**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**











**FORM
      10-Q**





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





**For
      the quarterly period ended June 30, 2006**





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





**000-31083**


**(Commission
      File Number)**











**MILLENNIUM
      CELL INC.**


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











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





**One
      Industrial Way West,**


**Eatontown,
      New Jersey 07724**


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





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








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





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





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








Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date: 48,735,099
      of Common Stock, par value $.001, were outstanding on August 11,
      2006.














**MILLENNIUM
      CELL INC.**


**(a
      development stage enterprise)**


**Index**








**PART
      I - FINANCIAL INFORMATION**





**Page**Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance Sheets - June 30, 2006 and December 31, 2005
            1Consolidated
                Statements of Operations - Three and six months ended
            2June
                30, 2006 and 2005 and cumulative amounts from inceptionConsolidated
                Statements of Cash Flows -Six months ended June 30, 2006 and
                2005
            3and
                cumulative amounts from inceptionConsolidated
                Statements of Stockholders’ Equity - Six months ended June 30,
                2006
            4Notes
                to Consolidated Financial Statements - June 30, 2006
            5Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            11Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            18Item
                4.
            Controls
                and Procedures
            18**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            20Item
                1A.
            Risk
                Factors
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            20Item
                3.
            Defaults
                Upon Senior Securities
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            20Item
                5.
            Other
                Information
            21Item
                6.
            Exhibits
            22























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





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





**FORWARD-LOOKING
      STATEMENTS**





This
      report contains forward-looking statements (within the meaning of the Private
      Securities Litigation Reform Act of 1995). These forward-looking statements
      reflect our current view about future events and financial performance and
      are
      subject to risks and uncertainties. Statements contained herein that are not
      statements of historical fact may be deemed to be forward-looking information.
      When we use words such as “plan,” “believe,” “expect,” “anticipate,” “on target”
and “intend” or similar expressions, we are making forward-looking statements.
      Investors should
      not rely on forward-looking statements because they are subject to a variety
      of
      risks, uncertainties and other factors that could cause actual results to differ
      materially from our expectations, and we expressly do not undertake any duty
      to
      update forward-looking statements or to publicly announce revisions to any
      of
      the forward-looking statements, whether as a result of new information, future
      events or otherwise. These
      factors include, but are not limited to, the following: (i) the cost and timing
      of development and market acceptance of, and the availability of components
      and
      raw materials required by, a hydrogen battery technology and hydrogen delivery
      system, (ii) the cost and commercial availability of the quantities of raw
      materials required by the hydrogen fuel storage and delivery systems, (iii)
      competition from current, improving and alternate power technologies, (iv)
      our
      ability to raise capital at the times, in the amounts and at costs and terms
      that are acceptable to fund the development and commercialization of our
      hydrogen battery technology and hydrogen delivery system and our business plan,
      (v) our ability to protect our intellectual property, (vi) our ability to
      achieve budgeted revenue and expense amounts, (vii) our ability to generate
      revenues from the sale or license of, or provision of services related to,
      our
      technology, (viii) our ability to enter into agreements with collaborators
      and
      strategic partners and the failure of our collaborators and strategic partners
      to perform under their agreements with us, (ix) our ability to generate design,
      engineering or management services revenue opportunities in the hydrogen
      generation or fuel cell markets, (x) our ability to secure government funding
      of
      our research and development and technology demonstration projects and (xi)
      other factors discussed under the caption “Risk Factors” in
      our
      Annual Report on Form 10-K for the year ended December 31, 2005.








**PART
      I - FINANCIAL INFORMATION**




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





**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      BALANCE SHEETS**


**(Unaudited)**





**June
                30,**
            
            **December
                31,****Assets**
            
            **2006**
            
            **2005**Current
                assets:Cash
                and cash equivalents
            
            $
            8,414,705
            
            $
            11,675,877Restricted
                cash
            
            
            416,747
            
            
            373,868Accounts
                receivable - trade
            
            
            4,581
            
            
            36,808Accounts
                receivable - government
            
            
            110,975
            
            
            112,462Prepaid
                expenses
            
            
            74,339
            
            
            237,867Deferred
                financing costs
            
            
            94,404
            
            
            102,270Total
                current assets
            
            
            9,115,751
            
            
            12,539,152Property
                and equipment, net
            
            
            342,413
            
            
            450,138Patents
                and licenses, net
            
            
            660,506
            
            
            654,876Restricted
                cash
            
            
            908,734
            
            
            1,208,191Investment
                in unconsolidated subsidiary (Note 8)
            
            
            812,065
            
            
            —Deferred
                financing costs
            
            
            77,592
            
            
            136,360Security
                deposits
            
            
            45,676
            
            
            45,676$
            11,962,737
            
            $
            15,034,393**Liabilities
                and stockholders' equity**Current
                liabilities:Accounts
                payable
            
            $
            274,386
            
            $
            521,615Accrued
                expenses
            
            
            1,023,826
            
            
            893,868Short-term
                portion of capital lease obligation
            
            
            —
            
            
            6,173Short-term
                portion of refundable grant obligation
            
            
            —
            
            
            49,611Deferred
                compensation
            
            
            109,742
            
            
            101,050Convertible
                unsecured debentures (Note 5)
            
            
            899,988
            
            
            2,399,988Total
                current liabilities
            
            
            2,307,942
            
            
            3,972,305Redeemable
                Series C preferred stock, net of discount (Note 5)
            
            
            4,722,953
            
            
            5,035,416Refundable
                grant obligation
            
            
            156,329
            
            
            156,329Commitments
                and contingenciesStockholders'
                equity:Series
                A preferred stock, $.001 par value; 1,694,724 authorized shares,
                293,874
                and 155,724 issued and outstanding as of June 30, 2006 and December
                31,
                2005, respectively
            
            
            4,527,417
            
            
            2,413,722Series
                B preferred stock, $.001 par value; 1,539,000 authorized shares,
                71,429
                and 0 issued and outstanding as of June 30, 2006 and December 31,
                2005,
                respectively
            
            
            1,090,773
            
            
            —Common
                stock, $.001 par value; authorized 70,000,000 shares and 48,603,142
                and
                46,454,375 shares issued and outstanding as of June 30, 2006 and
                December
                31, 2005, respectively
            
            
            48,603
            
            
            46,454Additional
                paid-in capital
            
            
            102,432,802
            
            
            99,942,349Deferred
                compensation
            
            
            —
            
            
            (596,296)Deficit
                accumulated during development stage
            
            
            (103,324,082)
            
            
            (95,935,886)Total
                stockholders' equity
            
            
            4,775,513
            
            
            5,870,343$
            11,962,737
            
            $
            15,034,393





See
      notes
      to financial statements.






1









**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**








**Three
                  Months**
              
              **Three
                  Months**
              
              **Six
                  Months**
              
              **Six
                  Months**
              
              **Cumulative****Ended**
              
              **Ended**
              
              **Ended**
              
              **Ended**
              
              **Amounts****June
                  30,**
                **2006**
              
              **June
                  30,**
                **2005**
              
              **June
                  30,**
                **2006**
              
              **June
                  30,**
                **2005**
              
              **From**
                **Inception**Revenue
              
              $
              12,222
              
              $
              48,426
              
              $
              82,104
              
              $
              128,327
              
              $
              1,883,731Cost
                  of revenue
              
              
              12,222
              
              
              48,426
              
              
              82,104
              
              
              128,327
              
              
              1,762,404Gross
                  margin
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              121,327Product
                  development and marketing
              
              
              829,885
              
              
              799,399
              
              
              1,735,073
              
              
              1,880,634
              
              
              25,308,177General
                  and administrative
              
              
              1,035,105
              
              
              1,858,276
              
              
              2,053,842
              
              
              2,727,034
              
              
              27,666,307Restructuring
                  expense
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              104,982Non-cash
                  charges (Note 4)
              
              
              2,460,055
              
              
              2,525,075
              
              
              2,650,641
              
              
              3,030,282
              
              
              31,406,645Depreciation
                  and amortization
              
              
              78,138
              
              
              63,566
              
              
              215,325
              
              
              141,150
              
              
              3,202,337Research
                  and development
              
              
              26,366
              
              
              207,437
              
              
              222,349
              
              
              425,178
              
              
              9,418,605Total
                  operating expenses
              
              
              4,429,549
              
              
              5,453,753
              
              
              6,877,230
              
              
              8,204,278
              
              
              97,107,053Loss
                  from operations
              
              
              (4,429,549
              )
              
              (5,453,753)
              
              
              (6,877,230
              )
              
              (8,204,278
              )
              
              (96,985,726
              )Interest
                  expense, net
              
              
              211,726
              
              
              331,055
              
              
              373,559
              
              
              697,729
              
              
              4,447,851Equity
                  in losses of unconsolidated subsidiary (Note 8)
              
              
              84,107
              
              
              —
              
              
              137,407
              
              
              —
              
              
              993,485Loss
                  before income taxes
              
              
              (4,725,382
              )
              
              (5,784,808)
              
              
              (7,388,196
              )
              
              (8,902,008
              )
              
              (102,427,062
              )Benefit
                  from income taxes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,253,861Net
                  loss
              
              
              (4,725,382
              )
              
              (5,784,808)
              
              
              (7,388,196
              )
              
              (8,902,008
              )
              
              (101,173,201
              )Series
                  B Preferred Stock dividends
              
              
              6,575
              
              
              —
              
              
              6,575
              
              
              —
              
              
              6,575Preferred
                  stock amortization
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,150,881
              )Net
                  loss applicable to common stockholders
              
              $
              (4,731,957
              )
              $
              (5,784,808)
              
              $
              (7,394,771
              )
              $
              (8,902,008
              )
              $
              (103,330,657
              )Loss
                  per share — basic and diluted
              
              $
              (.10
              )
              $
              (.14)
              
              $
              (.16
              )
              $
              (.21
              )
              $
              (3.23
              )Weighted
                  — average number of shares outstanding
              
              
              48,358,350
              
              
              42,611,508
              
              
              47,662,882
              
              
              41,405,353
              
              
              31,956,231






See
      notes
      to financial statements.











2





**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(unaudited)**






**Six
                Months**
            
            **Six
                Months**
            
            **Cumulative****Ended**
            
            **Ended**
            
            **Amounts****June
                30,**
            
            **June
                30,**
            
            **From****2006**
            
            **2005**
            
            **Inception****Operating
                activities**Net
                loss
            
            $
            (7,388,196
            )
            $
            (8,902,008
            )
            $
            (101,173,201
            )Adjustments
                to reconcile net loss to net cash used in operation
                activitiesDepreciation
                and amortization
            
            
            215,325
            
            
            141,150
            
            
            3,202,337Amortization
                of discount on unsecured debentures
            
            
            119,537
            
            
            296,818
            
            
            2,698,366Amortization
                of deferred financing costs
            
            
            66,635
            
            
            119,117
            
            
            1,460,718Non-cash
                interest charges
            
            
            213,772
            
            
            153,100
            
            
            653,683Beneficial
                conversion feature
            
            
            105,000
            
            
            168,000
            
            
            2,127,582Losses
                on investment in unconsolidated subsidiary (Note 8)
            
            
            137,407
            
            
            —
            
            
            993,485Non-cash
                charges
            
            
            2,650,641
            
            
            3,030,282
            
            
            31,406,645Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            33,714
            
            
            254,982
            
            
            (115,556
            )Prepaid
                expenses and other assets
            
            
            163,528
            
            
            252,881
            
            
            (120,015
            )Accounts
                payable and accrued expenses
            
            
            (383,589
            )
            
            (186,934
            )
            
            1,907,650Deferred
                income
            
            
            —
            
            
            —
            
            
            2,399,988Net
                cash used in operating activities
            
            
            (4,066,226
            )
            
            (4,671,812
            )
            
            (54,558,318
            )**Investing
                activities**Purchase
                of property and equipment
            
            
            —
            
            
            —
            
            
            (2,885,446
            )Patent
                registration costs
            
            
            (82,422
            )
            
            (94,438
            )
            
            (984,989
            )Investment
                in unconsolidated subsidiary (Note 8)
            
            
            (563,318
            )
            
            —
            
            
            (1,419,396
            )(Increase)/decrease
                in restricted cash
            
            
            256,578
            
            
            (1,795,520
            )
            
            (1,325,481
            )Net
                cash used in by investing activities
            
            
            (389,162
            )
            
            (1,889,958
            )
            
            (6,615,312
            )**Financing
                activities**Proceeds
                from sale of common stock
            
            
            —
            
            
            1,172,755
            
            
            39,394,207Underwriting
                and other expenses of initial public offering
            
            
            —
            
            
            —
            
            
            (3,669,613
            )Proceeds
                from issuance of debentures
            
            
            —
            
            
            —
            
            
            21,428,806Proceeds
                from redeemable Series C preferred stock
            
            
            —
            
            
            10,000,000
            
            
            10,000,000Proceeds
                from Series B preferred stock
            
            
            1,250,000
            
            
            —
            
            
            1,250,000Deferred
                financing costs
            
            
            —
            
            
            (480,336
            )
            
            (1,281,656
            )Capital
                lease obligation payments
            
            
            (6,173
            )
            
            (15,943
            )
            
            (86,184
            )Proceeds
                from capital contribution
            
            
            —
            
            
            —
            
            
            500,000Payment
                of note payable
            
            
            —
            
            
            —
            
            
            (250,000
            )(Payments)/proceeds
                from grant, net
            
            
            (49,611
            )
            
            —
            
            
            156,329Proceeds
                from sale of preferred stock
            
            
            —
            
            
            —
            
            
            2,146,446Net
                cash (used in)/provided by financing activities
            
            
            1,194,216
            
            
            10,676,476
            
            
            69,588,335Net
                increase (decrease) in cash and cash equivalents
            
            
            (3,261,172
            )
            
            4,114,706
            
            
            8,414,705Cash
                and cash equivalents, beginning of period
            
            
            11,675,877
            
            
            8,217,840
            
            
            —Cash
                and cash equivalents, end of period
            
            $
            8,414,705
            
            $
            12,332,546
            
            $
            8,414,705





See
      notes
      to financial statements.


Supplemental
      cash flow information.


Please
      see note 7 for more information.









3








**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**(Unaudited)**








**Common
                Stock****Shares**
            
            
            **Amount**
            
            
            **Additional 
                  Paid-in**
              **Capital**
            
            
            **DeferredCompensation**
            
            
            **Series
                APreferred**
            
            
            **Series
                BPreferred**
            
            
            **AccumulatedDeficit**
            
            
            **Total
                Stockholder's Equity**Balance
                at December 31, 2005
            
            46,454,375
            
            $
            46,454
            
            $
            99,942,349
            
            $
            (596,296)
            
            $
            2,413,722
            
            $
            —
            
            $
            (95,935,886)
            
            $
            5,870,343Reclassification
                of unearned stock compensation in connection with adoption of SFAS
                123R
            
            —
            
            
            —
            
            
            (596,296
            )
            
            596,296
            
            
            —
            
            
            —
            
            
            
            
            
            —Issuance
                of common stock from conversion of debentures and Series C Preferred
                Stock
            
            1,193,596
            
            
            1,194
            
            
            1,930,806
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,932,000Beneficial
                conversion feature on private placement transactions
            
            —
            
            
            —
            
            
            105,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            105,000Issuance
                of stock for interest payments
            
            146,866
            
            
            147
            
            
            213,625
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            213,772Issuance
                of common stock for 401(k)
            
            92,905
            
            
            93
            
            
            156,528
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            156,621Issuance
                of restricted stock for merit awards
            
            465,400
            
            
            465
            
            
            (465
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Issuance
                of restricted stock for consulting
            
            200,000
            
            
            200
            
            
            (200
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Issuance
                of restricted stock for executive compensation
            
            50,000
            
            
            50
            
            
            (50
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Stock
                compensation expense
            
            —
            
            
            —
            
            
            536,945
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            536,945Deferred
                compensation plan
            
            —
            
            
            
            
            
            (8,092
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (8,092)Issuance
                of Series A preferred stock, 138,150 shares issued
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,113,695
            
            
            —
            
            
            —
            
            
            2,113,695Issuance
                of Series B preferred stock, 71,429 shares issued
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,250,000
            
            
            —
            
            
            1,250,000Warrants
                issued in connection with Series B preferred stock
            
            —
            
            
            —
            
            
            159,227
            
            
            —
            
            
            —
            
            
            (159,227
            )
            
            —
            
            
            —Series
                B preferred stock dividends
            
            —
            
            
            —
            
            
            (6,575
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (6,575)Net
                loss
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,388,196)
            
            
            (7,388,196)Balance
                at June 30, 2006
            
            48,603,142
            
            $
            48,603
            
            $
            102,432,802
            
            $
            —
            
            $
            4,527,417
            
            $
            1,090,773
            
            $
            (103,324,082)
            
            $
            4,775,513










See
      notes
      to financial statements.






4







**MILLENNIUM
      CELL INC.**


**(A
      DEVELOPMENT STAGE ENTERPRISE)**


**NOTES
      TO FINANCIAL STATEMENTS**


**(unaudited)**








**NOTE
      1--BASIS OF PRESENTATION**





The
      consolidated financial statements include the accounts of Millennium Cell Inc.
      and its wholly owned subsidiary, MCE Ventures LLC. MCE Ventures is a Delaware
      limited liability company that was formed in 2002 to engage in limited strategic
      investment activities. All significant inter-company transactions and accounts
      have been eliminated.





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with U.S. generally accepted accounting principles for interim
      financial information and with the instructions to Form 10-Q and Article 10
      of
      Regulation S-X. Accordingly, they do not include all of the information and
      footnotes required by U.S. generally accepted accounting principles for complete
      financial statements. In the opinion of management, all known adjustments (which
      consist primarily of normal recurring adjustments) considered necessary for
      a
      fair presentation have been included. The interim statements should be read
      in
      conjunction with our Annual Report on Form 10-K/A for the year ended December
      31, 2005.





**NOTE
      2--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
      3--STOCK BASED COMPENSATION**





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




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





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






5








The
      impact to the consolidated financial statements, as a result of the Company’s
      adoption of SFAS 123R compared to continued recognition of stock-based
      compensation under APB 25, was an increase to net loss of $57,522 and $128,807
      for the three and six months ended June 30, 2006, respectively. There was no
      impact on both basic and diluted earnings per share for the three and six months
      ended June 30, 2006. The increase to net loss that resulted from the adoption
      of
      SFAS 123R reflected the stock-based compensation expense associated with the
      unvested stock option awards.





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





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







**Three
                months**
              **ended
                June, 30**
              **2005**
            
            **Six
                months**
              **ended
                June 30,**
              **2005**Net
                loss attributable to common stockholders — as reported
            
            $
            (5,784,808
            )
            $
            (8,902,008
            )Add:
                Total stock-based compensation expense included in net
                loss
            
            
            111,353
            
            
            616,560Deduct:
                Total stock-based compensation expense determined under fair value
                based
                method for all stock option awards
            
            
            (114,286
            )
            
            (645,785
            )Net
                loss attributable to common stockholders — Pro forma
            
            $
            (5,787,741
            )
            $
            (8,931,233
            )Net
                loss per share attributable to common stockholders — As
                reported
            
            $
            (0.14
            )
            $
            (0.21
            )Net
                loss per share attributable to common stockholders — Pro
                forma
            
            $
            (0.14
            )
            $
            (0.22
            )





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





Expected
                dividend yield
            —Expected
                stock price volatility
            .89Risk-free
                interest rate
            3.74%Expected
                option term
            5
                years





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




*Stock
        Options*




The
      Company has awarded stock options to certain employees and directors. Stock
      options awarded to directors vest immediately. Stock options awarded to
      employees typically vest over three years. The Company granted 75,000 stock
      options to a director during the three months ended June 30, 2006 and the fair
      value of those awards was recorded as stock compensation expense immediately.
      The Company did not issue options to employees during the six months ended
      June
      30, 2006.









6





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





**Shares**
            
            **Weighted-
                Average Exercise****Price**
            
            **Weighted-
                Average Remaining Contractual Life(In****years)**
            
            **Aggregate
                Intrinsic****Value**Outstanding
                at December 31, 2005
            
            
            3,994,769
            
            $
            3.75
            
            
            —
            
            
            —Granted
            
            
            75,000
            
            
            1.47
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
                and cancelled
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at June 30, 2006
            
            
            4,069,769
            
            
            3.70
            
            
            6.0
            
            $
            9,000Vested
                and expected to vest at June 30, 2006
            
            
            3,866,281
            
            
            3.70
            
            
            6.0
            
            
            3,000Exercisable
                at June 30, 2006
            
            
            3,716,970
            
            $
            3.70
            
            
            5.9
            
            $
            3,000





The
      aggregate intrinsic value in the table above represents the total intrinsic
      value (the difference between the closing stock price on the last trading day
      of
      the second quarter of 2006 and the exercise price, multiplied by the number
      of
      in-the-money options) that would have been received by the option holders had
      all option holders exercised their options on June 30, 2006. The intrinsic
      value
      changes based on the fair market value of the Company’s common stock.





As
      of
      June 30, 2006, there was $0.2 million of total unrecognized
      compensation expense related to stock options which is expected to be recognized
      over a weighted-average period of 2.5 years.




*Restricted
        Stock Awards*





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





During
      the six months ended June 30, 2006 and 2005, the Company issued 465,400 and
      474,800 shares of restricted stock to employees with a fair market value of
      $763,256 and $1,044,560, respectively. These shares will vest in five years,
      or
      earlier, upon meeting certain accelerated vesting criteria, as defined. During
      the six months ended June 30, 2006 and 2005, the Company recorded $139,000
      and
      $62,674, respectively in non-cash charges for restricted stock issued to
      employees. The Company will recognize additional non-cash charges of $139,000
      in
      the remainder of 2006 and an additional $986,645 will be recorded through 2010,
      or earlier if other accelerated vesting features are met.





During
      the six months ended June 30, 2006 the Company issued 50,000 restricted shares
      to Mr. H. David Ramm, the Chief Executive Officer. These shares had a fair
      value
      of $89,500 and vest monthly through December 31, 2006. During the six months
      ended June 30, 2006, the Company recorded non-cash charges of $39,875 for the
      vesting.





The
      Company issued 200,000 shares of restricted stock awards to Ronald Kelley and
      Steven Pratt, the principal shareholders of Gecko Energy Technologies, Inc.
      (See
      Note 8), during the six months ended June 30, 2006. The issuance is in exchange
      for two consulting agreements with the Company. 50,000 shares of these
      restricted stock awards had a fair value of $72,500 at the date of grant and
      are
      fully vested as of June 30, 2006. 150,000 shares of these restricted stock
      awards had a fair value of $232,500 at the date of grant and vest on a graded
      basis over three years and the Company recorded a non-cash charge of $55,520
      with respect to the vesting of such awards during the six months ended June
      30,
      2006. As






7




prescribed
      by EITF No. 96-18 “Accounting for Equity Instruments That Are Issued to Other
      Than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services”, restricted stock awards issued to non-employees should be re-measured
      to fair value at each reporting date until the award vests. The final
      measurement date is on the date the award vests, rather than the grant-date
      measurement specified for most employee awards classified as equity. As a
      result, the Company recorded for both grants non-cash charges for the vested
      portion of the restricted stock awards to date and marked to market the unvested
      portion the remaining unvested restricted stock awards.





Changes
      in nonvested restricted stock awards during the three and six months ended
      June
      30, 2006 were as follows:





**Number
                of****Shares**
            
            **Weighted-
                Average Grant Date Fair****Value**Nonvested
                at December 31, 2005
            
            
            332,480
            
            $
            2.25Granted
            
            
            665,400
            
            
            1.63Vested
            
            
            (109,973
            )
            
            1.56Forfeited
            
            
            —
            
            
            —Nonvested
                at June 30, 2006
            
            
            887,907
            
            $
            1.87





As
      of
      June 30, 2006, there was $1.3 million of unrecognized stock-based
      compensation expense related to nonvested restricted stock awards. This expense
      is expected to be recognized as the shares vest.





**NOTE
      4-- NON-CASH CHARGES**





During
      the three and six months ended June 30, 2006 and 2005, the Company recorded
      non-cash charges for stock-based awards and Series A Preferred Stock. Please
      see
      Note 3 and Note 6 for more information on these awards.





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





**Three
                months ended June, 30**
            
            **Six
                months ended June, 30****2006**
            
            **2005**
            
            **2006**
            
            **2005**Product
                development and marketing
            
            $
            2,129,474
            
            $
            2,433,753
            
            $
            2,145,253
            
            $
            2,548,649General
                and administrative
            
            
            324,946
            
            
            86,476
            
            
            494,118
            
            
            438,141Research
                and development
            
            
            5,635
            
            
            4,846
            
            
            11,270
            
            
            43,492Total
            
            $
            2,460,055
            
            $
            2,525,075
            
            $
            2,650,641
            
            $
            3,030,282





**NOTE
      5—PRIVATE PLACEMENTS**





*Convertible
      Debentures*





On
      November 8, 2002, the Company issued to the Ballard Power Systems Inc.
      (“Ballard”) a $2.4 million secured convertible debenture with a maturity
      date of November 8, 2005. On September 30, 2005, Ballard sold its debenture
      in
      equal amounts to three accredited institutional investors (the “Investors”) in a
      private transaction. In connection with such transfer, the Company issued an
      $800,000 secured convertible debenture, in substance identical to the Ballard
      debenture, to each of the Investors. On November 8, 2005, the Company issued
      an
      amended and restated convertible debenture (each, a “New Debenture”) to each of
      the Investors as consideration for the Investors’ agreement to surrender their
      original debentures and cancel the standby letters of credit issued by Wachovia
      Bank, National Association, that secured the original debentures, thus enabling
      the Company to use the formerly restricted cash for the Company’s operations.
      The principal changes to the term of the debentures consisted of the reduction
      of the initial conversion price from $4.25 to $2.25 per share, an extension
      of
      the maturity date to September 30, 2007, and the provision for 6% quarterly
      interest payments to the holders. No gain or loss was required to be recognized
      by the Company upon the exchange. In accordance with EITF 00-27 (“Application of
      Issue No. 98-5 to Certain Convertible Instruments”) and EITF 98-5 (“Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios”), the Company is required to record a Beneficial
      Conversion Feature (“BCF”) interest






8




charge
      if
      the Company elects to convert debentures early at a discount. As of June 30,
      2006, the Company converted $1,500,000 of the New Debentures in exchange for
      929,927 shares of the Company’s common stock and recorded a BCF of $105,000
      associated with such conversions.





*Redeemable
      Series C Preferred Stock*




On
      April
      25, 2005, the Company consummated a private placement financing transaction
      with
      seven institutional and accredited investors who paid $10 million for 10,000
      shares of our redeemable Series C Preferred Stock (“Series C”) (which shares
      were subsequently exchanged for a like number of shares of redeemable Series
      C2
      Preferred Stock in an exchange offer conducted by the Company). Each Series
      C
      share is 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 lower based upon the market price of
      our
      common stock during the ten trading days preceding conversion. The shares of
      Series C bear a 7% cumulative dividend payable quarterly in shares of common
      stock or cash, at the Company’s option and are junior to the Series A and Series
      B preferred stock in liquidation preference. The Series C is subject to
      mandatory redemption by the Company three years after issuance and can be
      settled in cash or with the Company’s common stock. As a result, the Series C is
      recorded as a liability in accordance with FAS 150 “Accounting for Certain
      Financial Instruments with Characteristics of both Liabilities and Equity”.
      Additionally, the Company issued to the investors three-year warrants to
      purchase an aggregate of 1.25 million shares of the Company’s common stock at an
      exercise price equal to $2 per share, subject to adjustment based on customary
      antidilution protections. The warrants were valued at $1,021,928 at the date
      of
      issuance and were recorded as a discount to debt and as additional
      paid-in-capital on the balance sheet and are being amortized as interest expense
      throughout the term of the Series C or as they are converted, whichever comes
      first. During the six months ended June 30, 2006 and 2005, the Company recorded
      $119,547 and $63,690, respectively for the amortization of the
      discount.





Under
      the
      Series C purchase agreement, the Company is required to restrict funds for
      future dividends to be paid to Series C holders. As a result, these funds,
      which
      amounted to approximately $1,800,000 at issuance, were classified as restricted
      cash on the balance sheet. During the six months ended June 30, 2006, the
      Company issued 146,866 shares valued at $213,772 in satisfaction of the
      quarterly dividend payments for the Series C. These dividends were recorded
      as
      interest expense since the Series C was recorded as a liability as of June
      30,
      2006. According to the Series C purchase agreement, as dividends are issued
      or
      paid, and conversions are executed, the restricted cash is released ratably
      to
      our non-restricted cash accounts. During the six months ended June 30, 2006,
      the
      Company converted $432,000 of the Series C in exchange for 263,669 shares of
      the
      Company’s common stock. As of June 30, 2006, approximately $5.0 million of the
      Series C have been converted into 2,587,412 shares of the Company’s common stock
      and the Company has released $1,065,996 from restricted cash for the conversions
      that were executed and the dividends that were paid.





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





*Series
      A and Series B Preferred Stock*





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





The
      purpose of the joint development arrangement is for the two companies to jointly
      develop portable power solutions based on our Hydrogen on Demand® energy systems
      coupled with a fuel cell. The joint development arrangement has a three year
      term and each party may terminate the joint development arrangement under
      certain conditions. The joint development arrangement contemplates a series
      of
      four milestones designed to culminate in a commercially available product in
      military or consumer electronics applications. The milestones are focused on
      military and/or consumer electronics applications.





Upon
      the
      successful completion of each of the four milestones, Dow has a right, but
      not
      an obligation, to purchase a number of shares of the Company’s Series B
      Preferred Stock which is convertible into a number of shares of the Company’s
      common stock that could be purchased for $1,250,000 (based upon a purchase
      price
      equal to the volume weighted






9




average
      price for the 30-trading day period prior to the date of issuance). If Dow
      purchases shares of the Company’s Series B Preferred Stock, Dow will also
      receive warrants to purchase a number of shares of the Company’s common stock
      that equals 25% of the number of shares of common stock issuable upon conversion
      of the Series B Preferred Stock. If Dow purchases shares of the Company’s Series
      B Preferred Stock in such instances, the Company will issue to Dow additional
      shares of Series A Preferred Stock such that Dow will own a certain percentage
      of the Company’s capital stock as of the date of issuance as provided in the Dow
      Stock Purchase Agreement. If Dow elects not to purchase shares of the Company’s
      Series B Preferred Stock upon completion of any milestone, the Company will
      issue to Dow a lesser number of additional shares of Series A Preferred Stock.





On
      May 3,
      2006, the Company and Dow agreed that first milestone under the joint
      development agreement was met. Dow
      elected to purchase 71,429 shares of Series B Preferred Stock for $1.25 million,
      and received detachable warrants to purchase 178,571 shares of the Company’s
      common stock with an exercise price of $2.10 per share which
      were recorded as a discount to Series B Preferred Stock for $159,227. Series
      B
      Preferred Stock is convertible into ten shares of the Company’s common stock.
      The shares of Series B Preferred Stock bear a 6% cumulative dividend payable
      in
      shares of common stock or cash, at the Company’s option and are junior to Series
      A Preferred Stock. In
      accordance with the joint development arrangement, the Company issued 138,150
      shares of Series A Preferred Stock that were earned by Dow through human
      resource and intellectual property contributions toward achievement of the
      first
      milestone. As
      a
      result of the issuance of Series A Preferred Stock, the Company recorded a
      non-cash charge of $2,113,695 as product development expense based on the market
      value of the underlying common stock as of May 26, 2006.







**NOTE
      7—SUPPLEMENTAL CASH FLOW INFORMATION**





The
      Company issued 92,905 and 46,398 shares of common stock valued at $156,621
      and
      $62,959 to employees as 401(k) Plan employer matching contributions during
      the
      first half of 2006 and 2005, respectively.





The
      Company issued 465,400 and 474,800 shares of restricted stock valued at $763,256
      and $1,044,560 to employees as restricted stock during the first half of 2006
      and 2005, respectively. The Company also converted Series C and New Debentures
      during the six months ended June 30, 2006. See note 5 for further details on
      these conversions.





During
      the first half of 2006, the Company issued 146,866 shares of common stock valued
      at $213,772 as dividend payments on the Series C Preferred Stock.





During
      the first half of 2006, the Company issued 200,000 shares of restricted stock
      valued at $305,000 for two consulting agreements. See Note 8 for more
      information.





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





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





In
      addition to the joint development program, the Company acquired approximately
      23% of the outstanding common stock of Gecko in exchange for $0.5 million in
      cash and a one-year, commitment of services and facilities valued at $0.5
      million. In July 2006, the Company increased its equity position to a total
      of
      34.8% of Gecko’s outstanding common stock by investing another $0.5 million in
      cash. Later in the year, the Company is obligated to further increase its equity
      position to a total of 48% of Gecko’s outstanding stock by investing another
      $0.55 million in cash or the Company’s common stock. As part of the transaction,
      the Company received the right to invest up to $4 million of cash and services,
      at its sole option, for up to 80% of Gecko over the remaining 2 years of the
      agreement at fair value of the common stock on the date of the acquisition
      (excluding shares issuable under Gecko’s benefit plans).





The
      Company’s investment in Gecko was accounted for using the equity method of
      accounting since the investment gives the Company the ability to exercise
      significant influence, but not control, over Gecko. Significant influence is
      deemed to exist as of June 30, 2006 since the Company had an approximately
      23%
      ownership interest in the voting stock of Gecko as of such date.






10





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





The
      following discussion should be read in conjunction with the accompanying
      consolidated financial statements and notes thereto included within this report.
      In addition to historical information, this Form 10-Q and the following
      discussion contain forward-looking statements that reflect our plans, estimates,
      intentions, expectations and beliefs. See the discussion contained herein under
      the caption “Forward-Looking Statements” for more information. Our actual
      results could differ materially from those discussed in the forward-looking
      statements. The discussion below should be read in conjunction with the
      Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005 .





**General**





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





**Overview**





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





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








**Results
      of Operations**





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





*Revenues* .
      Revenues for the three months ended June 30, 2006 were $12,222 compared to
      $48,426 for the same period of 2005, a decrease of $36,204. R evenues
      in both periods were earned from engineering and design services. 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 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 in which technology is delivered, licensing revenues
      are earned, or as services are performed.





*Cost
      of Revenues.* Cost of
      revenues for the three months ended June 30, 2006 were $12,222 as compared
      to
      $48,426 for the same period of 2005, a decrease of $36,204.  Cost
      of
      revenues during the development stage represent the Product Development and
      Marketing expenses and Research and Development expenses associated with the
      revenues earned.






11





*Product
      Development and Marketing Expense* .
      Product
      development and marketing expenses for the three months ended June 30, 2006
      were
      $829,855 compared to $799,399 for the same period of 2005, an increase of
      $30,456. The expenses increased due to increased marketing staff and
      programs.





*General
      and Administrative Expense* .
      General
      and administrative expenses for the three months ended June 30, 2006 were
      $1,035,105 compared to $1,858,276 for the same period of 2005, a decrease of
      $823,171. The decrease was mainly the result of the non -recurrence of
      professional fees associated with the closing the Dow agreement in 2005.





*Non-cash
      Charges* .
      Non-cash charges were $2,460,055 for the three months ended June 30, 2006
      compared to $2,525,075 for the same period of 2005, a decrease of
      $65,020.  During
      the three months ended June 30, 2006, and 2005, we recorded non-cash charges
      of
      $2,113,695 and $2,413,722, respectively for the issuance of Series A Preferred
      Stock to the Dow Chemical Company. During the three months ended June 30, 2006,
      we recorded non-cash charges of $288,838 for the amortization of restricted
      stock awards granted to the founders of Gecko under two consulting agreements,
      the amortization of restricted stock issued to employees and the issuance of
      stock options to a director, compared to $80,736 for the amortization of
      restricted stock awards recorded during the three months ended June 30,
      2005.





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





**2006**
            
            **2005**Product
                development and marketing
            
            $
            2,129,474
            
            $
            2,433,753General
                and administrative
            
            
            324,946
            
            
            86,476Research
                and development
            
            
            5,635
            
            
            4,846Total
            
            $
            2,460,055
            
            $
            2,525,075








*Depreciation
      and Amortization* .
      Depreciation and amortization was $78,138 for the three months ended June 30,
      2006 compared to $63,566 for the same period of 2005, an increase of $14,572.
      This increase is mainly attributable to the continuing work with our
      intellectual property.





*Research
      and Development Expense* .
      Research and development expenses were $26,366 for the three months ended June
      30, 2006 compared to $207,438 for the same period of 2005, a decrease of
      $181,072. We
      are
      reimbursed for expenses under the Department of Energy (“DOE”) program for the
      joint research of electrochemical pathways to manufacture sodium borohydride,
      which are recorded as a reduction to research and development expense.
      Reimbursements under the DOE program totaled $346,086 and $121,440 for 2006
      and
      2005, respectively, and were primarily responsible for the decrease year over
      year.





*Interest
      Expense, net* .
      Net
      interest expense was $211,726 for the three months ended June 30, 2006 compared
      to $331,055 for the same period of 2005, a decrease of $119,329. The decrease
      was mainly attributable to fewer conversions of convertible securities which
      result in beneficial conversion feature charges, accelerated discount
      amortization, amortization of original issue discounts and issue costs on our
      debentures.





***Six
      Months Ended June 30, 2006 versus Six Months Ended June 30,
      2005***





*Revenues* .
      Revenues for the six months ended June 30, 2006 were $82,104 compared to
      $128,327 for the same period of 2005, a decrease of $46,223. R evenues
      in both periods were earned from engineering and design services. 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 up-front
      license fees, 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 in which technology is delivered, licensing revenues
      are earned, or as services are performed.





*Cost
      of Revenues.* Cost of
      revenues for the six months ended June 30, 2006 were $82,104 compared to
      $128,327 for the same period of 2005, a decrease of $46,223.  Cost
      of
      revenues during the development stage represent the Product Development and
      Marketing expenses and Research and Development expenses associated with the
      revenues earned.






12




*Product
      Development and Marketing Expense* .
      Product
      development and marketing expenses for the six months ended June 30, 2006 were
      $1,735,073 compared to $1,880,634 for the same period of 2005, a decrease of
      $145,561. The expenses decreased due to increased cost reimbursements from
      government funded programs in 2006 from 2005. This was a result of new contracts
      in late 2005 with the National Center for Manufacturing Services and the U.S.
      Army.





*General
      and Administrative Expense* .
      General
      and administrative expenses for the six months ended June 30, 2006 were
      $2,053,842 compared to $2,727,034 for the same period of 2005, a decrease of
      $673,192. The decrease was mainly the result of the professional associated
      with
      the closing the Dow agreement in 2005.





*Non-cash
      Charges* .
      Non-cash charges were $2,650,641 for the six months ended June 30, 2006 compared
      to $3,030,282 for the same period of 2005, a decrease of $379,641.  During
      the six months ended June 30, 2006, and 2005, we recorded non-cash charges
      of
      $2,113,695 and $2,413,722, respectively for the issuance of Series A Preferred
      Stock to the Dow Chemical Company. During the six months ended June 30, 2006,
      we
      recorded non-cash charges of $408,139 for the amortization of restricted stock
      awards granted to the founders of Gecko under two consulting agreements, the
      amortization of restricted stock issued to employees and the issuance of stock
      options to a director, compared to $579,298 for the amortization and vesting
      of
      restricted stock awards recorded during the six months ended June 30,
      2005.





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





**2006**
            
            **2005**Product
                development and marketing
            
            $
            2,145,253
            
            $
            2,548,649General
                and administrative
            
            
            494,118
            
            
            438,140Research
                and development
            
            
            11,270
            
            
            43,494Total
            
            $
            2,650,641
            
            $
            3,030,282








*Depreciation
      and Amortization* .
      Depreciation and amortization was $215,325 for the six months ended June 30,
      2006 compared to $141,150 for the same period of 2005, an increase of $74,175.
      This increase is mainly attributable to the accelerated amortization of of
      non-core intellectual property we chose to abandon.





*Research
      and Development Expense* .
      Research and development expenses were $222,349 for the six months ended June
      30, 2006 compared to $425,718 for the same period of 2005, a decrease of
      $203,369. We
      are
      reimbursed for expenses under the Department of Energy (“DOE”) program for the
      joint research of electrochemical pathways to manufacture sodium borohydride,
      which are recorded as a reduction to research and development expense.
      Reimbursements under the DOE program totaled $577,169 and $317,632 for 2006
      and
      2005, respectively and were responsible for the decrease year over
      year.





*Interest
      Expense, net* .
      Net
      interest expense was $373,559 for the six months ended June 30, 2006 compared
      to
      $697,729 for the same period of 2005, a decrease of $324,170. The decrease
      was
      mainly attributable to less amortization of the discount associated with the
      unsecured debentures and the amortization of related deferred financing costs.
      Interest expense is comprised of interest on Series C Preferred Stock dividends,
      debenture principal, beneficial conversion features, amortization of original
      issue discounts and issue costs on our debentures. We converted $1,000,000
      of
      unsecured debentures and $432,000 of Series C Preferred Stock in the first
      half
      of 2006 as compared to$4,400,000 of unsecured debentures into common stock
      for
      the first half of 2005.





**Liquidity
      and Capital Resources**





*General*





Since
      our
      inception, we have financed our operations primarily through our initial public
      offering in August 2000 and private placements of equity and debt securities.
      The net proceeds from our initial public offering totaled approximately $29.9
      million and we generated net proceeds from private placement transactions in
      2002 and 2003 totaling $14.1 million. In 2004, we received net proceeds of
      approximately $9.4 million from a separate private placement transaction. In
      April 2005, we received net proceeds of approximately $9.6 million for the
      issuance of redeemable Series C Preferred Stock. In May 2006, we received
      proceeds of $1.25 million for the issuance of Series B Preferred
      Stock.








13





*Convertible
      Debentures*





On
      November 8, 2002, we issued to the Ballard Power Systems Inc. (“Ballard”) a
      $2.4 million secured convertible debenture with a maturity date of November
      8, 2005. On September 30, 2005, Ballard sold its debenture in equal amounts
      to
      three accredited institutional investors (the “Investors”) in a private
      transaction. In connection with such transfer, we issued an $800,000 secured
      convertible debenture, in substance identical to the Ballard debenture, to
      each
      of the Investors. On November 8, 2005, we issued an amended and restated
      convertible debenture (each, a “New Debenture”) to each of the Investors as
      consideration for the Investors’ agreement to surrender their original
      debentures and cancel the standby letters of credit issued by Wachovia Bank,
      National Association, that secured the original debentures, thus enabling us
      to
      use the formerly restricted cash for our operations. The principal changes
      to
      the term of the debentures consisted of the reduction of the initial conversion
      price from $4.25 to $2.25 per share, an extension of the maturity date to
      September 30, 2007, and the provision for 6% quarterly interest payments to
      the
      holders. No gain or loss was required to be recognized by us upon the exchange.
      In accordance with EITF 00-27 (“Application of Issue No. 98-5 to Certain
      Convertible Instruments”) and EITF 98-5 (“Accounting for Convertible Securities
      with Beneficial Conversion Features or Contingently Adjustable Conversion
      Ratios”), we are required to record a Beneficial Conversion Feature (“BCF”)
      interest charge if we elect to convert debentures early at a discount. During
      the six months ended June 30, 2006, we have converted $1,500,000 of the New
      Debentures in exchange for 929,927 of our common stock and recorded a BCF of
      $105,000 associated with the conversions.





*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
      our redeemable Series C Preferred Stock (“Series C”) (which shares were
      subsequently exchanged for a like number of shares of redeemable Series C2
      Preferred Stock in an exchange offer conducted by us). Each Series C share
      is
      convertible into 500 hundred 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 lower 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 us three years after issuance and can be settled in cash or with
      our common stock. As a result, the Series C is recorded as a liability in
      accordance with FAS 150 “Accounting for Certain Financial Instruments with
      Characteristics of both Liabilities and Equity”.  Additionally, we issued
      to the investors three-year warrants to purchase an aggregate of 1.25 million
      shares of our common stock at an exercise price equal to $2 per share, subject
      to adjustment based on customary antidilution protections. The warrants were
      valued at $1,021,928 at the date of issuance and were recorded as a discount
      to
      debt and as additional paid-in-capital on the balance sheet and are being
      amortized as interest expense throughout the term of the Series C or as they
      are
      converted, whichever comes first.





Under
      the
      Series C purchase agreement, we are required to restrict funds for future
      dividends to be paid to Series C holders. As a result, these funds, which
      amounted to approximately $1,800,000 at issuance, were classified as restricted
      cash on the balance sheet. During the six months ended June 30, 2006, we issued
      146,866 shares valued at $213,772 in satisfaction of the quarterly dividend
      payments for the Series C. These dividends were recorded as interest expense
      since the Series C was recorded as a liability as of June 30, 2006. According
      to
      the Series C purchase agreement, as dividends are issued or paid, and
      conversions are executed, the restricted cash is released ratably to our
      non-restricted cash accounts. During the six months ended June 30, 2006, we
      converted $432,000 of the Series C in exchange for 263,669 of the Company’s
      common stock. As of June 30, 2006, approximately $5.0 million of the Series
      C
      have been converted into 2,587,412 shares of the our common stock and we have
      released $1,065,996 from restricted cash for the conversions that were executed
      and the dividends that were paid.








*Series
      A and Series B Preferred Stock*





On
      April
      25, 2005, we consummated the first closing under a joint development arrangement
      with The Dow Chemical Company (“Dow”). In connection with the closing, we issued
      155,724 shares of Series A Preferred Stock to Dow (which shares were
      subsequently exchanged for a like number of shares of Series A Preferred Stock
      in an exchange offer






14




conducted
      by us), each share of which is convertible into ten shares of our common stock.
      As a result of the Series A issuance in exchange for services rendered by Dow
      in
      conjunction with the joint development arrangement, we recorded a non-cash
      charge of $2,413,722 as product development expense based on the market value
      of
      the underlying common stock as of April 25, 2005. The Series A has substantially
      the same rights of our common stock, therefore the Series A was valued based
      on
      the closing price of our common stock on April 25, 2005.





The
      purpose of the joint development arrangement is for the two companies to jointly
      develop portable power solutions based on our Hydrogen on Demand® energy systems
      coupled with a fuel cell. The joint development arrangement has a three year
      term and each party may terminate the joint development arrangement under
      certain conditions. The joint development arrangement contemplates a series
      of
      four milestones designed to culminate in a commercially available product in
      military or consumer electronics applications. The milestones are focused on
      military and/or consumer electronics applications.





Upon
      the
      successful completion of each of the four milestones, Dow has a right, but
      not
      an obligation, to purchase a number of shares of our Series B Preferred Stock
      which is convertible into a number of shares of our common stock that could
      be
      purchased for $1,250,000 (based upon a purchase price equal to the volume
      weighted average price for the 30-trading day period prior to the date of
      issuance). If Dow purchases shares of our Series B Preferred Stock, Dow will
      also receive warrants to purchase a number of shares of our common stock that
      equals 25% of the number of shares of common stock issuable upon conversion
      of
      the Series B Preferred Stock. If Dow purchases shares of our Series B Preferred
      Stock in such instances, we will issue to Dow additional shares of Series A
      Preferred Stock such that Dow will own a certain percentage of our capital
      stock
      as of the date of issuance as provided in the Dow Stock Purchase Agreement.
      If
      Dow elects not to purchase shares of our Series B Preferred Stock upon
      completion of any milestone, we will issue to Dow a lesser number of additional
      shares of Series A Preferred Stock.





On
      May 3,
      2006, we both agreed that the first milestone under the joint development
      agreement was met. Dow
      elected to purchase 71,429 shares of Series B Preferred Stock for $1.25 million,
      and received detachable warrants to purchase 178,571 shares of our common stock
      with an exercise price of $2.10 per share which were recorded as a discount
      to
      Series B Preferred Stock for $159,227. Series
      B
      Preferred Stock is convertible into ten shares of our common stock. The shares
      of Series B Preferred Stock bear a 6% cumulative dividend payable in shares
      of
      common stock or cash, at our option and are junior to Series A Preferred Stock. In
      accordance with the joint development arrangement, we issued 138,150 shares
      of
      Series A Preferred Stock that were earned by Dow through human resource and
      intellectual property contributions toward achievement of the first milestone.
      As a result in the issuance of Series A Preferred Stock, we recorded a non-cash
      charge of $2,113,695 as product development expense based on the market value
      of
      the underlying common stock as of May 26, 2006.





*Investment
      in Gecko Energy Technologies, Inc.*





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





In
      addition to the joint development program, the we acquired approximately 23%
      of
      the outstanding common stock of Gecko in exchange for $0.5 million in cash
      and a
      one-year, commitment of services and facilities valued at $0.5 million. In
      July
      2006, we increased our equity position to a total of 34.8% of Gecko’s
      outstanding common stock by investing another $0.5 million in cash. Later in
      the
      year, we are obligated to further increase its equity position to a total of
      48%
      of Gecko’s outstanding stock by investing another $0.55 million in cash or our
      common stock. As part of the transaction, we received the right to invest up
      to
      $4 million of cash and services, at its sole option, for up to 80% of Gecko
      over
      the remaining 2 years of the agreement at fair value of the common stock on
      the
      date of the acquisition (excluding shares issuable under Gecko’s benefit plans).





We
      issued
      200,000 shares of restricted stock awards to Ronald Kelley and Steven Pratt,
      the
      principal shareholders of Gecko, during the three months ended March 31, 2006.
      The issuance is in exchange for two consulting agreements with us. 50,000 shares
      of these restricted stock awards had a $72,500 fair value at the date of grant
      and is fully vested as of June 30, 2006. 150,000 shares of these restricted
      stock award had a $232,500 fair value at the date of grant and vests on a graded
      basis over three years and we recorded a non-cash charge of $55,520 with respect
      to the vesting of this award during the six months ended June 30, 2006.






15





*Sources
      and Uses of Cash*





As
      of
      June 30, 2006, we had $8,414,705 in cash and cash equivalents and restricted
      cash of $1,325,481. Cash used in operations totaled $4,066,226 and
      $4,671 ,812 during
      the six months ended June 30, 2006 and 2005, respectively, and related to
      primarily funding our net operating losses.





Excluding
      changes in restricted cash, investing activities used cash of $645,740
      and $94,438 during
      the six months ended June 30, 2006 and 2005, respectively. The increase in
      2006
      from 2005 was directly related to our investment in Gecko. Restricted
      cash is comprised of $0.7 million as security on Series C Preferred dividends
      and $0.6 million of cash used for collateral as security deposit held by our
      landlord in connection with our amended lease agreement (see table
      below). These
      funds will not be available for use in operations until the letters of credit
      have been reduced or terminated. The $0.7 million of restricted cash related
      to
      the Series C Preferred will be available to us ratably as dividends are paid
      to
      the holders or as they are converted, whichever comes first.





*Off-Balance
      Sheet Arrangements*





We
      had no
      off-balance sheet arrangements as of June 30, 2006.





*Commitments
      and Contingencies*





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





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





Between
      January 1999 and April 2000, we received an aggregate of $227,522 from a
      recoverable grant award from the State of New Jersey Commission on Science
      and
      Technology. The funds were used to partially fund costs directly related to
      development of our technology. The recoverable grant is required to be repaid
      when we generate net sales in a fiscal year. The repayment obligation, which
      began in March 2001, ranges from 1% to 5% of net sales over a ten-year period.
      We are obligated to repay the unpaid amount of the original grant at the end
      of
      the ten-year period. As
      of
      June 30, 2006, we have repaid approximately $71,193.




Our
        contractual obligations are in the table outlined below:


.


**Payment
                due in fiscal years****Contractual
                Obligations**
              **Total**
            
            **2006**
              **(Six
                months**
              **remaining)**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**Operating
                lease - Facility
            
            $
            1,170,415
            
            $
            242,155
            
            $
            484,310
            
            $
            443,950
            
            $
            3⁄4
            
            $
            3⁄4Refundable
                grant obligation
            
            
            156,329
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            —
            
            
            156,329Gecko
                Energy Technologies, Inc. (1)
            
            
            1,050,000
            
            
            1,050,000
            
            
            —
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4Convertible
                unsecured debentures (2)
            
            
            899,988
            
            
            3⁄4
            
            
            899,988
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4Redeemable
                Series C Preferred Stock (2)
            
            
            4,722,953
            
            
            —
            
            
            —
            
            
            4,722,953
            
            
            —
            
            
            —Total
            
            $
            7,999,685
            
            $
            1,292,155
            
            $
            1,384,298
            
            $
            5,166,903
            
            $
            —
            
            $
            156,329







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


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






16




We
      believe that our current cash and cash equivalents will be sufficient to satisfy
      anticipated cash needs of our operations through 2007. We may raise additional
      funds through public or private financing, collaborative relationships or other
      arrangements at any time. Additional funding, if sought, may not be available
      or, if available, may be offered at terms not favorable to us. Further, any
      additional equity financing may be dilutive to stockholders, and debt financing,
      if available, may involve restrictive covenants. Our failure to raise capital
      when needed may harm our business and operating results.





**Critical
      Accounting Policies**





*Application
      of Critical Accounting Policies*





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





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





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





*Revenue
      Recognition*





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





*Convertible
      Debt and Series C Preferred Stock*





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





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






17




*Stock-Based
      Compensation*




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




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




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





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





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





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








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





(a)
      Evaluation of Disclosure Controls and Procedures




Our
      management is responsible for establishing and maintaininga system
      ofinternal
      and disclosure controls and procedures.
      Such
      controls and procedures aredesigned
      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 toour
      management, including our Chief Executive Officer and Chief Financial Officer,
      as appropriate, to allow timely decisions regarding required
      disclosure.




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






18




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      also conducted an evaluation of any changes in internal controls over financial
      reporting that occurred during the last fiscal quarter. 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.











19


**PART
      II**





**Item
      1.    Legal
      Proceedings.**





(a)  None.





**Item
      1A.  Risk
      Factors.**





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





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




During
      the period covered by this report on Form 10Q, we issued the following shares
      of
      our common stock (“Shares”) to institutional and accredited investors
      (“Investors”) upon conversion of an aggregate amount of $1,000,000.00 principal
      amount of our unsecured convertible debentures and $332,000 of Series C
      Preferred Stock owned by the Investors:




**Date**
            **Amount
                of Unsecured**
              **Convertible
                Debentures**
            **Number
                of Shares of**
              **Common
                Stock**
              **Issued**April
                25, 2006
              
              April
                25, 2006
              
              April
                26, 2006
            $333,333.00
              
              $333,333.00
              
              $333,334.00
            199,601
              
              199,601
              
              199,600**Date**
            **Amount
                of Series C Preferred****Stock**
            **Number
                of Shares of Common Stock****Issued**April
                25, 2006
              
              April
                25, 2006
            $167,000.00
              
              $165,000.00
            100,186
              
              98,992







We
      issued
      the Shares in reliance upon the exemption from registration under Section
      3(a)(9) of the Securities Act of 1933. Section 3(a)(9) is available because
      the
      Shares were exchanged by the Company with an existing security holder and no
      commission or other remuneration was paid or given directly or indirectly for
      soliciting such exchange. The resale of the Shares by the Investor is registered
      pursuant to a registration statement declared effective by the Securities and
      Exchange Commission.




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





None.




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




Our
      2006
      Annual Meeting of Shareholders was held on May 2, 2006. The meeting was called
      for the following purposes: (1) to elect eight directors to serve on our Board
      of Directors, each for a one year term and until their respective successors
      are
      elected, (2) to ratify the Board of Directors’ appointment of Ernst & Young
      LLP as our independent public accountants for the 2006 fiscal year, (3) to
      approve our issuance of securities in accordance with the terms of our private
      placement of our Series C Convertible Preferred Stock and (4) to approve an
      amendment to our Certificate of Incorporation to increase the number of
      authorized shares of our Common Stock from 70,000,000 to 120,000,000. There
      were
      no shareholder proposals. The results of the voting was as follows:






20
 
   Proposal (1)


VOTES
                  FOR
              WITHHELDG.
                  Chris Andersen
              42,620,095
              1,723,517Kenneth
                  R. Baker
              42,842,921
              1,500,691Alexander
                  MacLachlan
              42,830,896
              1,512,716Peter
                  A. McGuigan
              42,863,221
              1,480,391Zoltan
                  Merszei
              42,811,448
              1,532,164H.
                  David Ramm
              42,829,892
              1,513,720James
                  L. Rawlings
              42,584,392
              1,759,220Richard
                  L. Sandor
              42,370,729
              1,972,883






**Proposal
      (2)**





**For**
            **Against**
            **Abstain**To
                ratify the appointment of Ernst & Young LLP as the Company’s
                independent auditors for the fiscal year ending December 31,
                2006
            39,958,398
            1,708,981
            144,870





**Proposal
      (3)**





**For**
            **Against**
            **Abstain**To
                approve the Company’s issuance of securities in accordance with the terms
                of the private placement of the Company’s Series C Convertible Preferred
                Stock*
            14,551,496
            3,242,948
            309,869





**Proposal
      (4)**





**For**
            **Against**
            **Abstain**To
                approve an amendment to the Company’s Certificate of Incorporation
                increasing the number of authorized shares of the Company’s Common Stock
                from 70,000,000 to 120,000,000.
            37,447,178
            4,204,291
            130,781





* 25,560,431  Broker
      non-votes were not counted as being present and entitled to vote for purposes
      of
      this proposal (other than to confirm that a quorum of stockholders were present
      ) and shares of the Company’s Series C Convertible Preferred Stock were not
      entitled to vote on such proposal.








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





None.






21




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







10.1†
            —
            Amendment
                No. 2 to the Stock Purchase Agreement between Millennium Cell Inc.
                and The
                Dow Chemical Company dated May 30, 2006 (incorporated by reference
                to
                Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC
                on May
                30, 2006).10.2†
            —
            Amendment
                No. 1 to the Joint Development Agreement between Millennium Cell
                Inc. and
                The Dow Chemical Company dated May 30, 2006 (incorporated by reference
                to
                Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC
                on May30,
                2006).10.3†
            —
            Employment
                Agreement, dated as of June 22, 2006, by and between Millennium Cell
                Inc.
                and H. David Ramm (incorporated by reference to Exhibit 10.1 to the
                Current Report on Form 8-K filed with the SEC on June 22,
                2006).10.4†
            —
            Restricted
                Stock Grant Agreement, dated as of June 22, 2006, by and between
                Millennium Cell Inc. and H. David Ramm (incorporated by reference
                to
                Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC
                on June
                22, 2006).31.1*
            —
            Certification
                of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 2002.31.2*
            —
            Certification
                of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 2002.32.1*
            —
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of Sarbanes-Oxley Act of 2002.


___________________


†  Previously
      filed.


*  Filed
      herewith.










22




















**SIGNATURES**








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





MILLENNIUM
      CELL INC.


(Registrant)





By:
      /s/ H. David Ramm


H.
      David
      Ramm


Chief
      Executive Officer





August
      14,  2006






23