**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 September 30, 2006**





**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
                filerþ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Securities Exchange Act of 1934).   
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: 49,440,209 shares of Common Stock,
      par
      value $.001, were outstanding on November 14, 2006.
















**MILLENNIUM
      CELL INC.**


**(a
      development stage enterprise)**


**Index**








**PART
      I - FINANCIAL INFORMATION**





**Page**Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance Sheets - September 30, 2006 and December 31, 2005
            1Consolidated
                Statements of Operations - Three and nine months endedSeptember
                30, 2006 and 2005 and cumulative amounts from inception
            2Consolidated
                Statements of Cash Flows -Nine months ended September 30, 2006 and
                2005
            3and
                cumulative amounts from inceptionConsolidated
                Statements of Stockholders’ Equity - Nine months ended September 30,
                2006
            4Notes
                to Consolidated Financial Statements - September 30, 2006
            5Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            12Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            19Item
                4.
            Controls
                and Procedures
            20**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            21Item
                1A.
            Risk
                Factors
            21Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            21Item
                3.
            Defaults
                Upon Senior Securities
            21Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            21Item
                5.
            Other
                Information
            21Item
                6.
            Exhibits
            21


















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





Unless
      the context otherwise requires, all references herein to our Series A
      Convertible Preferred Stock and Series C Convertible Preferred Stock are
      references to our Series A2 Convertible Preferred Stock and Series C2
      Convertible Preferred Stock, respectively, to reflect the exchange offer we
      completed on June 30, 2005 with respect to such securities. For more information
      regarding the exchange offers, please refer to our Current Report on Form 8-K
      filed with the Securities and Exchange Commission on May 17, 2005.





**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 and (xi) other factors discussed under the caption “Risk
      Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005.



















**PART
      I - FINANCIAL INFORMATION**





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





**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      BALANCE SHEETS**


**(Unaudited)**




**September
                30,**
            
            **December
                31,****Assets**
            
            **2006**
            
            **2005**Current
                assets:Cash
                and cash equivalents
            
            $
            6,052,536
            
            $
            11,675,877Restricted
                cash
            
            
            466,221
            
            
            373,868Accounts
                receivable - trade
            
            
            32,794
            
            
            36,808Accounts
                receivable - government
            
            
            141,422
            
            
            112,462Prepaid
                expenses
            
            
            232,171
            
            
            237,867Deferred
                financing costs
            
            
            94,239
            
            
            102,270Total
                current assets
            
            
            7,019,383
            
            
            12,539,152Property
                and equipment, net
            
            
            295,673
            
            
            450,138Patents
                and licenses, net
            
            
            648,555
            
            
            654,876Restricted
                cash
            
            
            866,238
            
            
            1,208,191Investment
                in unconsolidated subsidiary (Note 9)
            
            
            1,217,498
            
            
            —Deferred
                financing costs
            
            
            53,962
            
            
            136,360Security
                deposit
            
            
            45,676
            
            
            45,676Total
                assets
            
            $
            10,146,985
            
            $
            15,034,393**Liabilities
                and stockholders’ equity**Current
                liabilities:Accounts
                payable
            
            $
            267,995
            
            $
            521,615Accrued
                expenses
            
            
            726,254
            
            
            893,868Short-term
                portion of capital lease obligation
            
            
            —
            
            
            6,173Short-term
                portion of refundable grant obligation
            
            
            4,350
            
            
            49,611Deferred
                compensation
            
            
            105,132
            
            
            101,050Deferred
                revenue
            
            
            66,653
            
            
            —Convertible
                unsecured debentures (Note 6)
            
            
            899,988
            
            
            2,399,988Total
                current liabilities
            
            
            2,070,372
            
            
            3,972,305Redeemable
                Series C preferred stock, net of discount (Note 6)
            
            
            4,765,639
            
            
            5,035,416Refundable
                grant obligation
            
            
            151,979
            
            
            156,329Commitments
                and contingenciesStockholders
                equity:Series
                A preferred stock, $.001 par value; 1,694,724 authorized shares,
                293,874and
                155,724 issued and outstanding as of September 30, 2006 andDecember
                31, 2005, respectively
            
            
            4,527,417
            
            
            2,413,722Series
                B preferred stock, $.001 par value; 1,539,000 authorized shares,
                71,429and
                0 issued and outstanding as of September 30, 2006 and December 31,
                2005,respectively
            
            
            1,090,773
            
            
            —Common
                stock, $.001 par value; authorized 70,000,000 shares and
                48,752,703and
                46,454,375 shares issued and outstanding as of September 30, 2006
                andDecember
                31, 2005, respectively
            
            
            48,752
            
            
            46,454Additional
                paid-in capital
            
            
            102,909,100
            
            
            99,942,349Deferred
                compensation
            
            
            —
            
            
            (596,296
            )Deficit
                accumulated during development stage
            
            
            (105,417,047
            )
            
            (95,935,886
            )Total
                stockholders’ equity
            
            
            3,158,995
            
            
            5,870,343Total
                liabilities and stockholders’ equity
            
            $
            10,146,985
            
            $
            15,034,393






See
      notes
      to financial statements







1




**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**





**Three**
            
            **Three**
            
            **Nine**
            
            **Nine****Months**
            
            **Months**
            
            **Months**
            
            **Months**
            
            **Cumulative****Ended**
            
            **Ended**
            
            **Ended**
            
            **Ended**
            
            **Amounts****Sept
                30,**
            
            **Sept
                30,**
            
            **Sept
                30,**
            
            **Sept
                30,**
            
            **From****2006**
            
            **2005**
            
            **2006**
            
            **2005**
            
            **Inception**Revenue
            
            $
            4,900
            
            $
            140,148
            
            $
            87,004
            
            $
            268,475
            
            $
            1,888,631Cost
                of revenue
            
            
            4,900
            
            
            100,673
            
            
            87,004
            
            
            229,000
            
            
            1,767,304Gross
                margin
            
            
            —
            
            
            39,475
            
            
            —
            
            
            39,475
            
            
            121,327Product
                development and marketing
            
            
            732,395
            
            
            867,219
            
            
            2,467,468
            
            
            2,747,853
            
            
            26,040,572General
                and administrative
            
            
            645,567
            
            
            1,438,435
            
            
            2,696,296
            
            
            4,165,469
            
            
            28,308,761Restructuring
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            104,982Non-cash
                charges (Note 5)
            
            
            395,716
            
            
            102,308
            
            
            3,049,470
            
            
            3,132,590
            
            
            31,805,474Depreciation
                and amortization
            
            
            72,272
            
            
            75,433
            
            
            287,597
            
            
            216,583
            
            
            3,274,609Research
                and development
            
            
            15,345
            
            
            98,984
            
            
            237,694
            
            
            524,162
            
            
            9,433,950Total
                operating expenses
            
            
            1,861,295
            
            
            2,582,379
            
            
            8,738,525
            
            
            10,786,657
            
            
            98,968,348Loss
                from operations
            
            
            (1,861,295
            )
            
            (2,542,904
            )
            
            (8,738,525
            )
            
            (10,747,182
            )
            
            (98,847,021
            )Interest
                expense, net
            
            
            137,105
            
            
            816,853
            
            
            510,662
            
            
            1,514,582
            
            
            4,584,954Equity
                in losses of unconsolidatedsubsidiary
                (Note 9)
            
            
            94,567
            
            
            —
            
            
            231,974
            
            
            —
            
            
            1,088,052Loss
                before income taxes
            
            
            (2,092,967
            )
            
            (3,359,757
            )
            
            (9,481,161
            )
            
            (12,261,764
            )
            
            (104,520,027
            )Benefit
                from income taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,253,861Net
                Loss
            
            
            (2,092,967
            )
            
            (3,359,757
            )
            
            (9,481,161
            )
            
            (12,261,764
            )
            
            (103,266,166
            )Series
                B preferred stock dividends
            
            
            (18,904
            )
            
            —
            
            
            (25,479
            )
            
            —
            
            
            (25,479
            )Preferred
                stock amortization
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,150,881
            )Net
                loss applicable to common stockholder
            
            $
            (2,111,871
            )
            $
            (3,359,757
            )
            $
            (9,506,640
            )
            $
            (12,261,764
            )
            $
            (105,442,526
            )Loss
                per share - basic and diluted
            
            $
            (0.04
            )
            $
            (0.08
            )
            $
            (0.20
            )
            $
            (0.29
            )
            $
            (3.24
            )Weighted
                average number of shares outstanding
            
            
            48,504,794
            
            
            44,360,337
            
            
            47,946,603
            
            
            42,392,779
            
            
            32,494,396








See
      notes
      to financial statements








2










**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Nine
                Months**
            
            **Nine
                Months**
            
            **Cumulative****Ended**
            
            **Ended**
            
            **Amounts****September
                30,**
            
            **September
                30,**
            
            **From****2006**
            
            **2005**
            
            **Inception****Operating
                activities**Net
                loss
            
            $
            (9,481,161
            )
            $
            (12,261,764
            )
            $
            (103,266,166
            )Adjustments
                to reconcile net loss to net cash used in operation
                activitiesDepreciation
                and amortization
            
            
            287,597
            
            
            216,583
            
            
            3,274,609Amortization
                of discount on unsecured debentures
            
            
            162,224
            
            
            782,063
            
            
            2,741,053Amortization
                of deferred financing costs
            
            
            90,430
            
            
            388,021
            
            
            1,484,513Non-cash
                interest charges
            
            
            308,078
            
            
            232,106
            
            
            747,989Beneficial
                conversion feature
            
            
            105,000
            
            
            168,000
            
            
            2,127,582Losses
                on investment in unconsolidated subsidiary (Note 9)
            
            
            231,974
            
            
            —
            
            
            1,088,052Non-cash
                charges
            
            
            3,049,470
            
            
            3,132,590
            
            
            31,805,474Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (24,946
            )
            
            241,071
            
            
            (174,216
            )Prepaid
                expenses and other assets
            
            
            5,696
            
            
            (11,439
            )
            
            (277,846
            )Accounts
                payable and accrued expenses
            
            
            (349,140
            )
            
            500,239
            
            
            1,942,097Deferred
                income
            
            
            66,653
            
            
            —
            
            
            2,466,641Net
                cash used in operating activities
            
            
            (5,548,125
            )
            
            (6,612,530
            )
            
            (56,040,218
            )**Investing
                activities**Purchase
                of property and equipment
            
            
            —
            
            
            —
            
            
            (2,885,446
            )Patent
                registration costs
            
            
            (126,811
            )
            
            (131,097
            )
            
            (1,029,378
            )Investment
                in unconsolidated subsidiary (Note 9)
            
            
            (1,392,221
            )
            
            —
            
            
            (2,248,299
            )(Increase)/decrease
                in restricted cash
            
            
            249,600
            
            
            (1,019,096
            )
            
            (1,332,459
            )Net
                cash used in investing activities
            
            
            (1,269,432
            )
            
            (1,150,193
            )
            
            (7,495,582
            )**Financing
                activities**Proceeds
                from sale of common stock
            
            
            —
            
            
            1,172,755
            
            
            39,394,207Underwriting
                and other expenses of initial public offering
            
            
            —
            
            
            —
            
            
            (3,669,613
            )Proceeds
                from issuance of debentures
            
            
            —
            
            
            —
            
            
            21,428,806Proceeds
                from redeemable Series C preferred stock
            
            
            —
            
            
            10,000,000
            
            
            10,000,000Proceeds
                from Series B preferred stock
            
            
            1,250,000
            
            
            —
            
            
            1,250,000Deferred
                financing costs
            
            
            —
            
            
            (583,272
            )
            
            (1,281,656
            )Capital
                lease obligation payments
            
            
            (6,173
            )
            
            (21,626
            )
            
            (86,185
            )Proceeds
                from capital contribution
            
            
            —
            
            
            —
            
            
            500,000Payment
                of note payable
            
            
            —
            
            
            —
            
            
            (250,000
            )(Payments)/proceeds
                from grant, net
            
            
            (49,611
            )
            
            —
            
            
            156,329Proceeds
                from sale of preferred stock
            
            
            —
            
            
            —
            
            
            2,146,446Net
                cash provided by financing activities
            
            
            1,194,216
            
            
            10,567,857
            
            
            69,588,334Net
                increase (decrease) in cash and cash equivalents
            
            
            (5,623,341
            )
            
            2,805,132
            
            
            6,052,536Cash
                and cash equivalents, beginning of period
            
            
            11,675,877
            
            
            8,217,840
            
            
            —Cash
                and cash equivalents, end of period
            
            
            6,052,536
            
            
            11,022,972
            
            
            6,052,536








See
      notes
      to financial statements


Supplemental
      cash flow information


Please
      see note 8 for more information









3








**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**(Unaudited)**





**Additional**
            
            
            
            
            
            
            
            
            
            **Total****Common
                Stock**
            
            **Paid-in**
            
            **Deferred**
            
            **Series
                A**
            
            **Series
                B**
            
            **Accumulated**
            
            **Stockholders’****Shares**
            
            **Amount**
            
            **Capital**
            
            **Compensation**
            
            **Preferred**
            
            **Preferred**
            
            **Deficit**
            
            **Equity**Balance
                at December 31, 2005
            
            
            46,454,375
            
            $
            46,454
            
            $
            99,942,349
            
            $
            (596,296
            )
            $
            2,413,722
            
            $
            —
            
            $
            (95,935,886
            )
            $
            5,870,343Reclassification
                of unearned stock compensation in connection with adoption of SFAS
                123R
            
            
            —
            
            
            —
            
            
            (596,296
            )
            
            596,296
            
            
            —
            
            
            —
            
            
            —
            
            
            —Issuance
                of common stock from conversion of debentures and Series C preferred
                stock
            
            
            1,193,596
            
            
            1,194
            
            
            1,930,806
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,932,000Beneficial
                conversion feature on private placement transactions
            
            
            —
            
            
            —
            
            
            105,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            105,000Issuance
                of stock for BOD compensation
            
            
            105,455
            
            
            105
            
            
            150,695
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            150,800Issuance
                of stock for interest payments
            
            
            216,096
            
            
            216
            
            
            308,474
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            308,690Issuance
                of common stock for 401(k)
            
            
            154,314
            
            
            154
            
            
            252,546
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            252,700Issuance
                of restricted stock for merit awards
            
            
            465,400
            
            
            465
            
            
            (465
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Issuance
                of restricted stock for consulting
            
            
            200,000
            
            
            200
            
            
            (200
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Issuance
                of restricted stock for executive compensation expense
            
            
            50,000
            
            
            50
            
            
            (50
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Stock
                compensation expense
            
            
            —
            
            
            —
            
            
            717,799
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            717,799Deferred
                compensation plan
            
            
            (86,533
            )
            
            (86
            )
            
            (35,306
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (35,392
            )Issuance
                of Series A preferred stock, 138,150 shares issued
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,113,695
            
            
            —
            
            
            —
            
            
            2,113,695Issuance
                of Series B preferred stock, 71,429 shares issued
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,250,000
            
            
            —
            
            
            1,250,000Warrants
                issued in connection with Series B preferred stock
            
            
            —
            
            
            —
            
            
            159,227
            
            
            —
            
            
            —
            
            
            (159,227
            )
            
            —
            
            
            —Series
                B preferred dividends
            
            
            —
            
            
            —
            
            
            (25,479
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (25,479
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (9,481,161
            )
            
            (9,481,161
            )Balance
                at September 30, 2006
            
            
            48,752,703
            
            $
            48,752
            
            $
            102,909,100
            
            $
            —
            
            $
            4,527,417
            
            $
            1,090,773
            
            $
            (105,417,047
            )
            $
            3,158,995







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, MCE Ventures LLC. MCE Ventures is a Delaware
      limited liability company that was formed in 2002 to engage in limited strategic
      investment activities. All significant 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/A for the year ended December
      31, 2005.





**NOTE 2—NEW
      ACCOUNTING PROUNOUNCEMENTS**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes —
an interpretation of FASB Statement No. 109” (“FIN 48”). This
      interpretation increases the relevancy and comparability of financial reporting
      by clarifying the way companies account for uncertainty in income taxes.
      FIN 48 prescribes a consistent recognition threshold and measurement
      attribute, as well as clear criteria for subsequently recognizing, derecognizing
      and measuring such tax positions for financial statement purposes. The
      interpretation also requires expanded disclosure with respect to the uncertainty
      in income taxes. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. The Company is evaluating the potential impact of this
      interpretation on its consolidated financial statements.





In
      September 2006, the 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 is currently evaluating the impact of
      this statement on its consolidated financial statements.




**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—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.
      Options and warrants issued under this plan have a life of ten years and
      generally vest ratably over three years. The specific terms and conditions
      of
      awards granted under the plan are specified in a written agreement between
      the
      Company and the participant.






5




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123R , “Share-Based Payment” (“SFAS 123R”) using the modified
      prospective transition method and therefore has not restated results for prior
      periods. Under this transition method, stock-based compensation expense for
      the
      nine months ended September 30, 2006 included compensation expense for
      stock-based compensation awards granted prior to, but not yet vested as of
      December 31, 2005, based on the grant date fair value estimated in accordance
      with the original provision of SFAS No. 123, "Accounting for Stock-Based
      Compensation" ("SFAS 123"). Stock-based compensation expense for all stock-based
      compensation awards granted after December 31, 2005 is based on the grant date
      fair value estimated in accordance with the provisions of SFAS 123R. As of
      September 30, 2006, the Company recognized compensation expense based upon
      the
      number of stock options and restricted stock awards expected to vest, which
      was
      determined based on historical turnover experience of the Company. The Company
      reviews its forfeiture rate at each balance sheet date and revise its
      compensation expense, if necessary. The Company generally recognizes these
      compensation costs using the cliff vesting method over the requisite service
      period of the award, which is generally the vesting term of three years. Certain
      restricted stock awards are recognized using the graded vesting attribution
      method over the requisite service period of the restricted stock award.





Prior
      to
      the adoption of SFAS 123R, the Company recognized stock-based compensation
      expense in accordance with Accounting Principles Board ("APB") Opinion No.
      25,
      "Accounting for Stock Issued to Employees" ("APB 25"). In March 2005, the
      Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin
      No.
      107 ("SAB 107") regarding the SEC's interpretation of SFAS 123R and the
      valuation of share-based payments for public companies. The Company has applied
      the provisions of SAB 107 in its adoption of SFAS 123R.





The
      impact to the consolidated financial statements, as a result of the Company’s
      adoption of SFAS 123R compared to continued recognition of stock-based
      compensation under APB 25, was an increase to net loss of $57,845 and $186,651
      for the three and nine months ended September 30, 2006, respectively. The
      increase in the net loss resulted in a $0.01 increase on the net loss per share
      to both basic and diluted earnings per share for the nine months ended September
      30, 2006. There was no impact to both basic and diluted earnings per share
      for
      the three months ended September 30, 2006. The increase to net loss that
      resulted from the adoption of SFAS 123R reflected the stock-based compensation
      expense associated with the unvested stock option awards.





Stock-based
      compensation expense previously recognized in accordance with APB 25 for
      restricted stock awards, remains essentially unchanged under the provisions
      of
      SFAS 123R. Restricted stock awards are issued at the fair value of the stock
      on
      the grant date. Prior to the adoption of FAS 123(R), unearned compensation
      for
      grants of restricted stock equivalent to the fair value of the shares at the
      date of grant was recorded as a separate component of shareholders' equity
      and
      subsequently amortized to compensation expense over the awards' vesting period.
      In accordance with FAS 123(R), shareholders' equity is credited commensurate
      with the recognition of compensation expense. All unamortized unearned
      compensation at January 1, 2006 was reclassified to additional paid-in capital.





The
      following table illustrates the effect on net loss and earnings per share for
      the three and nine months ended September 30, 2005 as if the Company had applied
      the fair value recognition provisions of SFAS 123, as amended by SFAS No. 148,
      "Accounting for Stock-Based Compensation -- Transition and Disclosure.":






6







**Three
                Months**
            
            **Nine
                Months****Ended**
            
            **Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2005**Net
                loss attributable to common stockholders — as reported
            
            $
            (3,359,757
            )
            $
            (12,261,764
            )Add:
                Total stock-based compensation expense included in net
                loss
            
            
            102,308
            
            
            718,868Deduct:
                Total stock-based compensation expense determined under fair value
                based
                method for all stock option awards
            
            
            (115,204
            )
            
            (645,785
            )Net
                loss attributable to common stockholders — Pro forma
            
            $
            (3,372,653
            )
            $
            (12,188,681
            )Net
                loss per share attributable to common stockholders — As
                reported
            
            $
            (0.08
            )
            $
            (0.29
            )Net
                loss per share attributable to common stockholders — Pro
                forma
            
            $
            (0.08
            )
            $
            (0.29
            )





The
      fair
      value of each option grant was estimated on the date of grant using the
      Black-Scholes option-pricing model with the following weighted average
      assumptions during the three and nine months ended September 30,
      2005:




Expected
                dividend yield
            —Expected
                stock price volatility
            .80Risk-free
                interest rate
            4.89%Expected
                option term
            5
                years





Based
      upon the above assumptions, the weighted average fair value of stock options
      granted was $1.22 for the nine months ended September 30, 2005.





*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 granted 75,000 stock
      options to a director during the nine months ended September 30, 2006 and the
      fair value of the award was recorded as stock compensation expense on the grant
      date. The Company did not issue options to employees during the nine months
      ended September 30, 2006.





Option
      activity for all outstanding options, vested and nonvested, from January 1,
      2006 through September 30, 2006 was as follows:





**Shares**
            
            **Weighted-
                Average Exercise****Price**
            
            **Weighted-
                Average Remaining Contractual Life(In****years)**
            
            **Aggregate
                Intrinsic****Value**Outstanding
                at December 31, 2005
            
            
            3,994,769
            
            $
            3.75
            
            
            —
            
            
            —Granted
            
            
            75,000
            
            
            1.47
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
                and cancelled
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at September 30, 2006
            
            
            4,069,769
            
            $
            3.70
            
            
            5.7
            
            $
            —Vested
                and expected to vest at September 30, 2006
            
            
            3,866,281
            
            $
            3.70
            
            
            5.7
            
            $
            —Exercisable
                at September 30, 2006
            
            
            3,716,970
            
            $
            3.70
            
            
            5.6
            
            $
            —





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 third quarter of 2006 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 September 30, 2006. The intrinsic
      value changes based on the fair market value of the Company’s common stock.





As
      of
      September 30, 2006, 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 2.1 years.






7





*Restricted
      Stock Awards*





Restricted
      stock awards will
      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.





During
      the nine months ended September 30, 2006 and 2005, the Company issued 465,400
      and 474,800 shares of restricted stock to employees with a fair market value
      of
      $763,256 and $1,044,560, respectively. These shares will vest in five years,
      or
      earlier, upon meeting certain accelerated vesting criteria, as defined. During
      the nine months ended September 30, 2006 and 2005, the Company recorded $208,499
      and $94,010, respectively in non-cash charges for restricted stock issued to
      employees. The Company will recognize additional non-cash charges of $70,000
      in
      the remainder of 2006 and an additional $917,145 will be recorded through 2010,
      or earlier if other accelerated vesting features are met.





On
      May 8,
      2006 the Company issued 50,000 restricted shares to H. David Ramm, Chief
      Executive Officer. These shares had a fair value of $89,500 and vest ratably
      through December 31, 2006. As a result, the Company recorded non-cash charges
      during the nine months ended September 30, 2006 of $67,125 for the vested
      shares.





During
      the nine months ended September 30, 2006, the Company issued 200,000 shares
      of
      restricted stock awards to Ronald Kelley and Steven Pratt, the principal
      shareholders of Gecko Energy Technologies, Inc. (See Note 9). The issuance
      was
      made pursuant to two consulting agreements between the Company and those
      individuals. The initial 50,000 shares of the restricted stock had a fair value
      of $72,500 on the date of grant and are fully vested as of September 30, 2006.
      150,000 shares of the restricted stock had a fair value of $232,500 on the
      date
      of grant and vest on a graded basis over three years. The Company recorded
      non-cash charges of $165,529 associated with these shares during the nine months
      ended September 30, 2006. As prescribed by EITF No. 96-18 “Accounting for Equity
      Instruments That Are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services,” restricted stock awards issued to
      non-employees should be re-measured to fair value at each reporting date until
      the award vests. The final measurement date is on the date the award vests,
      rather than the grant-date measurement specified for most employee awards
      classified as equity. As a result, the Company recorded for both grants non-cash
      charges for the vested portion of the restricted stock awards to date and marked
      to market the unvested portion the remaining unvested restricted stock awards.





Changes
      in nonvested restricted stock awards during the nine months ended September
      30,
      2006 were as follows:





**Number
                of****Shares**
            
            **Weighted-
                Average Grant Date Fair****Value**Nonvested
                at December 31, 2005
            
            
            282,480
            
            $
            2.25Granted
            
            
            715,400
            
            
            1.63Vested
            
            
            (148,704
            )
            
            1.58Forfeited
            
            
            —
            
            
            —Nonvested
                at September 30, 2006
            
            
            849,176
            
            $
            1.88





As
      of
      September 30, 2006, there was $1.2 million of unrecognized stock-based
      compensation expense related to nonvested restricted stock awards. This expense
      is expected to be recognized as the shares vest.







8







**NOTE
      5—NON-CASH CHARGES**





During
      the three months ended September 30, 2006 and 2005, the Company recorded
      non-cash charges for stock-based awards. During the nine months ended September
      30, 2006 and 2005, the Company recorded non-cash charges for stock-based awards
      and Series A Preferred Stock. Please see Note 4 for more information on these
      awards and Note 7 for more information on the Series A Preferred
      Stock.





The
      following is a breakdown by function of non-cash charges for the three and
      nine
      months ended September 30:





**Three
                months ended Sept., 30**
            
            **Nine
                months ended Sept., 30****2006**
            
            **2005**
            
            **2006**
            
            **2005**Product
                development and marketing
            
            $
            15,780
            
            $
            20,031
            
            $
            1,754,072
            
            $
            2,568,680General
                and administrative
            
            
            374,301
            
            
            77,431
            
            
            1,278,493
            
            
            515,571Research
                and development
            
            
            5,635
            
            
            4,846
            
            
            16,905
            
            
            48,339Total
            
            $
            395,716
            
            $
            102,308
            
            $
            3,049,470
            
            $
            3,132,590







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




*Convertible
      Debentures*





On
      November 8, 2002, the Company issued a $2.4 million secured convertible
      debenture with a maturity date of November 8, 2005 to Ballard Power Systems
      Inc.
      (“Ballard”). On September 30, 2005, Ballard sold its debenture in equal amounts
      to three accredited institutional investors (the “Investors”) in a private
      transaction. In connection with such transfer, the Company issued an $800,000
      secured convertible debenture, in substance identical to the Ballard debenture,
      to each of, the Investors. On November 8, 2005, the Company issued an amended
      and restated convertible debenture (each, a “New Debenture”) to each of the
      Investors as consideration for the Investors’ agreement to surrender their
      original debentures and cancel the standby letters of credit issued by the
      Wachovia Bank, National Association, that secured the original debentures,
      thus
      enabling the Company to
      use
      the formerly restricted cash for the Company’s operations. The principal changes
      to the term of the debentures consisted of the reduction of the holders initial
      conversion price from $4.25 to $2.25 per share, an extension of the maturity
      date to September 30, 2007, and the provision for 6% quarterly interest payments
      to the holders. No gain or loss was required to be recognized by the Company
      upon the exchange. 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 is required to record a Beneficial Conversion
      Feature (“BCF”) interest charge if the Company elects to convert debentures
      early at a discount. As of September 30, 2006, the Company converted $1,500,000
      of the New Debentures in exchange for 929,927 shares of the Company’s common
      stock and recorded a BCF of $105,000 associated with such conversions. On
      October 24, 2006, the Company converted $450,000 of the New Debentures in
      exchange for 422,535 shares of common stock.





*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 our redeemable Series C Preferred Stock (“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 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. During the nine months ended
      September 30, 2006 and 2005, the Company recorded $162,224 and $519,398,
      respectively for the amortization of the discount.





9




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. During the nine months ended September 30, 2006,
      the
      Company issued 216,096 shares valued at $308,690 in satisfaction of the
      quarterly dividend payments for the Series C. These dividends were recorded
      as
      interest expense since the Series C was recorded as a liability as of September
      30, 2006. According to the Series C purchase agreement, as dividends are issued
      or paid, and conversions are executed, the restricted cash is released ratably
      to our non-restricted cash accounts. During the nine months ended September
      30,
      2006, the Company converted $432,000 of the Series C in exchange for 263,669
      shares of the Company’s common stock. As of September 30, 2006, approximately
      $5.0 million of the Series C have been converted into 2,587,412 shares of the
      Company’s common stock and the Company had released $1,065,996 from restricted
      cash for the conversions and dividends paid.





**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 Preferred Stock to Dow,
      each share of which is initially 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 for 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. The joint development arrangement contemplates a series
      of
      four milestones designed to culminate in a commercially available product in
      military or consumer electronics applications. The milestones are focused on
      military and/or consumer electronics applications.





Upon
      the
      successful completion of each of the four milestones, Dow has a right, but
      not
      an obligation, to purchase a number of shares of the Company’s Series B
      Preferred Stock 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 purchases shares of the Company’s Series B
      Preferred Stock, Dow will 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 Preferred Stock. If Dow elects
      to
      purchase shares of the Company’s Series B Preferred Stock, the Company will also
      issue to Dow additional shares of Series A Preferred Stock at market value
      such
      that Dow will own a certain percentage of the Company’s capital stock as of the
      date of issuance as provided in the Dow Stock Purchase Agreement. If Dow elects
      not to purchase shares of the Company’s Series B Preferred Stock upon completion
      of any milestone, the Company will also issue to Dow a lesser number of
      additional shares of Series A Preferred Stock at market value.





On
      May 3,
      2006, the Company and Dow agreed that the first milestone under the joint
      development agreement 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 Preferred Stock for $159,227 based
      on
      the fair value of the warrants at the date of the issuance. Series
      B
      Preferred Stock is initially convertible into ten shares of the Company’s common
      stock. The shares of Series B Preferred Stock bear a 6% cumulative dividend
      payable in shares of common stock or cash, at the Company’s option and are
      junior to Series A Preferred Stock. In
      accordance with the joint development arrangement and achievement of the first
      milestone, the Company also issued 138,150 shares of Series A Preferred Stock
      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 Preferred Stock, 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.






10





**NOTE
      8—SUPPLEMENTAL CASH FLOW INFORMATION**





The
      Company issued 154,314 and 110,952 shares of common stock valued at $252,700
      and
      $164,030 to employees as 401(k) Plan employer matching contributions during
      the
      first nine months of 2006 and 2005, respectively. The Company also issued
      105,455 and 98,659 shares of common stock to the Board of Directors members
      in
      lieu of cash compensation of $150,800 and $158,188 during the nine months ended
      September 30, 2006 and 2005, respectively.





The
      Company issued 465,400 and 474,800 shares of restricted stock valued at $763,256
      and $1,044,560 to employees as restricted stock during the nine months ended
      September 30, 2006 and 2005, respectively. The Company also converted Series
      C
      and New Debentures during the nine months ended September 30, 2006. See note
      6
      for further details on these conversions.





During
      the nine months ended September 30, 2006, the Company issued 216,096 shares
      of
      common stock valued at $308,690 as dividend payments on the Series C Preferred
      Stock.




During
      the nine months ended September 30, 2006, the Company issued 200,000 shares
      of
      restricted stock for two consulting agreements. See Note 9 for more information
      on this issuance of restricted stock.





**NOTE
      9—INVESTMENT IN GECKO ENERGY TECHNOLOGIES, INC.**





On
      February 15, 2006, the Company entered into a 3-year joint development program
      with Gecko Energy Technologies, Inc. (“Gecko”) to collaborate on the development
      and commercialization of portable fuel cell systems for use in military,
      medical, industrial and consumer electronics applications. These products will
      pair the company’s patented Hydrogen on Demand® technology with Gecko’s thin
      planar Proton Exchange Membrane (PEM) fuel cells to create a hydrogen battery
      that is lighter, smaller and less expensive than traditional batteries for
      a
      variety of applications. Gecko’s efforts are focused on the development of an
      easy-to-manufacture fuel cell that provides portable device makers with design
      flexibility by allowing the thin power source to be part of the exterior surface
      of the device itself.





In
      addition to the joint development program, the Company acquired approximately
      23% of the outstanding common stock of Gecko in exchange for $0.5 million in
      cash and a one-year commitment of services and facilities valued at $0.5 million
      based on direct expenses to be incurred by the Company throughout 2006. In
      July
      2006, the Company increased its equity position to a total of 34.8% of Gecko’s
      outstanding common stock by investing another $0.5 million in cash. The Company
      is obligated to further increase its equity position to a total of 48% of
      Gecko’s outstanding stock by investing another $0.55 million in cash or the
      Company’s common stock no later than December 31, 2006. As part of the
      transaction, the Company received the right to purchase an additional $4 million
      of Gecko’s common stock payable in cash and services, at its sole option, for up
      to 80% of Gecko over the remaining 2 years of the agreement  (excluding
      shares issuable under Gecko’s benefit plans).  The Company must elect to
      purchase this additional common stock during the fourth quarter of 2006. 
Any purchased stock will be valued at fair value on the date of the acquisition.





The
      Company’s investment in Gecko is accounted for using the equity method of
      accounting as the investment gives the Company the ability to exercise
      significant influence, but not control, over Gecko. Significant influence is
      deemed to exist as of September 30, 2006 since the Company had an approximately
      35% ownership interest in the voting stock of Gecko as of such date. As of
      September 30, 2006, the Company’s investment in Gecko represented approximately
      12% of the Company’s total assets.





As
      of
      September 30, 2006, the investment in Gecko was approximately $1.2 million.
      Of
      the $1.2 million investment in Gecko, approximately $0.7 million is equity
      method goodwill. This equity method goodwill is not amortized. Equity method
      goodwill arises when the Company's investment in Gecko exceeds its applicable
      share of the fair market value of Gecko's net assets at the investment date.
      In
      accordance with SFAS 142, “Goodwill and Other Intangible Assets,” equity method
      goodwill is not amortized or tested for impairment in accordance with this
      standard. The Company reviews the equity method goodwill in accordance with
      APB
      18, “The Equity Method of Accounting for Investments in Common Stock”, under
      which the Company would recognize an impairment loss when there is a loss in
      the
      value of the equity method investment which is deemed to be other than a
      temporary decline. No impairments were recognized during the three and nine
      months ended September 30, 2006. The
      following is a summary of aggregate financial information for the Company’s
      investment in Gecko for the nine months ended, September 30, 2006:





Condensed
                consolidated statement of operations dataNet
                loss
            $
            859,398Company’s
                share of net loss
            
            231,974Condensed
                consolidated balance sheet data at period endAssets
            $
            907,018Liabilities
            
            7,221Equity
            
            899,787Company’s
                investment in equity investee
            $
            1,217,498










11







**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 herein 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/A for the fiscal
      year ended December 31, 2005 .





**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.





**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 September 30, 2006 versus Three Months Ended September 30,
      2005*






*Revenues.* Revenues
      for the three months ended September 30, 2006 were $4,900 compared to $140,148
      for the same period of 2005, a decrease of $135,248. 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 September 30, 2006 were $4,900 compared
      to
      $100,673 for the same period of 2005, a decrease of $95,773. 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 three months ended September 30,
      2006
      were $763,085 compared to $867,219 for the same period of 2005, a decrease
      of
      $104,134. The expenses decreased due to increased cost reimbursements under
      government funded programs as compared to the same period last
      year.






12





*General
      and Administrative Expense* .
      General
      and administrative expenses for the three months ended September 30, 2006 were
      $645,567 compared to $1,438,435 for the same period of 2005, a decrease of
      $792,868. The decrease was mainly the result of the non-recurrence of
      professional fees associated with strategic and financial transactions closed
      in
      2005.





*Non-cash
      Charges* .
      Non-cash charges were $395,716 for the three months ended September 30, 2006
      compared to $102,308 for the same period of 2005, an increase of
      $293,408.  During
      the three months ended September 30, 2006, we recorded non-cash charges of
      $369,888 for the amortization of restricted stock awards granted to the founders
      of Gecko under two consulting agreements, the amortization of restricted stock
      issued to employees, the issuance of Board of Directors compensation and the
      issuance of 401(K) match to employees, compared to $102,308 for the amortization
      of restricted stock awards recorded during the three months ended September
      30,
      2005.





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





**2006**
            
            **2005**Product
                development and marketing
            $
            15,779
            
            $
            20,032General
                and administrative
            
            374,302
            
            
            77,430Research
                and development
            
            5,635
            
            
            4,846Total
            $
            395,716
            
            $
            102,308





*Depreciation
      and Amortization* .
      Depreciation and amortization was $72,272 for the three months ended September
      30, 2006 compared to $75,433 for the same period of 2005, a decrease of $3,161.
      The decrease reflects the impact of assets that have been fully
      depreciated.





*Research
      and Development Expense* .
      Research and development expenses were $15,345 for the three months ended
      September 30, 2006 compared to $98,984 for the same period of 2005, a decrease
      of $83,639. We
      are
      reimbursed for expenses under the Department of Energy (“DOE”) program for the
      joint research of electrochemical pathways to manufacture sodium borohydride,
      which are recorded as a reduction to research and development expense.
      Reimbursements under the DOE program totaled $450,224 and $230,072 for 2006
      and
      2005, respectively, and were primarily responsible for the decrease year over
      year.





*Interest
      Expense, net* .
      Net
      interest expense was $137,105 for the three months ended September 30, 2006
      compared to $816,853 for the same period of 2005, a decrease of $679,748. The
      decrease was mainly attributable to fewer conversions of convertible securities
      which result in beneficial conversion feature charges, accelerated discount
      amortization, amortization of original issue discounts and issue costs on our
      debentures.




*Nine
      Months Ended September 30, 2006 versus Nine Months Ended September 30,
      2005*




*Revenues.* Revenues
      for the nine months ended September 30, 2006 were $87,004 compared to $268,475
      for the same period of 2005, a decrease of $181,471. 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 nine months ended September 30, 2006 were $87,004 compared
      to
      $229,000 for the same period of 2005, a decrease of $141,996. 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 nine months ended September 30,
      2006
      were $2,498,158 compared to $2,747,853 for the same period of 2005, a decrease
      of $249,695. The expenses decreased due to an increased number government funded
      programs and subsequent cost reimbursements compared to the same period last
      year.






13





*General
      and Administrative Expense* .
      General
      and administrative expenses for the nine months ended September 30, 2006 were
      $2,756,466 compared to $4,165,469 for the same period of 2005, a decrease of
      $1,409,003. The decrease was mainly the result of the non-recurrence of
      professional fees associated with strategic and financial transactions closed
      in
      2005.





*Non-cash
      Charges* .
      Non-cash charges were $3,049,470 for the nine months ended September 30, 2006
      compared to $3,132,590 for the same period of 2005, a decrease of
      $83,120.  During
      the nine months ended September 30, 2006, and 2005, we recorded non-cash charges
      of $2,113,695 and $2,413,722, respectively for the issuance of Series A
      Preferred Stock to the Dow Chemical Company.  During
      the nine months ended September 30, 2006, we recorded non-cash charges of
      $967,793 for the amortization of restricted stock awards granted to the founders
      of Gecko under two consulting agreements, the amortization of restricted stock
      issued to employees, the vesting of stock options and the issuance of stock
      options to a director, compared to $718,868 for the amortization of restricted
      stock awards recorded during the nine months ended September 30, 2005.





The
      following is a breakdown by function of non-cash charges for the nine months
      ended September 30:





**2006**
            
            **2005**Product
                development and marketing
            $
            1,754,072
            
            $
            2,568,680General
                and administrative
            
            1,278,493
            
            
            515,571Research
                and development
            
            16,905
            
            
            48,339Total
            $
            3,049,470
            
            $
            3,132,590





*Depreciation
      and Amortization* .
      Depreciation and amortization was $287,597 for the nine months ended September
      30, 2006 compared to $216,583 for the same period of 2005, an increase of
      $71,014. The increase is mainly attributable to the accelerated amortization
      of
      non-core intellectual property we chose to abandon.





*Research
      and Development Expense* .
      Research and development expenses were $237,694 for the nine months ended
      September 30, 2006 compared to $524,162 for the same period of 2005, a decrease
      of $286,468. We
      are
      reimbursed for expenses under the Department of Energy (“DOE”) program for the
      joint research of electrochemical pathways to manufacture sodium borohydride,
      which are recorded as a reduction to research and development expense.
      Reimbursements under the DOE program totaled $1,027,393 and $593,880 for 2006
      and 2005, respectively, and were primarily responsible for the decrease year
      over year.





*Interest
      Expense, net* .
      Net
      interest expense was $510,662 for the nine months ended September 30, 2006
      compared to $1,514,582 for the same period of 2005, a decrease of $1,003,920.
      The decrease was mainly attributable to fewer conversions of convertible
      securities which result in beneficial conversion feature charges, accelerated
      discount amortization, amortization of original issue discounts and issue costs
      on our debentures.





**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 $29.9
      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.








14








*Convertible
      Debentures*





On
      November 8, 2002, we issued a $2.4 million secured convertible debenture with
      a
      maturity date of November 8, 2005 to Ballard Power Systems Inc. (“Ballard”). On
      September 30, 2005, Ballard sold its debenture in equal amounts to three
      accredited institutional investors (the “Investors”) in a private
      transaction. .
      In
      connection with such transfer, we issued an $800,000 secured convertible
      debenture, in substance identical to the Ballard debenture, to each of the
      Investors. On November 8, 2005, we issued an amended and restated convertible
      debenture (each, a “New Debenture”) to each of the Investors as consideration
      for the Investors’ agreement to surrender their original debentures and cancel
      the standby letters of credit issued by Wachovia Bank, National Association,
      that secured the original debentures, thus enabling us to use the formerly
      restricted cash for our operations. The principal changes to the term of the
      debentures consisted of the reduction of the holders initial conversion price
      from $4.25 to $2.25 per share, an extension of the maturity date to September
      30, 2007, and the provision for 6% quarterly interest payments to the holders.
      No gain or loss was required to be recognized by us upon the exchange. 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 are required to record a Beneficial Conversion Feature (“BCF”)
      interest charge if we elect to convert debentures early at a discount. During
      the nine months ended September 30, 2006, we have converted $1,500,000 of the
      New Debentures in exchange for 929,927 of our common stock and recorded a BCF
      of
      $105,000 associated with the conversions. On October 24, 2006, we converted
      $450,000 of the New Debentures in exchange for 422,535 shares of common
      stock.





*Redeemable
      Series C Preferred Stock*




On
      April
      25, 2005, the we consummated a private placement financing transaction with
      seven institutional and accredited investors who paid $10 million for 10,000
      shares of our redeemable Series C Preferred Stock (“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 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. During the nine months ended September 30, 2006 and
      2005,
      we recorded $162,224 and $519,398, respectively for the amortization of the
      discount.





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. During the nine months ended September 30, 2006,
      we
      issued 216,096 shares valued at $308,690 in satisfaction of the quarterly
      dividend payments for the Series C. These dividends were recorded as interest
      expense since the Series C was recorded as a liability as of September 30,
      2006.
      According to the Series C purchase agreement, as dividends are issued or paid,
      and conversions are executed, the restricted cash is released ratably to our
      non-restricted cash accounts. During the nine months ended September 30, 2006,
      we converted $432,000 of the Series C in exchange for 263,669 shares of our
      common stock. As of September 30, 2006, approximately $5.0 million of the Series
      C have been converted into 2,587,412 shares of our common stock and we have
      released $1,065,996 from restricted cash for the conversions and dividends
      paid.





*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 Preferred Stock to Dow each share of which is
      initially 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.






15





The
      purpose of the joint development arrangement is for 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. The joint development arrangement contemplates a series
      of
      four milestones designed to culminate in a commercially available product in
      military or consumer electronics applications. The milestones are focused on
      military and/or consumer electronics applications.





Upon
      the
      successful completion of each of the four milestones, Dow has a right, but
      not
      an obligation, to purchase a number of shares of our Series B Preferred Stock
      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 purchases shares of our Series B Preferred Stock, Dow will
      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 elects to purchase shares of our Series
      B
      Preferred Stock in such instances, we will issue to Dow additional shares of
      Series A Preferred Stock at market value such that Dow will own a certain
      percentage of our capital stock as of the date of issuance as provided in the
      Dow Stock Purchase Agreement. If Dow elects not to purchase shares of our Series
      B Preferred Stock upon completion of any milestone, we will issue to Dow a
      lesser number of additional shares of Series A Preferred Stock at market value.





On
      May 3,
      2006, we both agreed that the first milestone under the joint development
      agreement 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 our common stock
      with an exercise price of $2.10 per share which were recorded as a discount
      to
      Series B Preferred Stock for $159,227 based on the fair value of the warrants
      at
      the date of the issuance. Series
      B
      Preferred Stock is initially convertible into ten shares of our common stock.
      The shares of Series B Preferred Stock bear a 6% cumulative dividend payable
      in
      shares of common stock or cash, at our option and are junior to Series A
      Preferred Stock. In
      accordance with the joint development arrangement and achievement of the first
      milestone, we issued 138,150 shares of Series A Preferred Stock 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
      Preferred Stock, 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.





*Investment
      in Gecko Energy Technologies, Inc.*





On
      February 15, 2006, we entered into a 3-year joint development program with
      Gecko
      Energy Technologies, Inc. (“Gecko”) to collaborate on the development and
      commercialization of portable fuel cell systems for use in military, medical,
      industrial and consumer electronics applications. These products will pair
      the
      company’s patented Hydrogen on Demand® technology with Gecko’s thin planar
      Proton Exchange Membrane (PEM) fuel cells to create a hydrogen battery that
      is
      lighter, smaller and less expensive than traditional batteries for a variety
      of
      applications. Gecko’s efforts are focused on the development of an
      easy-to-manufacture fuel cell that provides portable device makers with design
      flexibility by allowing the thin power source to be part of the exterior surface
      of the device itself.





In
      addition to the joint development program, we acquired approximately 23% of
      the
      outstanding common stock of Gecko in exchange for $0.5 million in cash and
      a
      one-year commitment of services and facilities valued at $0.5 million. In July
      2006, we increased our equity position to a total of 34.8% of Gecko’s
      outstanding common stock by investing another $0.5 million in cash. We are
      obligated to further increase its equity position to a total of 48% of Gecko’s
      outstanding stock by investing another $0.55 million in cash or shares of our
      common stock no later than December 31, 2006. As part of the transaction, we
      received the right to purchase an additional $4 million of Gecko’s common stock
      payable in cash and services, at its sole option, for up to 80% of Gecko over
      the remaining 2 years of the agreement (excluding shares issuable under Gecko’s
      benefit plans).  We must elect elect to purchase this additional common
      stock during the fourth quarter of 2006.  Any purchased stock will be
      valued at fair value on the date of the acquisition.




We
      issued
      200,000 shares of restricted stock awards to Ronald Kelley and Steven Pratt,
      the
      principal shareholders of Gecko, during the nine months ended September 30,
      2006. The issuance is in exchange for two consulting agreements with us. 50,000
      shares of these restricted stock awards had a $72,500 fair value at the date
      of
      grant and is fully vested as of September 30, 2006. 150,000 shares of these
      restricted stock award had a $232,500 fair value at the date of grant and vests
      on a graded basis over three years and we recorded a non-cash charge of $165,529
      with respect to the vesting of this award during the nine months ended September
      30, 2006. As prescribed by EITF No. 96-18 “Accounting for Equity Instruments
      That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
      Selling, Goods or Services,” restricted stock awards issued to non-employees
      should be re-measured to fair value at each reporting date until the award
      vests. The final measurement date is on the date the award vests, rather than
      the grant-date measurement specified for most employee awards classified as
      equity. As a result, we recorded for both grants non-cash charges for the vested
      portion of the restricted stock awards to date and marked to market the unvested
      portion the remaining unvested restricted stock awards.







16





*Sources
      and Uses of Cash*





As
      of
      September 30, 2006, we had $6,052,536 in cash and cash equivalents and
      restricted cash of $1,332,459. Cash used in operations totaled $5,548,125 and
      $6,612 ,530 during
      the nine months ended September 30, 2006 and 2005, respectively, and related
      to
      primarily funding our net operating losses.





Excluding
      changes in restricted cash, investing activities used cash of $1,519,032
      and $131,097 during
      the nine months ended September 30, 2006 and 2005, respectively. The increase
      in
      2006 from 2005 was directly related to our investment in Gecko. Restricted
      cash is comprised of $0.7 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 $0.7 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 September 30, 2006.





*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
      September 30, 2006, we have repaid approximately $71,193.




Our
      contractual obligations are in the table outlined below:




**Payment
                due in fiscal years****2006****Contractual
                Obligations**
            
            **(three
                months****Total**
            
            **remaining)**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**Operating
                lease - facility
            
            $
            1,049,338
            
            $
            121,078
            
            $
            484,310
            
            $
            443,950
            
            $
            —
            
            $
            —Refundable
                grant obligation
            
            
            156,329
            
            
            —
            
            
            4,350
            
            
            —
            
            
            —
            
            
            151,979Gecko
                Energy Technologies, Inc. (1)
            
            
            550,000
            
            
            550,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —Convertible
                unsecured debentures (2)
            
            
            899,988
            
            
            —
            
            
            899,988
            
            
            —
            
            
            —
            
            
            —Redeemable
                Series C Preferred Stock (2)
            
            
            4,765,639
            
            
            —
            
            
            —
            
            
            4,765,639Total
            
            $
            7,421,294
            
            $
            671,078
            
            $
            1,388,648
            
            $
            5,209,589
            
            $
            —
            
            $
            151,979





*(1)*  *The
      Gecko Energy Technologies, Inc obligation can be satisfied with cash or with
      shares of our common stock.*


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





We
      believe that, based upon our current cash and cash equivalents and our
      projection for the source and uses of our cash during the fourth quarter, we
      will have a sufficient cash and cash equivalents to satisfy anticipated cash
      needs for the first nine months of 2007.  We expect to complete an
      additional financing no later than the first quarter of 2007.  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.







17




**Critical
      Accounting Policies**






*Application
      of Critical Accounting Policies*




The
      discussion and analysis of our financial condition and results of operations
      is
      based on our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect our reported assets and liabilities, revenues and
      expenses, and other financial information. Actual results may differ
      significantly from these estimates under different assumptions and conditions.
      In addition, our reported financial condition and results of operations could
      vary due to a change in the application of a particular accounting standard.





We
      regard
      an accounting estimate underlying our financial statements as a "critical
      accounting estimate" if the accounting estimate requires us to make assumptions
      about matters that are highly uncertain at the time of estimation and if
      different estimates that reasonably could have been used in the current period,
      or changes in the estimate that are reasonably likely to occur from period
      to
      period, would have had a material effect on the presentation of financial
      condition, changes in financial condition, or results of operations.





Our
      significant accounting policies are more fully described in Note 2 to our
      December 31, 2005 consolidated financial statements on Form 10K/A. Not all
      of
      these significant accounting policies, however, require management to make
      difficult, complex or subjective judgments or estimates. Our management has
      discussed our accounting policies with the audit committee of our board of
      directors, and we believe that our estimates relating to revenue recognition,
      convertible debt and stock options described below fit the definition of
      "critical accounting estimates."




*Revenue
      Recognition*




Our
      near-term revenues will be derived substantially from contracts that require
      the
      Company to deliver hydrogen generation technology, management services, system
      design and prototype systems and licensing of technology for test and
      evaluation. Revenues are recognized in the period in which the technology is
      delivered or licensed revenue is earned.




*Convertible
      Debt and Series C Preferred Stock*




We
      account for the issuance and conversion of convertible debt in accordance with
      APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
      Warrants". As a result, we have and will record original issue discounts to
      the
      extent the fair value of the debt is below the face value of the instrument
      and
      amortize the discount over the life of the instrument. To the extent conversions
      of debt into common stock are made prior to the maturity date of the instrument,
      we will record as interest expense a ratable proportion of the discount
      associated with the face value of the debt converted.





We
      account for issuances of convertible debt in accordance with Emerging Issues
      Task Force ("EITF") No. 00-27, "Application of Issue No. 98-5 to Certain
      Convertible Instruments" ("EITF No. 00-27"), and EITF No. 98-5, "Accounting
      for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios" ("EITF No. 98-5"). As a result of certain
      conversion price discounts included within our outstanding debt instruments,
      we
      will record interest expense resulting from BCFs as described under the caption
      "Liquidity and Capital Resources" above.






18




*Stock-Based
      Compensation*




In
      2006,
      we adopted SFAS No. 123(R), which requires the measurement at fair value
      and recognition of compensation expense for all share-based payment awards.
      Effective January 1, 2006, we began using the fair value method to apply
      the provisions of FAS 123(R) with a modified prospective application which
      provides for certain changes to the method for valuing share-based compensation.
      Under the modified prospective approach, the valuation provisions of FAS 123(R)
      apply to new awards and to awards that are outstanding on the effective date
      and
      subsequently modified or cancelled. Under the modified prospective application,
      prior periods are not revised for comparative purposes.




In
      accordance with FAS 123(R), we estimate the value of stock option awards on
      the
      date of grant using the Black-Scholes option-pricing model. The determination
      of
      the fair value of share-based payment awards on the date of grant using an
      option-pricing model is affected by our stock price as well as assumptions
      regarding a number of complex and subjective variables. These variables include,
      but are not limited to, our expected stock price volatility over the term of
      the
      awards, actual and projected employee stock option exercise behaviors, risk-free
      interest rate and expected dividends.




If
      factors change and we employ different assumptions in the application of FAS
      123(R) in future periods, the compensation expense that we record under FAS
      123(R) may differ significantly from what we have recorded in the current
      period. In addition, there is a risk that our estimates of the fair values
      of
      our share-based compensation awards on the grant dates may bear little
      resemblance to the actual values realized upon the exercise, expiration, early
      termination or forfeiture of those share-based payments in the future. Certain
      share-based payments, such as employee stock options, may expire worthless
      or
      otherwise result in zero intrinsic value as compared to the fair values
      originally estimated on the grant date and reported in our financial statements.
      Alternatively, value may be realized from these instruments that are
      significantly in excess of the fair values originally estimated on the grant
      date and reported in our financial statements.




**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.





**Item
      4.**   ***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
      they 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.






19




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      also conducted an evaluation of any changes in internal controls 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. We have implemented an
      upgrade of our accounting and timekeeping systems to help further manage our
      business.







20







**PART
      II**





**Item
      1.  
Legal Proceedings.**





(a)  None.





**Item
      1A.Risk
      Factors.**





There
      have been no material changes from the risk factors previously disclosed in
      our
      Annual Report on Form 10K/A for the year ended December 31, 2005.





**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.**





None.





**Item
      5.** **Other
      Information.**





None.




**Item
      6.** ***Exhibits***





10.1†
            —
            Entry
                into a Material Definitive Agreement(incorporated by reference to Exhibit 10.1 to the Current Report
                on Form
                8-K filed with the SEC on September
              29,
                2006).31.1*
            —
            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.











21










**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)Date: November
              14, 2006
            By:
            /s/ H.
              David
              RammH.
              David RammChief
              Executive Officer




**MILLENNIUM
              CELL INC.**(Registrant)Date: November
              14, 2006
            By:
            /s/ John
              D.
              GiolliJohn
              D. GiolliChief
              Financial Officer









22