**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, 2007**





**OR**





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





**000-31083**


**(Commission
      File Number)**





**MILLENNIUM
      CELL INC.**


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





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





**One
      Industrial Way West,**


**Eatontown,
      New Jersey 07724**


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





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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. (as defined See definition of
      “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the
      Securities Exchange Act of 1934).





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




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




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date: 67,930,601 shares of Common Stock,
      par
      value $.001, were outstanding on November 13, 2007.










**MILLENNIUM
      CELL INC.**


**(a
      development stage enterprise)**


**Index**





**Page****PART
              I - FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance Sheets - September 30, 2007 and December 31, 2006
            1Consolidated
                Statements of Operations - Three and nine months ended September
                30, 2007
              and
                2006 and cumulative amounts from inception
            2Consolidated
                Statements of Cash Flows -Nine months ended September 30, 2007 and
                2006
                and cumulative amounts from inception
            3Consolidated
                Statements of Stockholders’ Equity - Nine months ended September 30,
                2007
            4Notes
                to Consolidated Financial Statements - September 30, 2007
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            14Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                4T.
            Controls
                and Procedures
            22**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            23Item
                1A.
            Risk
                Factors
            23Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            23Item
                3.
            Defaults
                Upon Senior Securities
            23Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            23Item
                5.
            Other
                Information
            23Item
                6.
            Exhibits
            24








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





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





**FORWARD-LOOKING
      STATEMENTS**





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








**PART
      I - FINANCIAL INFORMATION**





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





**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      BALANCE SHEETS**




**(Unaudited)September
                30,2007**
            
            **December
                31,2006****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            4,234,926
            
            $
            4,358,040Restricted
                cash
            
            
            240,128
            
            
            174,045Accounts
                receivable - trade
            
            
            —
            
            
            75,000Accounts
                receivable - government
            
            
            698,752
            
            
            523,878Prepaid
                expenses
            
            
            206,214
            
            
            133,992Deferred
                financing costs
            
            
            128,512
            
            
            92,532Total
                current assets
            
            
            5,508,532
            
            
            5,357,487Property
                and equipment, net
            
            
            163,803
            
            
            307,257Intangibles,
                net
            
            
            2,965,095
            
            
            3,280,257Restricted
                cash
            
            
            588,972
            
            
            846,767Deferred
                financing costs
            
            
            45,730
            
            
            29,407Security
                deposit
            
            
            45,676
            
            
            45,676Total
                assets
            
            $
            9,317,808
            
            $
            9,866,851**Liabilities
                and stockholders’ equity**Current
                liabilities:Accounts
                payable
            
            $
            420,976
            
            $
            352,480Accrued
                expenses
            
            
            1,066,990
            
            
            1,016,198Refundable
                grant obligation
            
            
            3,441
            
            
            13,197Deferred
                compensation
            
            
            84,998
            
            
            116,273Deferred
                revenue
            
            
            488,182
            
            
            113,153Short-term
                portion of redeemable Series C preferred stock, net of discount (Note
                6)
            
            
            631,703
            
            
            2,356,375Convertible
                unsecured debentures (Note 6)
            
            
            —
            
            
            449,988Total
                current liabilities
            
            
            2,696,290
            
            
            4,417,664Redeemable
                Series C preferred stock, net of discount (Note 6)
            
            
            —
            
            
            2,356,375Convertible
                unsecured debentures, net of discount (Note 6)
            
            
            5,034,288
            
            
            —Debenture
                related liabilities (Note 6)
            
            
            478,466Refundable
                grant obligation
            
            
            139,691
            
            
            143,132Commitments
                and contingenciesStockholders
                equity:Series
                A preferred stock, $.001 par value; 1,694,724 authorized shares,
                407,620
                and 293,874 issued and outstanding as of September 30, 2007 and December
                31, 2006, respectively
            
            
            5,232,642
            
            
            4,527,417Series
                B preferred stock, $.001 par value; 1,539,000 authorized shares,
                71,429
                issued and outstanding as of September 30, 2007 and December 31,
                2006
            
            
            1,074,620
            
            
            1,090,773Common
                stock, $.001 par value; authorized 120,000,000 shares and 58,691,538
                and
                51,401,215 shares issued and outstanding as ofSeptember
                30, 2007 and December 31, 2006, respectively
            
            
            58,692
            
            
            51,401Additional
                paid-in capital
            
            
            111,373,710
            
            
            105,486,561Deficit
                accumulated during development stage
            
            
            (116,770,591
            )
            
            (108,206,472
            )Total
                stockholders’ equity
            
            
            969,073
            
            
            2,949,680Total
                liabilities and stockholders’ equity
            
            $
            9,317,808
            
            $
            9,866,851





See
      notes
      to financial statements




1


**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**




**Three
                Months**
                **Ended**
            
            **Three
                Months**
                **Ended**
            
            **Nine Months**
                **Ended**
            
            **Nine Months**
                **Ended**
            
            **Cumulative**
                **Amounts****September
                30,**
              **2007**
            
            **September
                30,**
              **2006**
            
            **September
                30,**
              **2007**
            
            **September
                30,**
              **2006**
            
            **From**
              **Inception**Revenue
            
            $
            1,124
            
            $
            4,900
            
            $
            68,824
            
            $
            87,004
            
            $
            2,092,361Cost
                of revenue
            
            
            1,124
            
            
            4,900
            
            
            62,719
            
            
            87,004
            
            
            1,960,821Gross
                margin
            
            
            —
            
            
            —
            
            
            6,105
            
            
            —
            
            
            131,540Product
                development and marketing
            
            
            747,229
            
            
            732,395
            
            
            2,863,667
            
            
            2,467,468
            
            
            29,418,702General
                and administrative
            
            
            896,481
            
            
            645,567
            
            
            2,606,791
            
            
            2,696,296
            
            
            32,113,833Restructuring
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            104,982Non-cash
                charges (Note 4)
            
            
            823,532
            
            
            395,716
            
            
            1,304,688
            
            
            3,049,470
            
            
            33,596,775Depreciation
                and amortization
            
            
            210,473
            
            
            72,272
            
            
            652,324
            
            
            287,597
            
            
            4,137,330Research
                and development
            
            
            193,606
            
            
            15,345
            
            
            487,035
            
            
            237,694
            
            
            10,585,564Total
                operating expenses
            
            
            2,871,321
            
            
            1,861,295
            
            
            7,914,505
            
            
            8,738,525
            
            
            109,957,186Loss
                from operations
            
            
            (2,871,321
            )
            
            (1,861,295
            )
            
            (7,908,400
            )
            
            (8,738,525
            )
            
            (109,825,646
            )Interest
                (income) expense, net
            
            
            283,714
            
            
            137,105
            
            
            655,719
            
            
            510,662
            
            
            5,407,672Equity
                in losses of unconsolidated subsidiary (Note 9)
            
            
            —
            
            
            94,567
            
            
            —
            
            
            231,974
            
            
            1,190,900Loss
                before income taxes
            
            
            (3,155,035
            )
            
            (2,092,967
            )
            
            (8,564,119
            )
            
            (9,481,161
            )
            
            (116,424,218
            )Benefit
                from income taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,804,508Net
                loss
            
            
            (3,155,035
            )
            
            (2,092,967
            )
            
            (8,564,119
            )
            
            (9,481,161
            )
            
            (114,619,710
            )Series
                B Preferred Stock dividends
            
            
            18,750
            
            
            18,904
            
            
            56,250
            
            
            25,479
            
            
            100,634Preferred
                stock amortization
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,150,881
            )Net
                loss applicable to common stockholders
            
            $
            (3,173,785
            )
            $
            (2,111,871
            )
            $
            (8,620,369
            )
            $
            (9,506,640
            )
            $
            (116,871,225
            )Loss
                per share — basic and diluted
            
            $
            (.06
            )
            $
            (.04
            )
            $
            (.16
            )
            $
            (.20
            )
            $
            (3.34
            )Weighted
                — average number of shares outstanding
            
            
            56,070,630
            
            
            48,504,337
            
            
            54,723,300
            
            
            47,946,603
            
            
            34,945,087





See
      notes
      to financial statements




2


**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**Nine Months**
                **Ended**
            
            **Nine Months**
                **Ended**
            
            **Cumulative**
                **Amounts****September
                30,**
              **2007**
            
            **September
                30,**
              **2006**
            
            **From**
              **Inception****Operating
                activities**Net
                loss
            
            $
            (8,564,119
            )
            $
            (9,481,161
            )
            $
            (114,619,710
            )Adjustments
                to reconcile net loss to net cash used in operation
                activitiesDepreciation
                and amortization
            
            
            652,324
            
            
            287,597
            
            
            4,137,330Amortization
                of discount on unsecured debentures and preferred stock
            
            
            757,112
            
            
            162,224
            
            
            3,545,275Amortization
                of deferred financing costs
            
            
            189,044
            
            
            90,430
            
            
            1,699,818Non-cash
                interest charges
            
            
            127,786
            
            
            308,078
            
            
            840,074Beneficial
                conversion feature
            
            
            283,500
            
            
            105,000
            
            
            2,442,582Losses
                on investment in unconsolidated subsidiary
            
            
            —
            
            
            231,974
            
            
            1,190,900Non-cash
                charges
            
            
            1,304,688
            
            
            3,049,470
            
            
            33,596,775Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (99,874
            )
            
            (24,946
            )
            
            (698,752
            )Prepaid
                expenses and other assets
            
            
            (72,222
            )
            
            5,696
            
            
            (251,889
            )Accounts
                payable and accrued expenses
            
            
            (856,098
            )
            
            (349,140
            )
            
            1,569,068Deferred
                revenue
            
            
            375,029
            
            
            66,653
            
            
            2,888,170Net
                cash used in operating activities
            
            
            (5,902,830
            )
            
            (5,548,125
            )
            
            (63,660,359
            )**Investing
                activities**Purchase
                of property and equipment
            
            
            —
            
            
            —
            
            
            (2,885,446
            )Patent
                registration costs
            
            
            (190,905
            )
            
            (126,811
            )
            
            (1,293,412
            )Investment
                in affiliate
            
            
            —
            
            
            (1,392,221
            )
            
            (1,163,539
            )Acquisition
                of Gecko, net of cash acquired
            
            
            —
            
            
            —
            
            
            (856,078
            )(Increase)/decrease
                in restricted cash
            
            
            191,712
            
            
            249,600
            
            
            (829,100
            )Net
                cash provided by/(used in) investing activities
            
            
            807
            
            
            (1,269,432
            )
            
            (7,027,575
            )**Financing
                activities**Proceeds
                from sale of common stock
            
            
            33,452
            
            
            —
            
            
            39,427,659Underwriting
                and other expenses of initial public offering
            
            
            —
            
            
            —
            
            
            (3,669,613
            )Proceeds
                from issuance of debentures
            
            
            6,000,000
            
            
            —
            
            
            27,428,806Proceeds
                from redeemable Series C preferred stock
            
            
            —
            
            
            —
            
            
            10,000,000Proceeds
                from Series B preferred stock
            
            
            —
            
            
            1,250,000
            
            
            1,250,000Deferred
                financing costs
            
            
            (241,346
            )
            
            —
            
            
            (1,523,002
            )Capital
                lease obligation payments
            
            
            —
            
            
            (6,173
            )
            
            (86,184
            )Payments
                from capital contribution
            
            
            —
            
            
            —
            
            
            (400,000
            )Proceeds
                from capital contribution
            
            
            —
            
            
            —
            
            
            500,000Payment
                of note payable
            
            
            —
            
            
            —
            
            
            (250,000
            )Series
                B dividends paid
            
            
            —
            
            
            —
            
            
            (44,384
            )(Payments)/proceeds
                from grant, net
            
            
            (13,197
            )
            
            (49,611
            )
            
            143,132Proceeds
                from sale of preferred stock
            
            
            —
            
            
            —
            
            
            2,146,446Net
                cash provided by financing activities
            
            
            5,778,909
            
            
            1,194,216
            
            
            74,922,860Net
                increase (decrease) in cash and cash equivalents
            
            
            (123,114
            )
            
            (5,623,341
            )
            
            4,234,926Cash
                and cash equivalents, beginning of period
            
            
            4,358,040
            
            
            11,675,877
            
            
            —Cash
                and cash equivalents, end of period
            
            
            4,234,926
            
            
            6,052,536
            
            
            4,234,926





See
      notes
      to financial statements


Please
      see note 8 for supplemental cash flow information





3


**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**(Unaudited)**




**Additional**
            
            
            
            
            
            
            
            **Total****Common
                Stock**
            
            **Paid-in**
            
            **Series
                A**
            
            **Series
                B**
            
            **Accumulated**
            
            **Stockholders’****Shares**
            
            **Amount**
            
            **Capital**
            
            **Preferred**
            
            **Preferred**
            
            **Deficit**
            
            **Equity**Balance
                at December 31, 2006
            
            
            51,401,215
            
            $
            51,401
            
            $
            105,486,561
            
            $
            4,527,417
            
            $
            1,090,773
            
            $
            (108,206,472
            )
            $
            2,949,680Issuance
                of common stock from conversion of debentures and Series C preferred
                stock
            
            
            6,234,375
            
            
            6,234
            
            
            4,707,766
            
            
            —
            
            
            —
            
            
            —
            
            
            4,714,000Beneficial
                conversion feature on private placement transactions
            
            
            —
            
            
            —
            
            
            283,500
            
            
            —
            
            
            —
            
            
            —
            
            
            283,500Issuance
                of common stock for interest payments
            
            
            85,705
            
            
            86
            
            
            74,985
            
            
            —
            
            
            —
            
            
            —
            
            
            75,071Issuance
                of common stock for 401(k)
            
            
            210,540
            
            
            211
            
            
            191,255
            
            
            —
            
            
            —
            
            
            —
            
            
            191,466Issuance
                of Series A preferred stock, 113,746 shares issued
            
            
            
            
            
            
            
            
            
            
            
            705,225
            
            
            
            
            
            
            
            
            705,225Series
                B preferred dividends
            
            
            —
            
            
            —
            
            
            (56,250
            )
            
            —
            
            
            —
            
            
            —
            
            
            (56,250
            )Warrant
                adjustment
            
            
            —
            
            
            —
            
            
            185,153
            
            
            —
            
            
            (16,153
            )
            
            —
            
            
            169,000Issuance
                of stock related to purchase of warrants
            
            
            55,753
            
            
            56
            
            
            33,396
            
            
            
            
            
            
            
            
            
            
            
            33,452Issuance
                of restricted stock for merit awards
            
            
            507,400
            
            
            507
            
            
            (507
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Stock
                based compensation expense
            
            
            —
            
            
            —
            
            
            335,780
            
            
            —
            
            
            —
            
            
            —
            
            
            335,780Issuance
                of stock for BOD compensation
            
            
            196,550
            
            
            197
            
            
            160,313
            
            
            —
            
            
            —
            
            
            —
            
            
            160,510Deferred
                compensation plan
            
            
            —
            
            
            —
            
            
            (28,242
            )
            
            —
            
            
            —
            
            
            —
            
            
            (28,242
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (8,564,119
            )
            
            (8,564,119
            )Balance
                at Sept. 30, 2007
            
            
            58,691,538
            
            $
            58,692
            
            $
            111,373,710
            
            $
            5,232,642
            
            $
            1,074,620
            
            $
            (116,770,591
            )
            $
            969,073





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.,
      (the “Company”) and its wholly owned subsidiary, Gecko Energy Technologies, LLC,
      (“Gecko”). Gecko, a fuel cell technology company, was acquired by the Company on
      December 29, 2006. All inter-company transactions and accounts have been
      eliminated.





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





The
      Company is engaged in a focused business development program with the objective
      of building a profitable hydrogen battery product business. As a result, the
      Company is devoting substantial efforts towards product development and
      marketing as well as research and development activities. The Company plans
      to
      continue to finance its operations with a combination of public and private
      financing, stock issuances, collaborative relationships and other arrangements
      until it achieves profitability. There can be no assurance, however, that the
      Company will be successful in obtaining an adequate level of financing when
      needed.





These
      conditions raise substantial doubt about the Company’s ability to continue as a
      going concern. The consolidated financial statements do not include any
      adjustments relating to the recoverability and classification of recorded assets
      amounts or the amounts and classification of liabilities that might be necessary
      should the Company be unable to continue as a going concern.





**NOTE 2—NEW
      ACCOUNTING PROUNOUNCEMENTS**





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





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





5


**NOTE
      3—EARNINGS PER SHARE**





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





**NOTE
      4—INCOME TAXES**




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




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





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





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





**NOTE
      5—STOCK BASED COMPENSATION**





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




6


*Stock
      Options*





The
      Company has awarded stock options to certain employees and directors. Stock
      options awarded to directors vest immediately. Stock options awarded to
      employees typically vest over three years. The Company issued 175,000 options
      to
      an officer and members of the Advisory Board during the nine months ended
      September 30, 2007. The
      fair value of the options issued was calculated using the Black-Scholes option
      pricing model with the following assumptions: weighted-average exercise
      price — $0.61; risk-free interest rate — 5.16%; dividend yield —
0%; expected volatility (based on historical volatility) — 75%; and
      expected life — 10 years.





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




**Shares**
            
            **Weighted-AverageExercisePrice**
            
            **Weighted-AverageRemainingContractualLife(In
                years)**
            
            **AggregateIntrinsicValue**Outstanding
                at December 31, 2006
            
            
            3,911,655
            
            $
            3.44
            
            
            —
            
            
            —Granted
            
            
            175,000
            
            
            0.61
            
            
            10.0
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
                and cancelled
            
            
            1,226,966
            
            
            3.05
            
            
            —
            
            
            —Outstanding
                at September 30, 2007
            
            
            2,859,689
            
            $
            3.44
            
            
            4.6
            
            $
            2,500Vested
                and expected to vest at September 30, 2007
            
            
            2,659,511
            
            $
            3.44
            
            
            4.6
            
            $
            2,325Exercisable
                at September 30, 2007
            
            
            2,596,033
            
            $
            3.70
            
            
            4.5
            
            $
            —





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 2007 and the exercise price, multiplied by the number
      of
      in-the-money options) that would have been received by the option holders had
      all option holders exercised their options on September 30, 2007. The intrinsic
      value changes based on the fair market value of the Company’s common stock.





As
      of
      September 30, 2007, there was $0.2 million of total unrecognized
      compensation expense related to stock options which is expected to be recognized
      over a weighted-average period of 1.2 years.




*Restricted
      Stock Awards*





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





During
      the nine months ended September 30, 2007 and 2006, the Company had issued an
      aggregate of 507,400 and 465,400 shares of restricted stock to employees with
      a
      fair market value of $487,104 and $763,256, respectively. These shares will
      generally vest in five years, or earlier, upon meeting certain accelerated
      vesting criteria, as defined. During the nine months ended September 30, 2007
      and 2006, the Company recorded $299,832 and $208,499, respectively in non-cash
      charges for restricted stock issued to employees. The Company will recognize
      additional non-cash charges of $92,947 in the remainder of 2007 and an
      additional $849,399 of non-cash charges will be amortized through 2011, or
      earlier if other accelerated vesting features are met.





7


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




**Number
                of**
              **Shares**
            
            **Weighted-**
              **Average
                Grant**
              **Date
                Fair**
              **Value**Nonvested
                at December 31, 2006
            
            
            736,480
            
            $
            1.88Granted
            
            
            507,400
            
            
            0.97Vested
            
            
            (50,000
            )
            
            1.45Forfeited
            
            
            (131,040
            )
            
            1.51Nonvested
                at September 30, 2007
            
            
            1,062,840
            
            $
            1.55





As
      of
      September 30, 2007, there was $1.0 million of unrecognized stock-based
      compensation expense related to nonvested restricted stock awards. This expense
      will be recognized as the shares vest.





*Non-Cash
      Charges*




The
      following is a breakdown by function of non-cash charges for stock-based awards
      and Series A Preferred Stock:





**Three
                months ended Sept., 30**
            
            **Nine
                months ended Sept., 30****2007**
            
            **2006**
            
            **2007**
            
            **2006**Product
                development and marketing
            
            $
            729,408
            
            $
            15,780
            
            $
            747,831
            
            $
            1,754,072General
                and administrative
            
            
            85,975
            
            
            374,301
            
            
            532,411
            
            
            1,278,493Research
                and development
            
            
            8,149
            
            
            5,635
            
            
            24,446
            
            
            16,905Total
            
            $
            823,532
            
            $
            395,716
            
            $
            1,304,688
            
            $
            3,049,470





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




*Amended Convertible
      Debentures*





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




8


*Redeemable
      Series C Preferred Stock*




On
      April
      25, 2005, the Company consummated a private placement financing transaction
      with
      seven institutional and accredited investors who paid $10 million for 10,000
      shares of redeemable Series C. Each Series C share is initially convertible
      into
      500 shares of our common stock, at any time, at an initial conversion price
      equal to $2 per share subject to adjustment based upon customary anti-dilution
      provisions, or a higher number of shares at a lower conversion price based
      upon
      the market price of our common stock during the ten trading days preceding
      conversion. The shares of Series C bear a 7% cumulative dividend payable
      quarterly in shares of common stock or cash, at the Company’s option and are
      junior to the Series A and Series B preferred stock in liquidation preference.
      The Series C is subject to mandatory redemption by the Company three years
      after
      issuance and can be settled in cash or with the Company’s common stock. As a
      result, the Series C is recorded as a liability in accordance with FAS 150
      “Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity.” Additionally, the Company issued to the Series C
      investors three-year warrants to purchase an aggregate of 1.25 million shares
      of
      the Company’s common stock at an exercise price equal to $2 per share, subject
      to adjustment based on customary antidilution protections. The warrants were
      valued at $1,021,928 at the date of issuance and were recorded as a discount
      to
      debt and as additional paid-in-capital on the balance sheet and are being
      amortized as interest expense throughout the term of the Series C or as they
      are
      converted, whichever comes first. In July 2007, the exercise price of the
      warrants was temporarily reduced to $0.60 per share if exercised on or before
      October 25, 2007 as part of the consideration given by the Company in exchange
      for certain amendments to the terms of the 2007 Debentures described below.
      This
      reduction in the warrant exercise price resulted in an additional $169,000
      of
      debt discount and additional paid-in-capital on the balance sheet and is being
      amortized as interest expense throughout the term of the Series C or as the
      Series C shares are converted, whichever occurs first. During the nine months
      ended September 30, 2007 and 2006, the Company recorded $241,954 and $162,224 ,
      respectively for the amortization of the discount.





On
      February 15, 2007, the Company entered into agreements (the “Letter Agreements”)
      with each holder of Series C pursuant to which the Company agreed, between
      the
      date of such agreement and July 15, 2007, to deliver Company Interim Conversion
      Election Notices (as such term is defined in the Certificate of Designations
      of
      the Series C) to convert 50% of such holder’s shares of Series C into shares of
      the Company’s common stock during
      a four month period. On May 30, 2007, the Company and each holder of Series
      C
      amended the Letter Agreements to extend the four month period for conversions
      under the Letter Agreements to five months, or August 15, 2007. As
      provided in the Certificate of Designations of the Series C, the closing sale
      price for the Company’s common stock on the date immediately preceding the date
      of each Company Interim Conversion Election Notice must be at least 114% of
      the
      conversion price (if the applicable closing sale price is $1.25 or less) or
      108%
      of the conversion price (if the applicable closing sale price is greater than
      $1.25), in order for the Company
      to cause such conversion. As a result, these conversions will result in BCF
      charges in accordance with EITF 00-27 (“Application of Issue No. 98-5 to Certain
      Convertible Instruments”) and EITF 98-5 (“Accounting for Convertible Securities
      with Beneficial Conversion Features or Contingently Adjustable Conversion
      Ratios”) since the conversion price would be lower than the market price of the
      Company’s common stock on the date of the conversion. During the nine months
      ended September 30, 2007, the Company converted $4,154,000 of the Series C
      into
      5,516,693 shares of the Company’s common stock. The Company recorded $252,000 in
      BCF expense related to conversions during the nine months ended September 30,
      2007.





Under
      the
      Series C purchase agreement, the Company is required to restrict funds for
      future dividends to be paid to Series C holders. As a result, these funds,
      which
      amounted to approximately $1,800,000 at issuance, were classified as restricted
      cash on the balance sheet. According to the Series C purchase agreement, as
      dividends are issued or paid, and conversions are executed, the restricted
      cash
      is released ratably to non-restricted cash accounts.  As of
      September 30, 2007, approximately $9.2 million of the Series C has been
      converted into 8,194,488 shares of the Company’s common stock and as a result,
      $1,594,188 has been released from restricted cash to date. During the nine
      months ended September 30, 2007, the Company paid $105,024 in quarterly dividend
      payments for the Series C and issued 44,717 shares of common stock for Series
      C
      dividend payments valued at $28,059. These dividends were recorded as interest
      expense since the Series C was recorded as a liability.





9


During
      the nine months ended September 30, 2007, a Series C warrant holder exercised
      55,753 warrants with a strike price of $0.60. As a result of this exercise,
      the
      Company received gross proceeds of $33,452. This amount was recorded as common
      stock and additional paid-in capital in the third quarter of 2007.




*2007
      Convertible Debentures*





On
      February 16, 2007, the Company sold to six institutional and accredited
      investors $6,000,000 aggregate principal amount of unsecured convertible
      debentures due February 16, 2009 (the “2007 Debentures”), and warrants to
      purchase an aggregate of 1,824,105 shares of common stock at an exercise price
      of $1.14 per share.
      Under certain circumstances, the Company and/or the investors
      are able to convert the 2007 Debentures at 91% of the volume weighted average
      price of the Company’s common stock for the 10 consecutive trading days
      preceding the applicable notice of conversion. During the nine months ended
      September 30, 2007, a holder of the Company’s 2007 Debentures converted $110,000
      principal amount of such debentures into 184,224 shares of the Company’s common
      stock.




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





Interest
      accrues on the 2007 Debentures at the prime rate (currently 7.50%) and is
      payable on a quarterly basis in shares of common stock (assuming satisfaction
      of
      certain Equity
      Conditions (as defined in the 2007 Debentures) )
      or, if the Company provides notice, it may elect to pay interest in cash. The
      Company currently
      does not meet the Equity Conditions due to the Company’s non-compliance with
      NASDAQ listing standards and thus it is required to pay such interest in cash
      (see Note 10). During the nine months ended September 30, 2007, the Company has recorded
      $307,019 in interest expense for the 2007 Debentures.




The
      fair value of the warrants issued with the 2007 Debentures, together with the
      fair value of conversion features and certain other
      contingent liabilities associated with the 2007 Debentures were recorded as
      a debt discount and as a liability under the caption “Debenture related liabilities” on the balance sheet
      upon issuance. The debt discount is amortized as interest expense throughout
      the
      term of the 2007 Debentures or as they are converted, whichever comes first.
      The
      Debenture related liabilities are marked to market each period end through
      interest expense. During the nine months ended September 30, 2007, the Company
      recorded interest expense
      of $406,722 for the amortization of the debt discount for the 2007 Debentures
      and interest income of $783,969 for the marking to market of the debenture
      related liabilities.





After
      giving effect to the letter agreement described above, the 2007 Debentures require that the Company maintain a ratio of unrestricted cash to unsecured
      debt as of the end of each fiscal quarter of (i) 0.5 to 1.0 (from July 25,
      2007
      through March 31, 2008) and (ii) 0.8 to 1.0 (from March 31, 2008 until
      maturity). In addition, the 2007 Debentures require that the Company’s common
      stock be listed on a national securities exchange (such as the NASDAQ Capital Market). Upon
      default of either of these covenants, the Company would be required to repay,
      in
      cash, 120% of the  outstanding
      principal amount, plus accrued and unpaid interest of the 2007 Debentures outstanding on the default date. See Note 10 for the
      status of the Company’s listing on The Nasdaq Stock Market.





10


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





*Series
      A and Series B Preferred Stock*





On
      April 25, 2005, the Company consummated the first closing under a joint
      development arrangement with The Dow Chemical Company (“Dow”). In connection
      with the closing, the Company issued 155,724 shares of Series A to Dow, each
      share of which is convertible into approximately 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 the Company’s Hydrogen on Demand®
energy systems coupled with a fuel cell. The joint development arrangement
      has a
      three year term and each party may terminate the joint development arrangement
      under certain conditions. In July 2007, the Company and Dow amended the joint
      development arrangement. As amended, the joint development arrangement
      contemplates three milestones designed to culminate in a commercially viable
      hydrogen storage system for consumer electronics applications.





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




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
      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 A for $159,227 based on the fair value of
      the
      warrants at the date of the issuance. The Series B was initially convertible
      into ten shares of the Company’s common stock. As a result of anti-dilution
      adjustments to the conversion price of the Series B, each share of Series B
      is
      currently convertible into approximately sixteen shares of the Company’s common
      stock, which resulted in a reduction in the carrying value of the Series B
      and
      an addition to paid-in capital of $16,153. As provided by the July 2007
      amendment to the joint development arrangement, the Series B is subject to
      weighted average anti-dilution protection. The shares of Series B bear a 6%
      cumulative dividend payable in shares of common stock or cash, at the Company’s
      option.  In accordance with the joint development arrangement and
      achievement of the first milestone, the Company also issued 138,150 shares
      of
      Series A that were earned by Dow through human resource and intellectual
      property contributions toward achievement of the first milestone. As a result
      of
      the issuance of Series A, the Company recorded a non-cash charge of $2,113,695
      as product development expense based on the market value of the underlying
      common stock as of May 26, 2006.





In
      July 2007, the Company and Dow agreed that the parties had achieved the second
      milestone under the joint development arrangement. As a result, the Company
      issued 113,746 shares of Series A that were earned by Dow through human resource
      and intellectual property contributions toward achievement of the second
      milestone. As a result of the issuance of these shares, the Company recorded
      a
      non-cash charge of $705,225 as product development expense based on the market
      value of the underlying common stock as of September 9, 2007. Dow did not
      exercise its option to purchase Series B in connection with the achievement
      of
      the second milestone.





11


**NOTE
      8—SUPPLEMENTAL CASH FLOW INFORMATION**





The
      Company issued 210,540 and 154,314 shares of common stock valued at $191,466
      and
      $252,700 to employees as 401(k) Plan employer matching contributions during
      the
      first nine months of 2007 and 2006, respectively.




The
      Company issued 507,400 and 465,400 shares of restricted common stock valued
      at
      $487,104 and $763,256 to employees as restricted stock during the nine months
      ended September 30, 2007 and 2006, respectively. The Company also converted
      Series C Preferred Stock and Amended Convertible Debentures during the nine
      months ended September 30, 2007. See note 6 for further details on these
      conversions.




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




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





**NOTE
      10—CONTINGENCIES**





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




On
      October 23, 2007, the Company received a second letter from Nasdaq notifying
      the
      Company that it met all initial listing criteria for the Nasdaq Capital Market
      set forth in Marketplace Rule 4310(c), except for the bid price requirement,
      and
      that, as a result, the Company has been provided with an additional 180 calendar
      days, or until April 21, 2008, in which to regain compliance with the Rule.




If
      the
      Company does not demonstrate compliance with the Rule by April 21, 2008, the
      staff will provide written notification that the Company’s securities will be
      delisted from The Nasdaq Capital Market. In that case, prior to any delisting,
      the Company may appeal the Nasdaq staff’s determination to a Listing
      Qualifications Panel, which would conduct a hearing on the matter.




**NOTE
      11—RELATED PARTIES**





On
      September 20, 2007, the Company’s Board of Directors established an advisory
      board to assist the Board of Directors and senior management of the Company
      in
      promoting the Company’s products and technology to the appropriate government
      and military agencies and prime military contractors with the objective of
      enhancing the use of those products and the widespread adoption of the
      technology in a wide range of targeted applications.





On
      that
      date, the Company’s Board authorized the Company’s entry into consulting
      agreements with Llewellyn J. “Bud” Evans, Jr., a member of the Company’s Board
      of Directors and four other consultants. Pursuant to his consulting agreement,
      Mr. Evans agreed to serve as the Chairman of the advisory board, and pursuant
      to
      their consulting agreements, each of the four consultants agreed to serve as
      members of the advisory board, until December 31, 2007, and for successive
      one
      year periods thereafter until any such relationship is terminated by either
      party.





12


The
      Company agreed to pay or award to Mr. Evans for each full year during which
      he
      serves as a consultant, pro rated for 2007 and for any other period of less
      then
      a full year, the following: an honorarium of $7,500, a fee of $1,000 for each
      meeting Mr. Evans attends, and options to purchase 75,000 shares of the
      Company’s common stock.





During
      the nine months ended September 30, 2007, the Company has issued 125,000 stock
      options to Mr. Evans and the four consultants. The Company has paid or awarded
      to Mr. Evans, an honorarium of $2,500, a meeting fee of $1,000, and options
      to
      purchase 25,000 shares of its common stock at an exercise price of $0.60 and
      each of the Members, an honorarium of $2,000, a meeting fee of $1,000 and
      options to purchase 25,000 shares of its common stock at an exercise price
      of
      $0.60.




The
      Company may terminate each of the consulting agreements at anytime for any
      reason, including, in the case of Mr. Evans agreement, a finding by the Board
      that Mr. Evans’ relationship with the Company under the such agreement shall
      cause him to no longer be an “independent director” as defined under Nasdaq
      Marketplace Rule 4200(a)(15).





**NOTE
      12—SUBSEQUENT EVENTS**





In
      October 2007, holders of the Company’s Series C converted $185,000 of Series C
      into 308,333 shares of common stock. Also, in October 2007, certain holders
      of
      the Company’s warrants exercised 830,149 of their warrants, with a strike price
      of $0.60, to purchase shares of the Company’s common stock. As a result of this
      exercise, the Company received gross proceeds of $668,839 in the fourth quarter
      of 2007.





On
      October 19, 2007, the Company entered into a securities purchase and sale
      agreement (the ”Agreement”) with Horizon Fuel Cell Technologies Pte Ltd., a
      company limited by shares organized under the laws of the Republic of Singapore
      (a privately held company) (“Horizon”), pursuant to which the Company issued to
      Horizon 7,936,508 shares of the Company’s common stock, par value $0.001 per
      share, and, in exchange therefor, Horizon issued to the Company a convertible
      promissory note in the aggregate principal amount of $5,000,000 (the “Horizon
      Note”), which will automatically convert into 33,740 of Horizon’s ordinary
      shares upon approval of certain of Horizon’s shareholders, which approval is
      necessary for Horizon’s board of directors to authorize the issuance of the
      Horizon Shares.  The Horizon Note matures on November 18, 2007 unless
      it is converted into the Horizon Shares (as described above) prior to such
      date.  After
      giving effect to the issuance by the Company and the conversion of the note
      under the Agreement, the Company shares will represent approximately 11.7%
      of
      the Company’s outstanding common stock and the Horizon Shares will represent
      approximately 6.7% of Horizon’s outstanding voting share capital and therefore
      the Company will account for such voting share capital under the cost
      method.





The
      Agreement contains customary representations, warranties and covenants by the
      Company and Horizon, including covenants that each party shall (i) indemnify
      the
      other party for, among other things, losses incurred as a result of breaches
      of
      the indemnifying party’s representations, warranties and covenants under the
      Agreement, (ii) have, subject to certain restrictions, the right to designate
      one non-voting board observer to the other party’s board of directors, (iii) not
      sell, transfer or otherwise dispose of shares received pursuant to the Agreement
      for a period of one year (the “Lock-Up Period”), and (iv) vote the shares
      received pursuant to the Agreement in accordance with the recommendation of
      the
      relevant issuer’s board of directors during the Lock-Up Period.





Additionally,
      subject to obtaining any necessary waivers and approvals from the holders of
      existing registration rights, the Company agreed to prepare and file with the
      SEC a registration statement no later than 90 days prior to the expiration
      of
      the Lock-Up Period registering Horizon’s resale of the Company shares under the
      Securities Act of 1933, as amended, if and to the extent the Company shares
      would not be freely transferable without volume limitations in the absence
      of
      such registration at the expiration of the Lock-Up Period.




On
      October 19, 2007, in connection with the execution of the Agreement, the Company
      and Horizon entered into a non-binding letter of intent (the “LOI”) that sets
      forth the terms of a proposed amendment (the “Amendment”) to a Joint Development
      and Licensing Agreement, dated as of August 10, 2007, between the Company and
      Horizon.  Pursuant to the terms set forth in the LOI, the Amendment
      would provide that the Company and Horizon collaborate on an expanded range
      of
      products, marketing, and manufacturing efforts as well as granting preferential
      product pricing.




13


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





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





**General**





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





**Overview**





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





Our
      losses have resulted primarily from costs associated with product development
      and research and development activities as well as non-cash amortization of
      preferred stock and non-cash charges related to the issuance of debt and equity.
      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, 2007 versus Three Months Ended September 30,
      2006*




*Revenues.* Revenues
      for the three months ended September 30, 2007 were $1,124 compared to $4,900
      for
      the same period of 2006, a decrease of $3,776. 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, 2007 were $1,124 compared
      to
      $4,900 for the same period of 2006, a decrease of $3,776. Cost of revenues
      during the development stage represent the Product Development and Marketing
      expenses and Research and Development expenses associated with the revenue
      earned.





14


*Product
      Development and Marketing Expense* .
      Product
      development and marketing expenses for the three months ended September 30,
      2007
      were $747,229 compared to $732,395 for the same period of 2006, an increase
      of
      $14,834.




*General
      and Administrative Expense* .
      General
      and administrative expenses for the three months ended September 30, 2007 were
      $896,481 compared to $645,567 for the same period of 2006, an increase of
      $250,914. The increase was mainly due to fewer allowable overhead expenses
      that
      could be billed under our cost sharing arrangement in the third quarter of
      2007
      compared to the same period in 2006.





*Non-cash
      Charges* .
      Non-cash charges were $823,532 for the three months ended September 30, 2007
      compared to $395,716 for the same period of 2006, an increase of $427,816.
      The
      increase was mainly the result of the issuance of shares of Series A Preferred
      Stock to The Dow Chemical Company, which resulted in a non-cash charge of
      $705,225, offset by restricted stock awards that were fully amortized in 2006.





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





**2007**
            
            **2006**Product
                development and marketing
            
            $
            729,408
            
            $
            15,779General
                and administrative
            
            
            85,975
            
            
            374,302Research
                and development
            
            
            8,149
            
            
            5,635Total
            
            $
            823,532
            
            $
            395,716





*Depreciation
      and Amortization* .
      Depreciation and amortization was $210,473 for the three months ended September
      30, 2007 compared to $72,272 for the same period of 2006, an increase of
      $138,201. The increase reflects intangible asset amortization resulting from
      the
      acquisition of Gecko on December 29, 2006.





*Research
      and Development Expense* .
      Research and development expenses were $193,606 for the three months ended
      September 30, 2007 compared to $15,345 for the same period of 2006, an increase
      of $178,261. The expenses increased due to a decrease in our work with the
      Department of Energy, which funds part of our research and development.
      Consistent with its near term focus on developing products, the Company reduced
      the resources allocated to the Department of Energy program in order to meet
      deliverables in funded military programs aimed at portable power
      applications.





*Interest
      Expense, net* .
      Net
      interest expense was $283,714 for the three months ended September 30, 2007
      compared to net interest expense of $137,105 for the same period of 2006, an
      increase of $146,609. The increase was mainly due to beneficial conversion
      feature charges, accelerated discount amortization and issue costs on the Series
      C and the 2007 Debentures.





*Nine
      months Ended September 30, 2007 versus Nine months Ended September 30,
      2006*




*Revenues.* Revenues
      for the nine months ended September 30, 2007 were $68,824 compared to $87,004
      for the same period of 2006, a decrease of $18,180. 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.





15


*Cost
      of Revenues.* Cost
      of
      revenues for the nine months ended September 30, 2007 were $62,719 compared
      to
      $87,004 for the same period of 2006, a decrease of $24,285. 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,
      2007
      were $2,863,667 compared to $2,467,468 for the same period of 2006, an increase
      of $396,199. The expenses increased due to an increase in product development
      staff as compared to the same period last year as well as the acquisition of
      Gecko in the fourth quarter of 2006.




*General
      and Administrative Expense* .
      General
      and administrative expenses for the nine months ended September 30, 2007 were
      $2,606,791 compared to $2,696,296 for the same period of 2006, a decrease of
      $89,505. The decrease was mainly the result of the non-recurrence of
      professional fees associated with strategic and financial transactions closed
      in
      2006.





*Non-cash
      Charges* .
      Non-cash charges were $1,304,688 for the nine months ended September 30, 2007
      compared to $3,049,470 for the same period of 2006, a decrease of
      $1,744,782.  The decrease was mainly the result of the issuance of shares
      of Series A to The Dow Chemical Company in 2006, which resulted in a non-cash
      charge of $2,113,695 compared to the issuance in 2007, which resulted in a
      non-cash charge of $705,225.





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





**2007**
            
            **2006**Product
                development and marketing
            
            $
            747,831
            
            $
            1,754,072General
                and administrative
            
            
            532,411
            
            
            1,278,493Research
                and development
            
            
            24,446
            
            
            16,905Total
            
            $
            1,304,688
            
            $
            3,049,470





*Depreciation
      and Amortization* .
      Depreciation and amortization was $652,324 for the nine months ended September
      30, 2007 compared to $287,597 for the same period of 2006, an increase of
      $364,727. The increase reflects intangible asset amortization resulting from
      the
      acquisition of Gecko on December 29, 2006.





*Research
      and Development Expense* .
      Research and development expenses were $487,035 for the nine months ended
      September 30, 2007 compared to $237,694 for the same period of 2006, an increase
      of $249,341. The expenses increased due to a decrease in our work with the
      Department of Energy, which funds part of our research and development.
      Consistent with its near term focus on developing products, the Company reduced
      the resources allocated to the Department of Energy program in order to meet
      deliverables in funded military programs aimed at portable power
      applications.





*Interest
      Expense, net* .
      Net
      interest expense was $655,719 for the nine months ended September 30, 2007
      compared to $510,662 for the same period of 2006, an increase of $145,057.
      The
      interest expense increase was due to the beneficial conversion feature charges,
      accelerated debt discount amortization and issue costs on the Series C and
      the
      2007 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 $35.9
      million and we generated net proceeds from private placement transactions in
      2002 and 2003 totaling $14.1 million. In 2004, we received net proceeds of
      approximately $9.4 million from a separate private placement transaction. In
      April 2005, we received net proceeds of approximately $9.6 million in a private
      placement of our redeemable Series C Preferred Stock. In May 2006, we received
      proceeds of $1.25 million in a private placement of Series B Preferred Stock.
      In
      February 2007, we received net proceeds of $5.76 million in a private placement
      of unsecured debentures.





16


*Amended Convertible
      Debentures*





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




*Redeemable
      Series C Preferred Stock*




On
      April
      25, 2005, we consummated a private placement financing transaction with seven
      institutional and accredited investors who paid $10 million for 10,000 shares
      of
      redeemable Series C. Each Series C share is initially convertible into 500
      shares of our common stock, at any time, at an initial conversion price equal
      to
      $2 per share subject to adjustment based upon customary anti-dilution
      provisions, or a higher number of shares at a lower conversion price based
      upon
      the market price of our common stock during the ten trading days preceding
      conversion. The shares of Series C bear a 7% cumulative dividend payable
      quarterly in shares of common stock or cash, at our option and are junior to
      the
      Series A and Series B preferred stock in liquidation preference. The Series
      C is
      subject to mandatory redemption by the Company three years after issuance and
      can be settled in cash or with our common stock. As a result, the Series C
      is
      recorded as a liability in accordance with FAS 150 “Accounting for Certain
      Financial Instruments with Characteristics of both Liabilities and Equity.”
Additionally, we issued to the Series C investors three-year warrants to
      purchase an aggregate of 1.25 million shares of our common stock at an exercise
      price equal to $2 per share, subject to adjustment based on customary
      antidilution protections. The warrants were valued at $1,021,928 at the date
      of
      issuance and were recorded as a discount to debt and as additional
      paid-in-capital on the balance sheet and are being amortized as interest expense
      throughout the term of the Series C or as they are converted, whichever comes
      first. In July 2007 the exercise price of the warrants was temporarily reduced
      to $0.60 per share if exercised on or before October 25, 2007 as part of the
      consideration given by us in exchange for certain amendments to the terms of
      the
      2007 Debentures described below. The reduction in the warrant exercise price
      resulted in an additional $169,000 of debt discount and additional
      paid-in-capital on the balance sheet and is being amortized as interest expense
      throughout the term of the Series C or as the Series C shares are converted,
      whichever occurs first. During the nine months ended September 30, 2007 and
      2006, we recorded $241,954 and $162,224 ,
      respectively for the amortization of the discount.





On
      February 15, 2007, we entered into agreements (the “Letter Agreements”) with
      each holder of Series C pursuant to which we agreed, between the date of such
      agreement and July 15, 2007, to deliver Company Interim Conversion Election
      Notices (as such term is defined in the Certificate of Designations of the
      Series C) to convert 50% of such holder’s shares of Series C into shares of our
      common stock during
      a four month period. On May 30, 2007, the Company and each holder of Series
      C
      amended the Letter Agreements to extend the four month period for conversions
      under the Letter Agreements to five months or August 15, 2007. As
      provided in the Certificate of Designations of the Series C, the closing sale
      price for our common stock on the date immediately preceding the date of each
      Company Interim Conversion Election Notice must be at least 114% of the
      conversion price (if the applicable closing sale price is $1.25 or less) or
      108%
      of the conversion price (if the applicable closing sale price is greater than
      $1.25), in order for us to cause such conversion. As a result, these conversions will result in BCF charges in accordance with EITF 00-27
      (“Application of Issue No. 98-5 to Certain Convertible Instruments”) and EITF
      98-5 (“Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios”) since the conversion price would
      be lower than the market price of our common stock on the date of the
      conversion. During the nine months ended September 30, 2007, $4,154,000 of
      the
      Series C were converted into 5,516,693 shares of our common stock. We recorded
      $252,000 in BCF expense related to conversions occuring during the nine months
      ended September 30, 2007.





17


Under
      the
      Series C purchase agreement, we are required to restrict funds for future
      dividends to be paid to Series C holders. As a result, these funds, which
      amounted to approximately $1,800,000 at issuance, were classified as restricted
      cash on the balance sheet. According to the Series C purchase agreement, as
      dividends are issued or paid, and conversions are executed, the restricted
      cash
      is released ratably to non-restricted cash accounts.  As of
      September 30, 2007, approximately $9.2 million of the Series C have been
      converted into 8,194,488 shares of our common stock and as a result, $1,594,188
      has been released from restricted cash to date. During the nine months ended
      September 30, 2007, we paid $105,024 in quarterly dividend payments for the
      Series C and issued 44,717 shares of common stock for Series C dividend payments
      valued at $28,059. These dividends were recorded as interest expense since
      the
      Series C was recorded as a liability.




During
      the nine months ended September 30, 2007, a Series C warrant holder exercised
      55,753 warrants with a strike price of $0.60. As a result of this exercise,
      we
      received gross proceeds of $33,452. This amount was recorded as common stock
      and
      additional paid-in capital in the third quarter of 2007.





*Series
      A and Series B Preferred Stock*





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





The
      purpose of the joint development arrangement is 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. In July 2007, the Company and Dow amended the joint
      development arrangement. As amended, the joint development arrangement,
      contemplates three milestones designed to culminate in a commercially viable
      hydrogen storage system for consumer electronics applications.





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




18


On
      May 3,
      2006, the Company and Dow agreed that the first milestone under the joint
      development arrangement was met. Dow elected to purchase 71,429 shares of Series
      B for $1,250,000, and received detachable warrants to purchase 178,571 shares
      of
      our common stock with an exercise price of $2.10 per share which were recorded
      as a discount to Series A for $159,227 based on the fair value of the warrants
      at the date of the issuance. The Series B was initially convertible into ten
      shares of our common stock. As a result of anti-dilution adjustments to the
      conversion price of the Series B, each share of Series B is currently
      convertible into approximately sixteen shares of our common stock which
      resulted in a reduction in the carrying value of the Series B and an addition
      to
      paid-in capital of $16,153. As
      provided by the July 2007 amendment to the joint development arrangement, the
      Series B is subject to weighted average anti-dilution protection. The shares
      of
      Series B bear a 6% cumulative dividend payable in shares of common stock or
      cash, at our option.  In accordance with the joint development arrangement
      and achievement of the first milestone, we also issued 138,150 shares of Series
      A that were earned by Dow through human resource and intellectual property
      contributions toward achievement of the first milestone. As a result of the
      issuance of Series A, we recorded a non-cash charge of $2,113,695 as product
      development expense based on the market value of the underlying common stock
      as
      of May 26, 2006.





In
      July 2007, both parties agreed that the second milestone was achieved under
      the
      joint development arrangement. In accordance with the joint development
      arrangement and achievement of the first milestone, we issued 113,746 shares
      of
      Series A that were earned by Dow through human resource and intellectual
      property contributions toward achievement of the first milestone. As a result
      of
      the issuance, we recorded a non-cash charge of $705,225 as product development
      expense based on the market value of the common stock underlying the newly
      issued shares of Series A as of September 9, 2007. Dow did not exercise its
      option to purchase Series B in connection with the achievement of the second
      milestone.





*2007
      Convertible Debentures*





On
      February 16, 2007, we sold to six institutional and accredited investors
      $6,000,000 aggregate principal amount of unsecured convertible debentures due
      February 16, 2009 (the “2007 Debentures”), and warrants to purchase an aggregate
      of 1,824,105 shares of common stock at an exercise price of $1.14 per share. Under
      certain circumstances, we and/or the
      investors are able to convert the 2007 Debentures at 91% of the volume weighted
      average price of our common stock for the 10 consecutive trading days preceding
      the applicable notice of conversion. During
      the nine months ended September 30, 2007, a holder of our 2007 Debentures
      converted $110,000 principal amount of such debentures into 184,224 shares
      of
      our common stock.




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





Interest
      accrues on the 2007 Debentures at the prime rate (currently 7.50%) and is
      payable on a quarterly basis in shares of common stock (assuming satisfaction
      of
      certain Equity
      Conditions (as defined in the 2007 Debentures) )
      or, if we provide notice, we may elect to pay interest in cash. We currently
      do
      not meet the Equity Conditions due to our non-compliance with NASDAQ listing
      standards and thus we are required to pay such interest in cash (see Note
      10). During the nine months ended September 30, 2007, we have recorded $307,019
      in
      interest expense for the 2007 Debentures.




The
      fair value of the warrants issued with the 2007 Debentures, together with the
      fair value of conversion features and certain other
      contingent liabilities associated with the 2007 Debentures were recorded as
      a debt discount and as a liability under the caption “Debenture related
      liabilities” on the balance sheet upon issuance. The debt discount is amortized
      as interest expense throughout the term of the 2007 Debentures or as they are
      converted, whichever comes first. The Debenture related liabilities are marked
      to market each period end through interest expense. During
      the nine months ended September 30, 2007, we recorded interest expense
      of $406,722 for the amortization of the debt discount for the 2007 Debentures
      and interest income of $783,969 for the marking to market of the debenture
      related liabilities.





19


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





*Sources
      and Uses of Cash*





As
      of September 30, 2007, we had $4,234,926 in cash and cash equivalents and
      restricted cash of $829,100. Cash used in operations totaled $5,902,829 and
      $5,548,125 during the nine months ended September 30, 2007 and 2006,
      respectively, and related to primarily funding our net operating
      losses.





Excluding
      changes in restricted cash, investing activities used cash of $190,905 and
      $1,519,032  during
      the nine months ended September 30, 2007 and 2006, respectively. The decrease
      in
      2007 from 2006 was directly related to acquisition of Gecko in 2006. Restricted
      cash is comprised of $0.2 million as security on Series C Preferred dividends
      and $0.6 million of cash used for collateral as security deposit held by our
      landlord in connection with our amended lease agreement (see contractual
      obligations table below). These funds for the amended lease agreement will
      not
      be available for use in operations until the letters of credit have been reduced
      or terminated. The $0.2 million of restricted cash related to the Series C
      Preferred will be available to us ratably as dividends are paid to the holders
      or as they are converted, whichever comes first.





*Off-Balance
      Sheet Arrangements*





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





*Commitments
      and Contingencies*





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





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





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





20


Our
      contractual obligations are in the table outlined below:




**Payment
                due in fiscal years****Contractual
                Obligations**
            
            **2007****(three
                months****Total**
            
            **remaining)**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**Operating
                lease - facility
            
            $
            565,028
            
            $
            121,078
            
            $
            443,950
            
            $
            —
            
            $
            —
            
            $
            —Refundable
                grant obligation
            
            
            143,132
            
            
            —
            
            
            3,441
            
            
            —
            
            
            139,691
            
            
            —Redeemable
                Series C Preferred Stock (1)
            
            
            790,000
            
            
            —
            
            
            790,000
            
            
            —
            
            
            —
            
            
            —2007
                Debentures (1)
            
            
            6,000,000
            
            
            —
            
            
            —
            
            
            6,000,000
            
            
            —
            
            
            —2007
                Debentures interest
            
            
            619,678
            
            
            112,892
            
            
            449,113
            
            
            57,673
            
            
            —
            
            
            —Total
            
            $
            8,117,838
            
            $
            233,970
            
            $
            1,686,504
            
            $
            6,057,673
            
            $
            139,691
            
            $
            —





*(1)*
            *Redeemable
                Series C Preferred Stock and 2007 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 in the future that we will have
      sufficient cash and cash equivalents to satisfy anticipated cash needs into
      the
      second quarter of 2008.




As
      mentioned above, if the Company does not satisfy either the minimum bid price
      requirement or the other initial listing requirements of Nasdaq as of April
      21,
      2008, the Company’s common stock will be delisted from the NASDAQ Capital
      Market. If our common stock is delisted, it will be an event of default under
      the 2007 Debentures which, if not waived by the holders of a majority of the
      outstanding convertible debentures, would give the holders the right to require
      us to redeem the outstanding 2007 Debentures at a price equal to 120% of the
      outstanding principal amount plus accrued and unpaid interest.





We
      are contemplating a number of options which could allow us to regain compliance
      with NASDAQ listing requirements. In the event we are unable to regain
      compliance, we may consider restructuring our 2007 Debentures or taking other
      actions necessary to secure financing for operations. We
      may raise additional funds through public or private financing, collaborative
      relationships or other arrangements at any time.  Additional funding, if
      sought, may not be available or, if available, may be offered at terms not
      favorable to us. Further, any additional equity financing may be dilutive to
      stockholders, and debt financing, if available, may involve restrictive
      covenants. Our failure to raise capital when needed may harm our business and
      operating results.





**Discussion
      of Critical Accounting Policies**




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




21


**Recent
      Accounting Pronouncements**




See
      Note
      2 to the financial statements included in this Quarterly Report 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
      4T.** ***Controls
      and Procedures***





(a)
      Evaluation of Disclosure Controls and Procedures





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





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




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





(b)
      Changes in Internal Controls





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




22


**PART
      II**





**Item
      1.        Legal
      Proceedings.**





None.





**Item
      1A.     Risk Factors.**





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




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




If
      we fail to satisfy the minimum bid price requirement of $1.00 per share for
      10
      consecutive trading days before April 21, 2008, our common stock will likely
      be
      subject to delisting. If our common stock is delisted then: (i) our market
      liquidity could be adversely affected and the market price of our common stock
      could decline, (ii) our ability to obtain financing could also be adversely
      affected, (iii) it would be an event of default under the 2007 Debentures which,
      if not waived by the holders of a majority of the outstanding convertible
      debentures, would give the holders the right to require us to redeem the
      outstanding 2007 Debentures at a price equal to 120% of the outstanding
      principal amount plus accrued and unpaid interest.




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





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




None.





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





None.




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





None.





**Item
      5.       Other Information.**





None.





23


**Item
      6.       Exhibits**





10.1†
            —
            Advisory
                Board Chairman Consulting Agreement, between Millennium Cell Inc.
                and
                Llewellyn J. “Bud” Evans, Jr., dated as of September 20,2007.(incorporated by reference to Exhibit 10.1 to the Current Report
                on
                Form 8-K filed with the SEC onOctober
                04,2007).10.2†
            —
            Form
                of Advisory Board ConsultingAgreement,between
                Millennium Cell Inc. andeach
                of the Members, dated as of September 20, 2007 (incorporated by reference
                to Exhibit 10.2 to the Current Report on Form 8-K filed with the
                SEC on
                October 04, 2007).10.3†
            
            Retention
                Agreement, between Millennium Cell Inc. and John D. Giolli, dated
                as of
                September 28, 2007 (incorporated by reference to Exhibit 10.2 to
                the
                Current Report on Form 8-K filed with the SEC on October 04,
                2007).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.




24


**SIGNATURES**





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




MILLENNIUM CELL INC.(Registrant)By:
            /s/ H.
              David
              RammH.
              David RammChief
              Executive
              OfficerNovember 14, 2007


By:
              /s/ John
                D.
                GiolliJohn
                D. GiolliChief
                Financial
                OfficerNovember 14, 2007
  25