplied by the number
      of
      in-the-money options) that would have been received by the option holders had
      all option holders exercised their options on June 30, 2007. The intrinsic
      value
      changes based on the fair market value of the Company’s common
      stock.





As
      of
      June 30, 2007, there was $0.2 million of total unrecognized compensation
      expense related to stock options which is expected to be recognized over a
      weighted-average period of 1.5 years.




*Restricted
      Stock
      Awards*





Restricted
      stock awards vest in five years, or earlier, upon meeting certain accelerated
      vesting criteria, as defined. Restricted stock awards are stock-based awards
      for
      which the employee or director does not have a vested right to the stock
      (“nonvested”) until the requisite service period has been rendered or the
      required financial performance factor has been reached for each pre-determined
      vesting date. Restricted stock awards are generally subject to forfeiture if
      the
      employee is not employed or a director is not a member of the board of directors
      on the vesting date. Prior to vesting, restricted stock awards have all of
      the
      rights of common stock (other than the right to sell or otherwise transfer).
      The
      fair value of restricted stock awards is based on the market price of the
      Company’s common stock on the grant date of the award.





As
      of
      June 30, 2007 and 2006, the Company had issued an aggregate of 491,400 and
      465,400 shares of restricted stock to employees with a fair market value of
      $471,744 and $763,256, respectively. These shares will vest in five years,
      or
      earlier, upon meeting certain accelerated vesting criteria, as defined. During
      the six months ended June 30, 2007 and 2006, the Company recorded $197,968
      and
      $139,000, respectively in non-cash charges for restricted stock issued to
      employees. The Company will recognize additional non-cash charges of $197,968
      in
      the remainder of 2007 and an additional $910,350 of non-cash charges will be
      amortized through 2011, or earlier if other accelerated vesting features are
      met.







7







Changes
      in nonvested restricted stock awards during the six months ended June 30, 2007
      were as follows:




**Number
                of**
              **Shares**
            
            
            **Weighted-**
              **Average
                Grant**
              **Date
                Fair**
              **Value**Nonvested
                at December 31, 2006
            
            
            736,480
            
            
            $
            1.88Granted
            
            
            491,400
            
            
            
            0.97Vested
            
            
            (50,000
            )
            
            
            1.50Forfeited
            
            
            (81,640
            )
            
            
            1.71Nonvested
                at June 30, 2007
            
            
            1,096,240
            
            
            $
            1.88





As
      of
      June 30, 2007, there was $1.2 million of unrecognized stock-based compensation
      expense related to nonvested restricted stock awards. This expense will be
      recognized as the shares vest.





*Non-Cash
      Charges*





The
      following is a breakdown by function of non-cash charges for stock-based awards
      and Series A Preferred Stock issued in the second quarter of 2006 (see Note
      7)
      for the three and six months ended June 30:




**Three
                months ended June, 30**
            
            
            **Six
                months ended June, 30****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Product
                development and   marketing
            
            $
            21,303
            
            
            $
            2,129,474
            
            
            $
            42,606
            
            
            $
            2,145,253General
                and administrative
            
            
            234,832
            
            
            
            324,946
            
            
            
            422,252
            
            
            
            494,118Research
                and development
            
            
            8,149
            
            
            
            5,635
            
            
            
            16,297
            
            
            
            11,270Total
            
            $
            264,284
            
            
            $
            2,460,055
            
            
            $
            481,155
            
            
            $
            2,650,641





**NOTE
      6—CONVERTIBLE DEBENTURES AND REDEEMABLE SERIES C PREFERRED
      STOCK**




*Amended Convertible
      Debentures*





On
      November 8, 2005, the Company issued a $2.4 million unsecured convertible
      debenture with a maturity date of September 30, 2007 (the “Amended Convertible
      Debentures”).  In accordance with EITF 00-27 (“Application of Issue No.
      98-5 to Certain Convertible Instruments”) and EITF 98-5 (“Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios”), the Company records a Beneficial Conversion
      Feature (“BCF”) if the Amended Convertible Debentures are converted into
      common stock at a discount. In 2006, the Company converted $1.95 million of
      the Amended Convertible Debentures into 1,352,462 shares of the Company’s
      common stock and recorded a BCF charge of $136,500 associated with the
      conversions. In the first half of 2007, the Company converted the remaining
      $450,000 of the Amended Convertible Debentures into 533,458 shares of the
      Company’s common stock and recorded a BCF charge of $31,500 associated with the
      conversion.




*Redeemable
      Series C Preferred Stock*




On
      April
      25, 2005, the Company consummated a private placement financing transaction
      with
      seven institutional and accredited investors who paid $10 million for 10,000
      shares of redeemable Series C. Each Series C share is initially convertible
      into
      500 shares of our common stock, at any time, at an initial conversion price
      equal to $2 per share subject to adjustment based upon customary anti-dilution
      provisions, or a higher number of shares at a lower conversion price based
      upon
      the market price of our common stock during the ten trading days preceding
      conversion. The shares of Series C bear a 7% cumulative dividend payable
      quarterly in shares of common stock or cash, at the Company’s option and are
      junior to the Series A and Series B preferred stock in liquidation preference.
      The Series C is subject to mandatory redemption by the Company three years
      after
      issuance and can be settled in cash or with the Company’s common stock. As a
      result, the Series C is recorded as a liability in accordance with FAS 150
      “Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity”). Additionally, the Company issued to the Series C
      investors three-year warrants to purchase an aggregate of 1.25 million shares
      of
      the Company’s common stock at an exercise price equal to $2 per share, subject
      to adjustment based on customary antidilution protections. The warrants were
      valued at $1,021,928 at the date of issuance and were recorded as a discount
      to
      debt and as additional paid-in-capital on the balance sheet and are being
      amortized as interest expense throughout the term of the Series C or as they
      are
      converted, whichever comes first.  In July 2007 the exercise price of the
      warrants was reduced to $0.60 per share if exercised on or before October 25,
      2007 as part of the consideration given by the Company in exchange for an
      amendment to the terms of the 2007 Debentures and certain agreements associated
      with the initial sale of the 2007 Debentures by the Company, described
      below.  During the six months ended June 30, 2007 and 2006, the
      Company recorded $160,284 and $119,547, respectively for the amortization of
      the
      discount.






8





On
      February 15, 2007, the Company entered into agreements (the “Letter Agreements”)
      with each holder of Series C pursuant to which the Company agreed, between
      the
      date of such agreement and July 15, 2007, to deliver Company Interim Conversion
      Election Notices (as such term is defined in the Certificate of Designations
      of
      the Series C) to convert 50% of such holder’s shares of Series C into shares of
      the Company’s common stock during a four month period.  On May 30,
      2007, the Company and each holder of Series C amended the Letter Agreements
      to
      extend the four month period for conversions to five months.   As
      provided in the Certificate of Designations of the Series C, the closing sale
      price for the Company’s common stock on the date immediately preceding the date
      of each Company Interim Conversion Election Notice must be at least 114% of
      the
      conversion price (if the applicable closing sale price is $1.25 or less) or
      108%
      of the conversion price (if the applicable closing sale price is greater than
      $1.25), in order for the Company to cause such conversion. As a result, these
      conversions will result in BCF charges in accordance with EITF 00-27
      (“Application of Issue No. 98-5 to Certain Convertible Instruments”) and EITF
      98-5 (“Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios”) since the conversion price would
      be lower than the market price of the Company’s common stock on the date of the
      conversion. During the six months ended June 30, 2007, the Company converted
      $2,826,000 of the Series C into 3,472,643 shares of the Company’s common
      stock.  These conversions fulfilled the Company’s obligations under
      the Letter Agreements.  The Company recorded $252,000 in BCF expense
      related to conversions during the six months ended June 30, 2007.





Under
      the Series C purchase agreement,
      the Company is required to restrict funds for future dividends to be paid to
      Series C holders. As a result, these funds, which amounted to approximately
      $1,800,000 at issuance, were classified as restricted cash on the balance sheet.
      According to the Series C purchase agreement, as dividends are issued or paid,
      and conversions are executed, the restricted cash is released ratably to
      non-restricted cash accounts. As of June 30, 2007,
      approximately
      $7.9 million of the Series C have been converted into 6,150,438 shares of the
      Company’s common stock and as a result, $1,594,188 has been released from
      restricted cash to date.   During the six months ended June 30,
      2007, the Company paid $105,024 in quarterly dividend payments for the Series
      C
      and issued 17,738 shares of common stock for Series C dividend payments valued
      at $11,814. These dividends were recorded as interest expense since the Series
      C
      was recorded as a liability.




*2007
      Convertible Debentures*





On
      February 16, 2007, the Company sold to six institutional and accredited
      investors $6,000,000 aggregate principal amount of unsecured convertible
      debentures due February 16, 2009 (the “2007 Debentures”), and warrants to
      purchase an aggregate of 1,824,105 shares of common stock at an exercise price
      of $1.14 per share.  Under certain circumstances, the investors are
      able to convert the 2007 Debentures at 91% of the volume weighted average price
      of the Company’s common stock for the 10 consecutive trading days preceding the
      applicable notice of conversion.




In
      July
      2007, the Company and the investors executed a letter agreement in which they
      amended the 2007 Debentures and certain other agreements entered into by the
      Company and the investors in connection with the sale of the 2007
      Debentures.  Under the letter agreement the investors agreed to
      eliminate the registration obligations of the Company in exchange for (i)
      certain covenants by the Company to enable the investors to rely on Rule 144(d)
      for potential future sales of the common stock which underlies the convertible
      debt, (ii) a reduction of the initial conversion price of the 2007 Debentures
      from $1.42 to $1.00, and (iii) a reduction of the exercise price of those
      warrants previously issued to certain investors in connection with the Series
      C
      offering, as mentioned above.  For a description of the amendment,
      please refer to the Company’s Current Report on Form 8-K filed with the SEC on
      July 26, 2007 and incorporated herein by reference.






9





Interest
      accrues on the 2007 Debentures at the prime rate (currently 8.25%) and is
      payable on a quarterly basis in shares of common stock (assuming satisfaction
      of
      certain Equity Conditions (as defined in the 2007 Debentures)) or, if the
      Company provides notice, it may elect to pay interest in cash.  The Company
      currently does not meet the Equity Conditions due to the Company’s
      non-compliance with NASDAQ listing standards and thus it is required to pay
      such
      interest in cash (see Note 10).




The
      fair
      value of the warrants, together with the fair value of conversion features
      and
      certain other contingent liabilities associated with the 2007
      Debentures were recorded as a debt discount and as a liability under the caption
      “Debenture related liabilities” on the balance sheet upon issuance. The debt
      discount is amortized as interest expense throughout the term of the 2007
      Debentures or as they are converted, whichever comes first. The Debenture
      related liabilities are marked to market each period end through interest
      expense. During the six months ended June 30, 2007, the Company recorded
      interest expense of $202,737 for the amortization of the debt discount for
      the
      2007 Debentures and interest income of $671,128 for the marking to market of
      the
      debenture related liabilities.





After
      giving effect to the letter agreement described above, the 2007 Debentures
      require that the Company maintain a ratio of unrestricted cash to unsecured
      debt
      as of the end of each fiscal quarter of (i) 0.5 to 1.0 (from July 25, 2007
      through March 31, 2008) and (ii) 0.8 to 1.0 (from March 31, 2008 until
      maturity).  In addition, the 2007 Debentures require that the
      Company’s common stock be listed on a national securities exchange (such as the
      NASDAQ Capital Market).  Upon default of either of these covenants,
      the Company would be required to repay, in cash, 120% of the outstanding
      principal amount, plus accrued and unpaid interest of the 2007 Debentures
      outstanding on the default date.





**NOTE
      7—SERIES A AND SERIES B PREFERRED STOCK**





*Series
      A and Series B Preferred Stock*





On
      April
      25, 2005, the Company consummated the first closing under a joint development
      arrangement with The Dow Chemical Company (“Dow”). In connection with the
      closing, the Company issued 155,724 shares of Series A to Dow, each share of
      which is convertible into ten shares of the Company’s common stock.  As a
      result of the Series A issuance in exchange for services rendered by Dow in
      conjunction with the joint development arrangement, the Company recorded a
      non-cash charge of $2,413,722 as product development expense based on the market
      value of the underlying common stock as of April 25, 2005. The Series A has
      substantially the same rights of our common stock, therefore the Series A was
      valued based on the closing price of the Company’s common stock on April 25,
      2005.





The
      purpose of the joint development arrangement is to enable the two
      companies to jointly develop portable power solutions based on the Company’s
      Hydrogen on Demand® energy systems coupled with a fuel cell. The joint
      development arrangement has a three year term and each party may terminate
      the
      joint development arrangement under certain conditions. In July 2007, the
      Company and Dow amended the joint development arrangement. As amended, the
      joint development arrangement contemplates three milestones designed to
      culminate in a commercially viable hydrogen storage system for consumer
      electronics applications.  For a description of the amendment to the
      joint development arrangement, please refer to the Company’s Current Report on
      Form 8-K, filed with the SEC on July 26, 2007 and incorporated herein by
      reference.





Under
      the
      joint development arrangement, as amended, upon the successful completion of
      milestone 1 and 2, Dow has a right, but not an obligation, to purchase a number
      of shares of the Company’s Series B which is convertible into a number of shares
      of the Company’s common stock that could be purchased for $1,250,000 (based upon
      a purchase price equal to the volume weighted average price for the 30-trading
      day period prior to the date of issuance). If Dow purchased shares of the
      Company’s Series B , Dow would also receive warrants to purchase a number of
      shares of the Company’s common stock that equals 25% of the number of shares of
      common stock issuable upon conversion of the Series B. If Dow elects not to
      purchase shares of the Company’s Series B upon the achievement of any milestone,
      the Company would be obligated to issue to Dow a lesser number of additional
      shares of Series A in consideration for Dow’s human resource and intellectual
      property contributions to the Company.  Upon the achievement of
      milestone 3, Dow will only receive a number of shares of the Company’s common
      stock with a market value (calculated using the volume weighted average price
      for the 30-trading day period prior to the date of issuance) equal to the
      greater of 1% of the Company’s fully diluted outstanding shares or
      $250,000.  If such issuance would cause Dow to beneficially own more
      than 9.9% of the Company’s outstanding common stock (the “9.9% Limit”), then the
      Company is obligated to pay to Dow in cash the value of those shares that would
      exceed the 9.9% Limit in lieu of their issuance.  Dow does not have
      the right to purchase any shares of the Company’s Series B in connection with
      the achievement of milestone 3.






10




On
      May 3,
      2006, the Company and Dow agreed that the first milestone under the joint
      development arrangement was met. Dow elected to purchase 71,429 shares of Series
      B Preferred Stock for $1,250,000, and received detachable warrants to purchase
      178,571 shares of the Company’s common stock with an exercise price of $2.10 per
      share which were recorded as a discount to Series B for $159,227 based on
      the fair value of the warrants at the date of the issuance. The Series B was
      initially convertible into ten shares of the Company’s common stock. As a result
      of anti-dilution adjustments to the conversion price of the Series B, each
      share
      of Series B is currently convertible into approximately sixteen shares of the
      Company’s common stock.  As provided by the July 2007 amendment to the
      joint development arrangement, the Series B is subject to weighted average
      anti-dilution protection.  The shares of Series B bear a 6% cumulative
      dividend payable in shares of common stock or cash, at the Company’s option.
 In accordance with the joint development arrangement and achievement of
      the first milestone, the Company also issued 138,150 shares of Series
      A that were earned by Dow through human resource and intellectual property
      contributions toward achievement of the first milestone. As a result of the
      issuance of Series A, the Company recorded a non-cash charge of $2,113,695
      as product development expense based on the market value of the underlying
      common stock as of May 26, 2006.





In
      July
      2007, the Company and Dow agreed that the parties had achieved the second
      milestone under the joint development arrangement.  Within 70 days of
      the milestone achievement date, the Company will issue to Dow shares of the
      Company’s Series A that were earned by Dow through human resource and
      intellectual property contributions toward achievement of the second
      milestone.  The number of Series A shares to be issued to Dow will be
      convertible into approximately 2% of the fully diluted outstanding common shares
      of the Company at time of issuance as provided by the agreements governing
      the
      joint development arrangement.  The fair value of the Series
      A will be charged to product development and marketing
      expenses.  Dow has informed the Company that it will not exercise its
      option to purchase Series B in connection with the achievement of the second
      milestone.








**NOTE
      8—SUPPLEMENTAL CASH FLOW INFORMATION**





The
      Company issued 99,485 and 92,905 shares of common stock valued at $93,518 and
      $156,621 to employees as 401(k) Plan employer matching contributions during
      the
      first six months of 2007 and 2006, respectively.




The
      Company issued 491,400 and 465,400 shares of restricted common stock valued
      at
      $471,744 and $763,256 to employees as restricted stock during the six months
      ended June 30, 2007 and 2006, respectively. The Company also converted Series
      C
      Preferred Stock and Amended Convertible Debentures during the six months ended
      June 30, 2007. See note 6 for further details on these conversions.






11




**NOTE
      9—GECKO ENERGY TECHNOLOGIES, LLC.**




During
      the year ended December 31, 2006, the Company acquired Gecko’s remaining
      outstanding common stock (the “Acquisition”) that it did not already own. Prior
      to the Acquisition in 2006, the Company accounted for its investment in Gecko
      under the equity method of accounting. On the Acquisition date, Gecko was a
      developmental stage company, as defined, and the Acquisition was accounted
      for
      as an asset acquisition, which although similar to accounting for a business
      combination pursuant to SFAS No. 141, “Business Combinations” (“SFAS 141”),
      no goodwill was recorded. During the six months ended June 30, 2007, the Company
      finalized the purchase accounting for the Acquisition which resulted in an
      increase of $146,000 to the intangibles acquired.  No other adjustments
      were required to finalize the purchase accounting.





**NOTE
      10—CONTINGENCIES**





In
      April 2007, the Company received a
      letter from The Nasdaq Stock Market (“Nasdaq”) notifying the Company that
      for 30 consecutive trading days prior to the date of the letter, the minimum
      bid
      price per share of the Company's listed securities had been below the minimum
      bid price per share of $1.00 as required for continued inclusion on the NASDAQ
      Capital Market.





Nasdaq
      provided the Company with 180 calendar days, or until October 22, 2007, to
      regain compliance.  If, at anytime prior to October 22, 2007, the
      minimum bid price per share of the Company's common stock is $1.00 or more
      for a
      minimum of 10 consecutive business days, the staff of Nasdaq will provide
      written notification that  the Company complies with the
      Rule.





If
      the
      Company does not demonstrate compliance with the Rule by October 22, 2007,
      the
      staff of Nasdaq will determine whether the Company meets the NASDAQ Capital
      Market initial listing criteria, except for the bid price
      requirement.  If the staff determines the Company meets the initial
      listing criteria, as of October 22, 2007, the staff will notify the Company
      that
      it has been granted an additional 180 calendar day compliance
      period.  Otherwise, the staff will provide written notification that
      the Company’s securities will be delisted from the NASDAQ Capital
      Market.  In that case, prior to any delisting, the Company may appeal
      the Nasdaq staff's determination to a Listing Qualifications Panel, which would
      conduct a hearing on the matter.







**NOTE
      11—SUBSEQUENT EVENTS**





As
      previously disclosed by the Company, in July 2007, the Company converted
      $1,328,000 of Series C into 2,044,050 shares of common
      stock.   As mentioned in Notes 6 and 7, in July 2007, the Company
      entered into amendments in connection with the 2007 Debenture, the Series C
      and
      the joint development arrangement with Dow.










12




**Item
      2.*Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.***





The
      following discussion should be read in conjunction with the accompanying
      consolidated financial statements and notes thereto included within this report.
      In addition to historical information, this Form 10-Q and the following
      discussion contain forward-looking statements that reflect our plans, estimates,
      intentions, expectations and beliefs. See the discussion contained under the
      caption “Forward-Looking Statements” for more information. Our actual results
      could differ materially from those discussed in the forward-looking statements.
      The discussion below should be read in conjunction with the Company's Annual
      Report on Form 10-K for the fiscal year ended December 31, 2006.





**General**





We
      were
      formed as a Delaware limited liability company on December 17, 1998, and
      organized and began operations on January 1, 1999 (inception date). We were
      converted into a Delaware corporation on April 25, 2000 when all of the
      outstanding equity interests of the limited liability company were converted
      into shares of common stock of the corporation. Unless otherwise indicated,
      all
      information that we present in this Form 10-Q for any date or period gives
      effect to the conversion as if it had occurred on that date or as of the
      beginning of that period and all references to common stock for periods before
      the conversion mean our issued and outstanding membership interests. On December
      29, 2006, we acquired Gecko Energy Technologies, LLC (“Gecko”), a fuel cell
      company.





**Overview**





We
      are
      engaged in the development of hydrogen battery technology for use primarily
      in
      portable electronic devices for the, military, medical, industrial and consumer
      markets. We are developing this technology in partnership with corporate and
      government entities. Hydrogen on Demand® is the trademarked name for our
      proprietary hydrogen energy storage and delivery technology. Our technology
      is
      based on the culmination of work reflected in more than 90 patents (granted
      or
      pending) that collectively provide us with a leading position in the system
      and
      fuel blend technology used to convert sodium borohydride to hydrogen energy
      for
      use in portable electronic device applications.





Our
      losses have resulted primarily from costs associated with product development
      and research and development activities as well as non-cash amortization of
      preferred stock and non-cash charges related to the issuance of stock options,
      restricted stock and warrants to employees and third parties. As a result of
      planned expenditures in the areas of research, product development and marketing
      and additional non-cash charges relating to employee stock awards, we expect
      to
      incur additional operating losses for the foreseeable future.





**Results
      of Operations**




*Three
      Months Ended June 30, 2007 versus Three Months Ended June 30,
      2006*




*Revenues.*
      Revenues for the three months ended June 30, 2007 were $0 compared to $12,222
      for the same period of 2006, a decrease of $12,222. While in the development
      stage, our revenues are expected to fluctuate from year to year with the timing
      of prototype development and design services.




In
      the
      near-term, revenues are expected to be derived substantially from catalyst
      sales, up-front license fees, research contracts with various federal, state
      and
      local agencies, collaborations with other companies, management services, and
      royalty payments or joint venture revenue from licensees or strategic
      partnerships. Revenues will be recognized in the period which technology is
      delivered, licensing revenues are earned, or as services are
      provided.





*Cost
      of Revenues.*Cost of revenues for the three months ended June 30, 2007 were
      $0 compared to $12,222 for the same period of 2006, a decrease of $12,222.
      Cost
      of revenues during the development stage represent the Product Development
      and
      Marketing expenses and Research and Development expenses associated with the
      revenue earned.






13





*Product
      Development and Marketing Expense*. Product development and marketing
      expenses for the three months ended June 30, 2007 were $1,107,903 compared
      to
      $829,885 for the same period of 2006, an increase of $278,018. The expenses
      increased due to an increase in product development staff as compared to the
      same period last year and also increased due to the acquisition of Gecko in
      the
      fourth quarter of 2006.




*General
      and Administrative Expense*. General and administrative expenses for the
      three months ended June 30, 2007 were $915,294 compared to $1,035,105 for the
      same period of 2006, a decrease of $119,811. The decrease was mainly the result
      of the non-recurrence of professional fees associated with strategic and
      financial transactions closed in 2006.





*Non-cash
      Charges*. Non-cash charges were $264,284 for the three months ended June 30,
      2007 compared to $2,460,055 for the same period of 2006, a decrease of
      $2,195,771.  The decrease was mainly the result of the issuance of
      Series A Preferred Stock to the Dow Chemical Company in 2006, which resulted
      in
      a non-cash charge of $2,113,695.





The
      following is a breakdown by function of non-cash charges for stock awards for
      the three months ended June 30:





**2007**
            
            
            **2006**Product
                development and marketing
            
            $
            21,303
            
            
            $
            2,129,474General
                and administrative
            
            
            234,832
            
            
            
            324,946Research
                and development
            
            
            8,149
            
            
            
            5,635Total
            
            $
            264,284
            
            
            $
            2,460,055





*Depreciation
      and Amortization*. Depreciation and amortization was $215,886 for the three
      months ended June 30, 2007 compared to $78,138 for the same period of 2006,
      an
      increase of $137,748. The increase reflects intangible asset amortization
      resulting from the acquisition of Gecko on December 29, 2006.





*Research
      and Development Expense*. Research and development expenses were $192,202
      for the three months ended June 30, 2007 compared to $26,366 for the same period
      of 2006, an increase of $165,836. The expenses increased due to a decrease
      in
      our work with the Department of Energy, which was funding part of our research
      and development.





*Interest
      (Income) Expense, net*. Net (income)interest expense was ($11,073) for the
      three months ended June 30, 2007 compared to net interest expense of $278,923
      for the same period of 2006, a decrease of $289,996. The decrease was mainly
      due
      to marking to market the fair value of the 2007 Debentures conversion feature
      and related warrants which was offset by beneficial conversion feature charges,
      accelerated discount amortization and issue costs on our Series C Preferred
      Stock.





*Six
      Months Ended June 30, 2007 versus Six Months Ended June 30,
      2006*




*Revenues.*
      Revenues for the six months ended June 30, 2007 were $67,700 compared to $82,104
      for the same period of 2006, a decrease of $14,404. While in the development
      stage, our revenues are expected to fluctuate from year to year with the timing
      of prototype development and design services.




In
      the
      near-term, revenues are expected to be derived substantially from catalyst
      sales, up-front license fees, research contracts with various federal, state
      and
      local agencies, collaborations with other companies, management services, and
      royalty payments or joint venture revenue from licensees or strategic
      partnerships. Revenues will be recognized in the period which technology is
      delivered, licensing revenues are earned, or as services are
      provided.






14





*Cost
      of Revenues.*Cost of revenues for the six months ended June 30, 2007 were
      $61,595 compared to $82,104 for the same period of 2006, a decrease of $20,509.
      Cost of revenues during the development stage represent the Product Development
      and Marketing expenses and Research and Development expenses associated with
      the
      revenue earned.





*Product
      Development and Marketing Expense*. Product development and marketing
      expenses for the six months ended June 30, 2007 were $2,077,621 compared to
      $1,735,073 for the same period of 2006, an increase of $342,548. The expenses
      increased due to an increase in product development staff as compared to the
      same period last year as well as the acquisition of Gecko in the fourth quarter
      of 2006.




*General
      and Administrative Expense*. General and administrative expenses for the six
      months ended June 30, 2007 were $1,710,310 compared to $2,053,842 for the same
      period of 2006, a decrease of $343,532. The decrease was mainly the result
      of
      the non-recurrence of professional fees associated with strategic and financial
      transactions closed in 2006.





*Non-cash
      Charges*. Non-cash charges were $481,155 for the six months ended June 30,
      2007 compared to $2,650,641 for the same period of 2005, a decrease of
      $2,169,486.  The decrease was mainly the result of the issuance of Series A
      Preferred Stock to the Dow Chemical Company in 2006, which resulted in a
      non-cash charge of $2,113,695.





The
      following is a breakdown by function of non-cash charges for stock awards for
      the six months ended June 30:





**2007**
            
            
            **2006**Product
                development and marketing
            
            $
            42,606
            
            
            $
            2,145,253General
                and administrative
            
            
            422,252
            
            
            
            494,118Research
                and development
            
            
            16,297
            
            
            
            11,270Total
            
            $
            481,155
            
            
            $
            2,650,641





*Depreciation
      and Amortization*. Depreciation and amortization was $441,851 for the six
      months ended June 30, 2007 compared to $215,325 for the same period of 2006,
      an
      increase of $226,526. The increase reflects intangible asset amortization
      resulting from the acquisition of Gecko on December 29, 2006.




*Research
      and Development Expense*. Research and development expenses were $293,429
      for the six months ended June 30, 2007 compared to $222,349 for the same period
      of 2006, a decrease of $71,080.  The expenses increased due to a
      decrease in our work with the Department of Energy, which was funding part
      of
      our research and development.





*Interest
      Expense, net*. Net interest expense was $372,005 for the six months ended
      June 30, 2007 compared to $373,559 for the same period of 2006, a decrease
      of
      $1,554. The interest expense decrease due to the mark to market of the 2007
      Debentures conversion feature and related warrants was offset by beneficial
      conversion feature charges, accelerated discount amortization and issue costs
      on
      our Series C Preferred Stock.





**Liquidity
      and Capital Resources**




*General*




Since
      our
      inception, we have financed our operations primarily through our initial public
      offering in August 2000 and private placements of equity and debt securities.
      The net proceeds from our initial public offering totaled approximately $35.9
      million and we generated net proceeds from private placement transactions in
      2002 and 2003 totaling $14.1 million. In 2004, we received net proceeds of
      approximately $9.4 million from a separate private placement transaction. In
      April 2005, we received net proceeds of approximately $9.6 million in a private
      placement of our redeemable Series C Preferred Stock. In May 2006, we received
      proceeds of $1.25 million in a private placement of Series B Preferred Stock.
      In
      February 2007, we received net proceeds of $5.76 million in unsecured
      debentures.






15





*Amended Convertible
      Debentures*





On
      November 8, 2005, we issued a $2.4 million unsecured convertible debenture
      with a maturity date of September 30, 2007 (the “Amended Convertible
      Debentures”).  In accordance with EITF 00-27 (“Application of Issue No.
      98-5 to Certain Convertible Instruments”) and EITF 98-5 (“Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios”), we record a Beneficial Conversion Feature
      (“BCF”) if the Amended Convertible Debentures are converted into common
      stock at a discount. In 2006, we converted $1.95 million of the Amended
      Convertible Debentures into 1,352,462 shares of our common stock and recorded
      a
      BCF charge of $136,500 associated with the conversions. In the first half of
      2007, we converted the remaining $450,000 of the Amended Convertible
      Debentures into 533,458 shares of our common stock and recorded a BCF charge
      of
      $31,500 associated with the conversion.




*Redeemable
      Series C Preferred Stock*




On
      April
      25, 2005, we consummated a private placement financing transaction with seven
      institutional and accredited investors who paid $10 million for 10,000 shares
      of
      redeemable Series C. Each Series C share is initially convertible into 500
      shares of our common stock, at any time, at an initial conversion price equal
      to
      $2 per share subject to adjustment based upon customary anti-dilution
      provisions, or a higher number of shares at a lower conversion price based
      upon
      the market price of our common stock during the ten trading days preceding
      conversion. The shares of Series C bear a 7% cumulative dividend payable
      quarterly in shares of common stock or cash, at our option and are junior to
      the
      Series A and Series B preferred stock in liquidation preference. The Series
      C is
      subject to mandatory redemption by the Company three years after issuance and
      can be settled in cash or with our common stock. As a result, the Series C
      is
      recorded as a liability in accordance with FAS 150 “Accounting for Certain
      Financial Instruments with Characteristics of both Liabilities and Equity”).
      Additionally, we issued to the Series C investors three-year warrants to
      purchase an aggregate of 1.25 million shares of our common stock at an exercise
      price equal to $2 per share, subject to adjustment based on customary
      antidilution protections. The warrants were valued at $1,021,928 at the date
      of
      issuance and were recorded as a discount to debt and as additional
      paid-in-capital on the balance sheet and are being amortized as interest expense
      throughout the term of the Series C or as they are converted, whichever comes
      first. In July 2007 the exercise price of the warrants was reduced to $0.60
      per
      share if exercised on or before October 25, 2007 as part of the consideration
      given by us in exchange for certain amendments to the terms of the 2007
      Debentures and certain agreements associated with the initial sale of the 2007
      Debentures by the Company, as described below.  During
      the six months ended June 30, 2007 and 2006, we recorded $160,284 and $119,547,
      respectively for the amortization of the discount.





On
      February 15, 2007, we entered into agreements (the “Letter Agreements”) with
      each holder of Series C pursuant to which we agreed, between the date of such
      agreement and July 15, 2007, to deliver Company Interim Conversion Election
      Notices (as such term is defined in the Certificate of Designations of the
      Series C) to convert 50% of such holder’s shares of Series C into shares of our
      common stock during a four month period.  On May 30, 2007, the Company
      and each holder of Series C amended the Letter Agreements to extend the four
      month period for conversions to five months.  As provided in the
      Certificate of Designations of the Series C, the closing sale price for our
      common stock on the date immediately preceding the date of each Company Interim
      Conversion Election Notice must be at least 114% of the conversion price (if
      the
      applicable closing sale price is $1.25 or less) or 108% of the conversion
      price (if the applicable closing sale price is greater than $1.25), in order
      for
      us to cause such conversion. As a result, these conversions will result in
      BCF
      charges in accordance with EITF 00-27 (“Application of Issue No. 98-5 to Certain
      Convertible Instruments”) and EITF 98-5 (“Accounting for Convertible Securities
      with Beneficial Conversion Features or Contingently Adjustable Conversion
      Ratios”) since the conversion price would be lower than the market price of our
      common stock on the date of the conversion. During the six months ended June
      30,
      2007, we converted $2,826,000 of the Series C into 3,472,643 shares of our
      common stock.  These conversions fulfilled our obligations under the
      Letter Agreements.  We recorded $252,000 in BCF expense related to
      conversions during the six months ended June 30, 2007.






16





Under
      the Series C purchase agreement,
      we are required to restrict funds for future dividends to be paid to Series
      C
      holders. As a result, these funds, which amounted to approximately $1,800,000
      at
      issuance, were classified as restricted cash on the balance sheet. According
      to
      the Series C purchase agreement, as dividends are issued or paid, and
      conversions are executed, the restricted cash is released ratably to
      non-restricted cash accounts. As of June 30, 2007,
      approximately
      $7.9 million of the Series C have been converted into 6,150,438 shares of our
      common stock and as a result, $1,594,188 has been released from restricted
      cash
      to date.   During the six months ended June 30, 2007, we paid
      $105,024 in quarterly dividend payments for the Series C and issued 17,738
      shares of common stock for Series C dividend payments valued at $11,814. These
      dividends were recorded as interest expense since the Series C was recorded
      as a
      liability.




*Series
      A and Series B Preferred Stock*





On
      April
      25, 2005, we consummated the first closing under a joint development arrangement
      with The Dow Chemical Company (“Dow”). In connection with the closing, we issued
      155,724 shares of Series A to Dow, each share of which is convertible into
      ten
      shares of our common stock.. As a result of the Series A issuance in exchange
      for services rendered by Dow in conjunction with the joint development
      arrangement, we recorded a non-cash charge of $2,413,722 as product development
      expense based on the market value of the underlying common stock as of April
      25,
      2005. The Series A has substantially the same rights of our common stock,
      therefore the Series A was valued based on the closing price of our common
      stock
      on April 25, 2005.





The
      purpose of the joint development arrangement is to enable the two
      companies to jointly develop portable power solutions based on our Hydrogen
      on
      Demand® energy systems coupled with a fuel cell. The joint development
      arrangement has a three year term and each party may terminate the joint
      development arrangement under certain conditions.  In July 2007, the
      Company and Dow amended the joint development arrangement.  As
      amended, the joint development arrangement, contemplates three milestones
      designed to culminate in a commercially viable hydrogen storage system for
      consumer electronics applications.  For a description of the amendment
      to the joint development arrangement, please refer to our Current Report on
      Form
      8-K, filed with the SEC on July 26, 2007 and incorporated herein by
      reference.





Under
      the
      joint development arrangement, as amended, upon the successful completion of
      milestone 1 and 2, Dow has a right, but not an obligation, to purchase a number
      of shares of our Series B which is convertible into a number of shares of our
      common stock that could be purchased for $1,250,000 (based upon a purchase
      price
      equal to the volume weighted average price for the 30-trading day period prior
      to the date of issuance). If Dow purchased shares of our Series B, Dow would
      also receive warrants to purchase a number of shares of our common stock that
      equals 25% of the number of shares of common stock issuable upon conversion
      of
      the Series B Preferred Stock. If Dow elected not to purchase shares of our
      Series B upon the achievement of any milestone, we would be obligated to
      issue to Dow a lesser number of additional shares of Series A in consideration
      for Dow’s human resource and intellectual property contributions to
      us.  Upon the achievement of milestone 3, Dow has the right to receive
      our common stock with a market value (calculated using the volume weighted
      average price for the 30-trading day period prior to the date of issuance)
      equal
      to the greater of 1% of our fully diluted outstanding shares or
      $250,000.  If such issuance would cause Dow to beneficially own more
      than 9.9% of our outstanding common stock (the “9.9% Limit”), then we are
      obligated to pay Dow in cash the value of those shares that would exceed the
      9.9% Limit in lieu of their issuance.  Dow does not have the right to
      purchase any shares of our Series B in connection with achievement of milestone
      3.




On
      May 3,
      2006, the Company and Dow agreed that the first milestone under the joint
      development arrangement was met. Dow elected to purchase 71,429 shares of Series
      B for $1,250,000, and received detachable warrants to purchase 178,571 shares
      of
      our common stock with an exercise price of $2.10 per share which were recorded
      as a discount to Series B for $159,227 based on the fair value of the warrants
      at the date of the issuance. The Series B was initially convertible into ten
      shares of our common stock.  As a result of anti-dilution adjustments
      to the conversion price of the Series B, each share of Series B is currently
      convertible into approximately sixteen shares of our common stock. As provided
      by the July 2007 amendment to the joint development arrangement, the Series
      B is
      subject to weighted average anti-dilution protection.  The shares of
      Series B tock bear a 6% cumulative dividend payable in shares of common stock
      or
      cash, at our option.  In accordance with the joint development arrangement
      and achievement of the first milestone, we also issued 138,150 shares of Series
      A that were earned by Dow through human resource and intellectual property
      contributions toward achievement of the first milestone. As a result of the
      issuance of Series A, we recorded a non-cash charge of $2,113,695 as product
      development expense based on the market value of the underlying common stock
      as
      of May 26, 2006.






17





In
      July
      2007, we agreed that the parties had achieved the second milestone under the
      joint development arrangement.  Within 70 days of the milestone
      achievement date, we will issue to Dow shares of our Series A that were earned
      by Dow through human resource and intellectual property contributions toward
      achievement of the second milestone.  The number of Series
      A shares to be issued to Dow will be convertible into approximately 2% of
      the fully diluted outstanding common shares of us at time of issuance as
      provided by the agreements governing the joint development
      arrangement.  The fair value of the Series A will be charged to
      product development and marketing expenses.  Dow has informed us that
      it will not exercise its option to purchase Series B in connection with the
      achievement of the second milestone.





*2007
      Convertible Debentures*





On
      February 16, 2007, we sold to six institutional and accredited investors
      $6,000,000 aggregate principal amount of unsecured convertible debentures due
      February 16, 2009 (the “2007 Debentures”), and warrants to purchase an aggregate
      of 1,824,105 shares of common stock at an exercise price of $1.14 per
      share.  Under certain circumstances, the investors are able to convert
      the 2007 Debentures at 91% of the volume weighted average price of our common
      stock for the 10 consecutive trading days preceding the applicable notice of
      conversion.




In
      July
      2007, the Company and the investors executed a letter agreement in which they
      amended the 2007 Debentures and certain other agreements entered into by
      us  and the investors in connection with the sale of the 2007
      Debentures.  Under the letter agreement the investors agreed to
      eliminate our registration obligations in exchange for (i) certain covenants
      by
      us to enable the investors to rely on Rule 144(d) for potential future
      sales of the common stock which underlies the convertible debt, (ii) a reduction
      of the initial conversion price of the 2007 Debentures from $1.42 to $1.00,
      and
      (iii) a reduction of the exercise price of those warrants previously issued
      to
      certain investors in connection with the Series C offering, as mentioned
      above.  For a description of the amendment, please refer to our
      Current Report on Form 8-K filed with the SEC on July 26, 2007 and incorporated
      herein by reference.





Interest
      accrues on the 2007 Debentures at the prime rate (currently 8.25%) and is
      payable on a quarterly basis in shares of common stock (assuming satisfaction
      of
      certain Equity Conditions (as defined in the 2007 Debentures)) or, if we provide
      notice, we may elect to pay interest in cash.  We currently do not
      meet the Equity Conditions due to our non-compliance with NASDAQ listing
      standards and thus we are required to pay such interest in cash (see Note
      10).





The
      fair
      value of the warrants, together with the fair value of conversion features
      and
      certain other contingent liabilities associated with the 2007
      Debentures were recorded as a debt discount and as a liability under the caption
      “Debenture related liabilities” on the balance sheet upon issuance. The debt
      discount is amortized as interest expense throughout the term of the 2007
      Debentures or as they are converted, whichever comes first. The Debenture
      related liabilities are marked to market each period end through interest
      expense. During the six months ended June, 2007, we recorded interest expense
      of
      $202,737 for the amortization of the discount and interest income of $671,128
      for the marking to market of the debenture related liabilities.





After
      giving effect to the letter agreement described above, the 2007 Debentures
      require that we maintain a ratio of unrestricted cash to unsecured debt as
      of
      the end of each fiscal quarter of (i) 0.5 to 1.0 (from July 25, 2007 through
      March 31, 2008) and (ii) 0.8 to 1.0 (from March 31, 2008 until
      maturity).  In addition, the 2007 Debentures require that the
      Company’s common stock be listed on a national securities exchange (such as the
      NASDAQ Capital Market).  Upon default of either of these covenants, we
      would be required to repay, in cash, 120% of the outstanding principal amount,
      plus accrued and unpaid interest of the 2007 Debentures outstanding on the
      default date.






18





*Sources
      and Uses of Cash*





As
      of
      June 30, 2007, we had $6,158,720 in cash and cash equivalents and restricted
      cash of $826,486. Cash used in operations totaled $3,948,718 and $4,066,226
      during the six months ended June 30, 2007 and 2006, respectively, and related
      to
      primarily funding our net operating losses.





Excluding
      changes in restricted cash, investing activities used cash of $190,385 and
      $645,740 during the six months ended June 30, 2007 and 2006, respectively.
      The
      decrease in 2007 from 2006 was directly related to acquisition of Gecko.
      Restricted cash is comprised of $0.2 million as security on Series C Preferred
      dividends and $0.6 million of cash used for collateral as security deposit
      held
      by our landlord in connection with our amended lease agreement (see contractual
      obligations table below). These funds will not be available for use in
      operations until the letters of credit have been reduced or terminated. The
      $0.2
      million of restricted cash related to the Series C Preferred will be available
      to us ratably as dividends are paid to the holders or as they are converted,
      whichever comes first.





*Off-Balance
      Sheet Arrangements*





We
      had no
      off-balance sheet arrangements as of June 30, 2007.





*Commitments
      and Contingencies*





In
      April
      2001, we amended our main operating lease to provide for additional space for
      our principal operating offices and laboratories. The amended lease will expire
      in 2008 and contains options to renew for an additional eight years and requires
      us to pay our allocated share of taxes and operating costs in addition to the
      annual base rent payment.





In
      connection with the amended lease agreement, we issued a letter of credit to
      the
      landlord for $588,972 in lieu of a cash security deposit. The letter of credit
      was collateralized with a portion of our cash and is classified as Restricted
      Cash. The funds used for collateral will not be available for use in
      operations.





Between
      January 1999 and April 2000, we received an aggregate of $227,522 from a
      recoverable grant award from the State of New Jersey Commission on Science
      and
      Technology. The funds were used to partially fund costs directly related to
      development of our technology. The recoverable grant is required to be repaid
      when we generate net sales in a fiscal year. The repayment obligation, which
      began in March 2001, ranges from 1% to 5% of net sales over a ten-year period.
      We are obligated to repay the unpaid amount of the original grant at the end
      of
      the ten-year period. As of June 30, 2007, we have repaid approximately
      $84,390.





Our
      contractual obligations are in the table outlined below:




**Payment
                due in fiscal years****2007****Contractual
                Obligations**
            
            
            **(six
                months****Total**
            
            
            **remaining)**
            
            
            **2008**
            
            
            **2009**
            
            
            **2010**
            
            
            **2011**Operating
                lease - facility
            
            $
            686,105
            
            
            $
            242,155
            
            
            $
            443,950
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Refundable
                grant obligation
            
            
            143,132
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            143,132
            
            
            
            —Redeemable
                Series C Preferred Stock (1)
            
            
            2,047,034
            
            
            
            ----
            
            
            
            2,047,034
            
            
            
            —
            
            
            
            —
            
            
            
            —2007
                Debentures (1)
            
            
            6,000,000
            
            
            
            —
            
            
            
            —
            
            
            
            6,000,000
            
            
            
            —
            
            
            
            —2007
                Debentures interest
            
            
            990,000
            
            
            
            437,250
            
            
            
            503,250
            
            
            
            49,500
            
            
            
            —
            
            
            
            —Total
            
            $
            9,886,271
            
            
            $
            679,405
            
            
            $
            2,994,234
            
            
            $
            6,049,500
            
            
            $
            143,132
            
            
            $
            —





*(1)*  *Redeemable
      Series C Preferred Stock
      and 2007 Debentures are convertible into common stock or can be satisfied with
      cash.*






19





We
      believe that, based upon our current cash and cash equivalents and our
      projection for the source and uses of our cash during the first half of 2007,
      we
      will have sufficient cash and cash equivalents to satisfy anticipated cash
      needs through the first half of 2008.





As
      mentioned above, if the Company does not satisfy either the minimum bid price
      requirement or the other initial listing requirements of Nasdaq as of October
      22, 2007, the Company‘s common stock will be delisted from the NASDAQ Capital
      Market.  If our common stock is delisted, it will be an event of
      default under the 2007 Debentures which, if not waived by the holders of a
      majority of the outstanding convertible debentures, would give the holders
      the
      right to require us to redeem the outstanding 2007 Debentures at a price equal
      to 120% of the outstanding principal amount plus accrued and unpaid interest.





We
      are
      contemplating a number of options which could allow us to regain compliance
      with
      NASDAQ listing requirements or to obtain an additional grace period of 180
      days
      in which to regain compliance. Our ability to obtain an additional 180-day
      grace period is predicated on our having stockholders’ equity of $5 million as
      of October 22, 2007.  In the event we are unable to regain compliance,
      or to obtain the additional 180-day grace period, we may consider restructuring
      our 2007 Debentures or taking other actions necessary to secure financing for
      operations.  We may raise additional funds through public or private
      financing, collaborative relationships or other arrangements at any time. 
Additional funding, if sought, may not be available or, if available, may be
      offered at terms not favorable to us. Further, any additional equity financing
      may be dilutive to stockholders, and debt financing, if available, may involve
      restrictive covenants. Our failure to raise capital when needed may harm our
      business and operating results.





**Discussion
      of Critical Accounting Policies**




In
      preparing our consolidated financial statements in accordance with United States
      generally accepted accounting principles, we are required to use judgment in
      making estimates and assumptions that affect the amounts reported in our
      financial statements and related notes. We base our estimates on historical
      experience and on various other assumptions that are believed to be reasonable
      under the circumstances. These estimates form the basis for making judgments
      about the carrying value of assets and liabilities that are not readily apparent
      from other sources. Many of our critical accounting policies are subject to
      significant judgments and uncertainties which could potentially result in
      materially different results under different conditions and assumptions. Future
      events rarely develop exactly as forecast, and the best estimates routinely
      require adjustment. See Discussion of Critical Accounting Policies in
      Item 7. “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” of our Annual Report on Form 10-K for the year ended
      December 31, 2006.




**Recent
      Accounting Pronouncements**




See
      Note
      2 for more information related to new accounting pronouncements.





**Item
      3.          *Quantitative and
      Qualitative Disclosures about Market Risk.***





Market
      risk represents the risk of loss that may impact our financial position,
      operating results or cash flows due to changes in U.S. interest rates. This
      exposure is directly related to our normal operating activities. Our cash and
      cash equivalents are invested with high quality issuers and are generally of
      a
      short-term nature. As a result, we do not believe that near-term changes in
      interest rates will have a material effect on our future results of
      operations.





Our
      systems' ability to produce energy depends on the availability of sodium
      borohydride, which has a limited commercial use and is not manufactured in
      vast
      quantities. There are currently only two major manufacturers of sodium
      borohydride and there can be no assurance that the high cost of this specialty
      chemical will be reduced. Once we commence full operations in the future, we
      may
      need to enter into long-term supply contracts to protect against price increases
      of sodium borohydride. As a result, we may be subject to commodity price risk
      in
      the future and there can be no assurance that we will be able to enter into
      agreements to protect against such risk.






20







**Item
      4T.          *Controls and
      Procedures***





(a)
      Evaluation of Disclosure Controls and Procedures





Our
      management is responsible for establishing and maintaining a system of adequate
      internal and disclosure controls and procedures over our financial reporting.
      Such controls and procedures are designed to ensure that information required
      to
      be disclosed by us in the reports we file or submit under the Securities
      Exchange Act of 1934, is recorded, processed, summarized and reported on a
      timely basis, and that such information is accumulated and communicated to
      all
      members of our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosure.





Our
      management, under the supervision and with the participation of our Chief
      Executive Officer and our Chief Financial Officer, has evaluated the
      effectiveness of our disclosure controls and procedures (as such term is defined
      in Rules 13a-15(e) or 15d-15(e)) under the Securities Exchange Act of 1934,
      as amended) as of the end of the period covered by this Quarterly Report. Based
      on such evaluation, our Chief Executive Officer and our Chief Financial Officer
      have concluded that, as of the evaluation date, our disclosure controls and
      procedures are effective in alerting them on a timely basis to material
      information relating to us required to be included in our reports filed or
      submitted under the Securities Exchange Act of 1934.




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      also conducted an evaluation of any changes in internal control over financial
      reporting that occurred during the last fiscal quarter covered by this Quarterly
      Report. That evaluation did not identify any significant changes to the
      Company’s internal control over financial reporting that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





(b)
      Changes in Internal Controls





Since
      the
      evaluation date, there have not been any significant changes in our internal
      control over financial reporting or in other factors that could significantly
      affect our internal control over financial reporting.






21





**PART
      II**





**Item
      1.        Legal
      Proceedings.**





None.





**Item
      1A.     Risk Factors.**





Except
      for the risk factor below, there have been no material changes from the risk
      factors previously disclosed in our Annual Report on Form 10-K for the year
      ended December 31, 2006.




If
      we
      fail to meet all applicable NASDAQ listing requirements and NASDAQ determines
      to
      delist our common stock, the delisting could adversely affect the market
      liquidity of our common stock, the market price of our common stock could
      decline, and it would be an event of default under the
      2007 Debentures.




If
      we
      fail to satisfy the minimum bid price requirement of $1.00 per share for 10
      consecutive trading days before October 22, 2007 or are unable to qualify for
      a
      180-day extension of this deadline, our common stock will likely be subject
      to
      delisting.  To obtain a 180-day extension of this deadline, it is
      necessary that we have $5 million of stockholders’ equity on October 22,
      2007.  If our common stock is delisted then: (i) our market liquidity
      could be adversely affected and the market price of our common stock could
      decline, (ii) our ability to obtain financing could also be adversely affected,
      (iii) it would be an event of default under the 2007 Debentures which, if not
      waived by the holders of a majority of the outstanding convertible debentures,
      would give the holders the right to require us to redeem the outstanding 2007
      Debentures at a price equal to 120% of the outstanding principal amount plus
      accrued and unpaid interest.




We
      are
      contemplating a number of options which could allow us to regain compliance
      with
      NASDAQ listing requirements.  In the event we are unable to regain
      compliance, we may consider restructuring our 2007 Debentures or taking other
      actions necessary to secure financing for operations.







**Item
      2.       Unregistered Sales of Equity Securities
      and Use of Proceeds.**




None.





**Item
      3.        Defaults Upon Senior
      Securities.**





None.




**Item
      4.        Submission of Matters to a Vote of
      Security Holders.**





Our
      2007
      Annual Meeting of Shareholders was held on May 3, 2007. The meeting was called
      for the following purposes: (1) to elect nine directors to serve on our Board
      of
      Directors, each for a one year term and until their respective successors are
      elected, (2) to ratify the Board of Directors’ appointment of Ernst & Young
      LLP as our independent public accountants for the 2006 fiscal year, (3) to
      approve our issuance of securities in accordance with the terms of our private
      placement of our 2007 Debentures. There were no shareholder proposals. The
      results of the voting was as follows:




**Proposal
      (1)**




VOTES
                FOR
            WITHHELDG.
                Chris Andersen
            44,481,116
            2,989,842Kenneth
                R. Baker
            44,532,510
            2,938,448L.J.
                Evans, Jr.
            44,543,810
            2,927,148Hideo
                Ito
            44,509,234
            2,961,724Alexander
                MacLachlan
            44,536,940
            2,934,018Peter
                A. McGuigan
            44,461,161
            3,009,797Zoltan
                Merszei
            44,525,810
            2,945,148H.
                David Ramm
            44,421,904
            3,049,054James
                L. Rawlings
            44,511,329
            2,959,629






22





**Proposal
      (2)**





**For**
            **Against**
            **Abstain**To
                ratify the appointment of Ernst & Young LLP as the Company’s
                independent auditors for the fiscal year ending December 31,
                2007
            47,070,011
            248,815
            152,132





**Proposal
      (3)**





**For**
            **Against**
            **Abstain**To
                approve the Company’s issuance of securities in accordance with the terms
                of the private placement of the 2007 Debentures*
            15,540,267
            1,925,590
            1,901,941





*
      28,103,160 votes were not counted as being present and entitled to vote for
      purposes of this proposal (other than to confirm that a quorum of stockholders
      were present ).








**Item
      5.       Other Information.**





None.





**Item
      6.       Exhibits**





10.1†
            —
            Form
                of amendment to letter agreement, entered into by the Company and
                the
                holders of a majority of the Series C2 Preferred Stock on May 30,
                2007.(incorporated by reference to Exhibit 10.1 to the Current Report
                on
                Form 8-K filed with the SEC on May 30, 2007).10.2*
            —
            Change-In-Control
                Agreement, dated as of June 22, 2007, by and between Millennium Cell
                Inc.
                and Dr. Richard Mohring31.1*
            —
            Certification
                of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 2002.31.2*
            —
            Certification
                of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 2002.32.1*
            —
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of Sarbanes-Oxley Act of 2002.





† Previously
      filed.


* Filed
      herewith.







23





**SIGNATURES**








Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.





MILLENNIUM
      CELL INC.


(Registrant)






By:
      /s/ H. David Ramm


H.
      David
      Ramm


Chief
      Executive Officer


August
      14, 2007





By:
      /s/ John D. Giolli


John
      D.
      Giolli


Chief
      Financial
      Officer


August
      14, 2007






24