**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**FORM
      10-Q**





xQUARTERLY
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





**For
      the quarterly period ended September 30, 2008**







oTRANSITION
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.




For
      the
      transition period from __________ to __________.





Commission
      File Number: **000-50542**





**HYDROGEN
      ENGINE CENTER, INC.**


(Exact
      name of registrant as specified in its charter)




**NEVADA**
            
            **82-0497807**(State
                or other jurisdiction
            
            (IRS
                Employerof
                incorporation)
            
            Identification
                No.)




**2502
      East Poplar Street, Algona, Iowa 50511**


(Address
      of principal executive offices)





Registrant's
      telephone number, including area code: (515) 295-3178





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  ̈




Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer or a smaller reporting company. See definition of "large
      accelerated filer” “accelerated filer" and “smaller reporting company” in Rule
      12b-2 of the Exchange Act. (Check one):





Large
                accelerated filer ̈
            
            Accelerated
                filer ̈Non-accelerated
                filer ̈
            
            Smaller
                reporting company x




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date :




**Class**
            
            **Outstanding
                at October 6, 2008**Common
            
            30,102,849















**FORM
      10-Q**




**TABLE
      OF CONTENTS**





.
            
            Page**PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Condensed
                Consolidated Financial StatementsCondensed
                Consolidated Balance Sheets as of September 30, 2008 (unaudited)and
                December 31, 2007
            3Condensed
                Consolidated Statements of Operations for the Nine Months andThree
                Months Ended September 30, 2008 and 2007 and the period from inception(May
                19, 2003) through September 30, 2008 (unaudited)
            5Condensed
                Consolidated Statements of Cash Flows for the Nine Months andThree
                Months Ended September 30, 2008 and 2007 and the period from inception(May
                19, 2003) through September 30, 2008 (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements (unaudited)
            8Item
                2.
            Management's
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            20Item
                4T.
            Controls
                and Procedures
            31**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            32Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            32Item
                6.
            Exhibits
                and Reports on Form 8-K
            33Notes
                About Forward-looking Statements
            33**SIGNATURES**
            
            34




2




**ITEM
      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**






**HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**


(a
      corporation in the development stage)




Condensed
        Consolidated Balance Sheets
  **September
                  30,**
              
              **December
                  31,****ASSETS**
              
              **2008**
              
              **2007****(Unaudited)****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              50,492
              
              $
              713,289Restricted
                  cash
              
              
              -
              
              
              115,157Accounts
                  receivable
              
              
              204,082
              
              
              134,237Inventories
              
              
              1,062,278
              
              
              1,655,359Prepaid
                  expenses
              
              
              279,606
              
              
              89,901Total
                  current assets
              
              
              1,596,458
              
              
              2,707,943**Property,
                  Plant and Equipment**Building
              
              
              2,271,209
              
              
              2,271,209Equipment
              
              
              900,194
              
              
              908,999Land
                  and improvements
              
              
              472,504
              
              
              472,5043,643,907
              
              
              3,652,712Less
                  accumulated depreciation
              
              
              557,177
              
              
              375,178Net
                  property and equipment
              
              
              3,086,730
              
              
              3,277,534**Total
                  Assets**
              
              $
              4,683,188
              
              $
              5,985,477
   See
        accompanying notes
  3
  **HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**


(a
      corporation in the development stage)




Condensed
        Consolidated Balance Sheets





**September
                30,**
            
            **December
                31,****LIABILITIES
                AND EQUITY**
            
            **2008**
            
            **2007****(Unaudited)****Current
                Liabilities**Notes
                payable, banks
            
            $
            1,378,081
            
            $
            594,677Current
                portion long-term debt
            
            
            24,271
            
            
            30,350Current
                installments of obligation under capital lease
            
            
            49,549
            
            
            45,247Accounts
                payable
            
            
            285,527
            
            
            146,585Accrued
                expenses
            
            
            315,025
            
            
            207,328Accrued
                interest
            
            
            166,273
            
            
            129,965Deferred
                revenue
            
            
            87,306
            
            
            -Unearned
                grants
            
            
            13,837
            
            
            30,977Total
                current liabilities
            
            
            2,319,869
            
            
            1,185,129**Long-term
                debt, net of current maturities**
            
            
            725,737
            
            
            1,338,235**Obligation
                under capital lease, excluding current
                installments**
            
            
            43,236
            
            
            80,955768,973
            
            
            1,419,190Total
                liabilities
            
            
            3,088,842
            
            
            2,604,319**Commitments
                and Contingencies****Stockholders'
                Equity**Preferred
                stock - Series B, $0.001 par value; 5,000,000 shares
                authorized,-0-
                and 930,000 shares issued and outstanding
            
            
            -
            
            
            1,933Common
                stock, $0.001 par value; 100,000,000 shares authorized,30,102,849
                and 27,590,164 shares issued and outstanding
            
            
            30,103
            
            
            27,590Additional
                paid-in capital
            
            
            16,347,601
            
            
            15,860,725Accumulated
                other comprehensive loss - foreign currency
            
            
            (7,168
            )
            
            (3,412
            )Deficit
                accumulated during the development stage
            
            
            (14,776,190
            )
            
            (12,505,678
            )Total
                stockholders' equity
            
            
            1,594,346
            
            
            3,381,158**Total
                Liabilities and Stockholders’ Equity**
            
            $
            4,683,188
            
            $
            5,985,477






See
        accompanying notes
  4
  **HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**


(a
      corporation in the development stage)




Condensed
        Consolidated Statements of Operations


**From
                Inception****Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,**
            
            **(May
                19, 2003) to****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **September
                30, 2008****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)****Sales**
            
            $
            352,571
            
            $
            86,047
            
            $
            874,028
            
            $
            527,720
            
            $
            1,936,731**Cost
                of Goods Sold**Material,
                labor, and overhead
            
            
            326,968
            
            
            74,299
            
            
            809,195
            
            
            447,143
            
            
            1,730,979Inventory
                markdown
            
            
            105,788
            
            
            239,598
            
            
            15,215
            
            
            220,853
            
            
            977,238432,756
            
            
            313,897
            
            
            824,410
            
            
            667,996
            
            
            2,708,217**Gross
                Profit (Loss)**
            
            
            (80,185
            )
            
            (227,850
            )
            
            49,618
            
            
            (140,276
            )
            
            (771,486
            )**Operating
                Expenses**Sales
                and marketing
            
            
            24,829
            
            
            64,488
            
            
            159,385
            
            
            231,236
            
            
            1,360,421General
                and administrative
            
            
            378,607
            
            
            610,243
            
            
            1,446,642
            
            
            2,167,029
            
            
            7,918,051Research
                and development
            
            
            208,004
            
            
            361,089
            
            
            614,678
            
            
            1,109,662
            
            
            3,865,181Vendor
                settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            448,011
            
            
            577,500611,440
            
            
            1,035,820
            
            
            2,220,705
            
            
            3,955,938
            
            
            13,721,153**Operating
                Loss**
            
            
            (691,625
            )
            
            (1,263,670
            )
            
            (2,171,087
            )
            
            (4,096,214
            )
            
            (14,492,639
            )**Other
                Income (Expense)**Interest
                income
            
            
            107
            
            
            24,935
            
            
            6,749
            
            
            60,681
            
            
            170,802Interest
                expense
            
            
            (33,549
            )
            
            (46,653
            )
            
            (106,174
            )
            
            (132,892
            )
            
            (447,619
            )Loss
                on disposals of assets
            
            
            -
            
            
            (1,027
            )
            
            -
            
            
            (1,027
            )
            
            (6,734
            )(33,442
            )
            
            (22,745
            )
            
            (99,425
            )
            
            (73,238
            )
            
            (283,551
            )**Net
                Loss**
            
            $
            (725,067
            )
            $
            (1,286,415
            )
            $
            (2,270,512
            )
            $
            (4,169,452
            )
            $
            (14,776,190
            )Series
                A Preferred stock beneficial conversionfeature
                accreted as a dividend
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            (1,889,063
            )
            $
            (1,889,063
            )**Net
                Loss Attributable To****Common
                Stockholders**
            
            $
            (725,067
            )
            $
            (1,286,415
            )
            $
            (2,270,512
            )
            $
            (6,058,515
            )
            $
            (16,665,253
            )**Weighted
                -average shares outstanding**
            
            
            29,834,325
            
            
            25,773,966
            
            
            28,522,401
            
            
            25,749,887**Basic
                and diuluted net loss per share**
            
            
            (0.02
            )
            
            (0.05
            )
            
            (0.08
            )
            
            (0.24
            )






See
        accompanying notes
  5
  **HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**


(a
        corporation in the development stage)


Condensed
        Consolidated Statements of Cash Flows


**From
                  Inception****Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,**
              
              **(May
                  19, 2003) to****2008**
              
              **2007**
              
              **2008**
              
              **2007**
              
              **September
                  30, 2008****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)****Operating
                  Activities**Net
                  loss
              
              $
              (725,067
              )
              $
              (1,286,415
              )
              $
              (2,270,512
              )
              $
              (4,169,452
              )
              $
              (14,776,190
              )Adjustments
                  to reconcile net loss to net cash used in operations:Depreciation
              
              
              62,586
              
              
              50,207
              
              
              191,607
              
              
              168,714
              
              
              618,450Compensation
                  to directors and employees of stock options and restricted
                  stock
              
              
              71,672
              
              
              153,759
              
              
              279,718
              
              
              478,795
              
              
              1,654,137Compensation
                  to consultants of stock options
              
              
              2,425
              
              
              2,463
              
              
              15,132
              
              
              7,388
              
              
              201,942Warrants
                  issued in vendor dispute
              
              
              -
              
              
              -
              
              
              -
              
              
              577,500
              
              
              577,500Loss
                  on sale of assets
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,734Change
                  in assets and liabilities:Accounts
                  receivable
              
              
              22,785
              
              
              33,743
              
              
              (44,845
              )
              
              102,200
              
              
              (179,082
              )Inventories
              
              
              326,027
              
              
              (16,316
              )
              
              593,081
              
              
              (349,658
              )
              
              (1,041,213
              )Prepaid
                  expenses
              
              
              (16,603
              )
              
              7,356
              
              
              (29,705
              )
              
              (26,312
              )
              
              (141,063
              )Accounts
                  payable
              
              
              25,294
              
              
              274,082
              
              
              138,139
              
              
              (54,196
              )
              
              368,809Accrued
                  expenses
              
              
              35,383
              
              
              (67,734
              )
              
              107,697
              
              
              44,762
              
              
              361,263Accrued
                  interest
              
              
              11,200
              
              
              12,688
              
              
              36,308
              
              
              18,409
              
              
              166,273Deferred
                  revenue
              
              
              87,306
              
              
              -
              
              
              87,306
              
              
              -
              
              
              87,306Unearned
                  grants
              
              
              (4,936
              )
              
              (8,536
              )
              
              (17,140
              )
              
              (26,328
              )
              
              13,837Net
                  cash used in operating activities
              
              
              (101,928
              )
              
              (844,703
              )
              
              (913,214
              )
              
              (3,228,178
              )
              
              (12,081,297
              )**Investing
                  Activities**Withdrawal/(Deposit)
                  of restricted cash
              
              
              -
              
              
              (4,021
              )
              
              115,157
              
              
              (11,846
              )
              
              -Proceeds
                  from sale of assets
              
              
              -
              
              
              36,000
              
              
              -
              
              
              36,000
              
              
              36,500Purchases
                  of property, plant, and equipment
              
              
              -
              
              
              (65,815
              )
              
              -
              
              
              (167,854
              )
              
              (3,012,908
              )Net
                  cash provided by (used in) investing activities
              
              
              -
              
              
              (33,836
              )
              
              115,157
              
              
              (143,700
              )
              
              (2,976,408
              )**Financing
                  Activities**Proceeds
                  from note payable, bank
              
              
              54,000
              
              
              -
              
              
              250,000
              
              
              250,000
              
              
              2,089,420Payments
                  on note payable, bank
              
              
              (23,355
              )
              
              (3,560
              )
              
              (55,441
              )
              
              (8,818
              )
              
              (968,585
              )Proceeds
                  from long-term debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,172,052Payments
                  on long-term debt
              
              
              (17,489
              )
              
              (22,471
              )
              
              (63,149
              )
              
              (56,109
              )
              
              (207,044
              )Proceeds
                  from exercise of stock option
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,000Issuance
                  of preferred stock (Series A) in private placement, net of
                  expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,779,813Issuance
                  of preferred stock (Series B) in private placement, net of
                  expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              3,595,095
              
              
              3,595,095Issuance
                  of common stock in private placements, net of expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,639,008Issuance
                  of common stock from registration, net of expenses
              
              
              7,606
              
              
              -
              
              
              7,606
              
              
              -
              
              
              7,606Net
                  cash provided by (used in) financing activities
              
              
              20,762
              
              
              (26,031
              )
              
              139,016
              
              
              3,780,168
              
              
              15,115,365**Effect
                  of Exchange Rates on Cash and Cash Equivalents**
              
              
              (682
              )
              
              13,376
              
              
              (3,756
              )
              
              6,231
              
              
              (7,168
              )**Net
                  Increase (Decrease) in Cash and Cash Equivalents**
              
              
              (81,848
              )
              
              (891,194
              )
              
              (662,797
              )
              
              414,521
              
              
              50,492**Cash
                  and Cash Equivalents – Beginning of Period**
              
              
              132,340
              
              
              2,454,922
              
              
              713,289
              
              
              1,149,207
              
              
              -**Cash
                  and Cash Equivalents – End of Period**
              
              $
              50,492
              
              $
              1,563,728
              
              $
              50,492
              
              $
              1,563,728
              
              $
              50,492


-Continued-


See
        accompanying notes
  6
  **HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**


(a
      corporation in the development stage)




Condensed
        Consolidated Statements of Cash Flows
   -Continued-


**From
                Inception****Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,**
            
            **(May
                19, 2003) to****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **September
                30, 2008****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)****Supplemental
                Cash Flow Information**Interest
                paid
            
            $
            22,348
            
            $
            33,961
            
            $
            69,865
            
            $
            114,331
            
            $
            281,155**Supplemental
                Disclosures of Noncash****Investing
                and Financing Activities**Additional
                paid-in capital contributionfor
                expenses paid by founder
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            103,636Issuance
                of common stock for equipment
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            47,851Issuance
                of common stock forconversion
                of debt
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            557,051Acquistion
                of property, plant, and equipmentthrough
                financing
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            111,450
            
            $
            692,081Payables
                for construction in progress
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            232,208Receivable
                for state loan
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            100,000Issuance
                of warrants for inventory
            
            $
            -
            
            $
            21,065
            
            $
            -
            
            $
            21,065
            
            $
            21,065Conversion
                of Preferred Stock for Series A
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            1,511Series
                A Preferred stock beneficial conversion featureaccreted
                as a dividend
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            1,889,063
            
            $
            1,889,063Conversion
                of Preferred Stock for Series B
            
            $
            -
            
            $
            -
            
            $
            1,933
            
            $
            -
            
            $
            1,933Issuance
                of common stock for financing commitment fee
            
            $
            -
            
            $
            -
            
            $
            160,000
            
            $
            -
            
            $
            160,000






See
        accompanying notes
 7


**HYDROGEN
      ENGINE CENTER, INC. AND SUBSIDIARIES**


**(a
      corporation in the development stage)**


**Notes
      to Condensed Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**








**1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Overview
      of Companies*





Hydrogen
      Engine Center, Inc. is a Nevada corporation with operations through its wholly
      owned subsidiaries, Hydrogen Engine Center, Inc., an Iowa corporation (“HEC
      Iowa”), and Hydrogen Engine Center (HEC) Canada Inc. (“HEC
      Canada”).





HEC
      Iowa
      was incorporated on May 19, 2003 (“inception date”) for the purpose of
      commercializing environmentally friendly internal combustion systems for
      industrial engines and generator sets. HEC Iowa’s operations are located in
      Algona, Iowa.





HEC
      Canada was incorporated as a Canadian corporation on August 25, 2005, for the
      purpose of establishing a research and development center to assist in the
      development of alternative fuel and hydrogen engines and generator sets. HEC
      Canada is located in Quebec, and works with Universite Du Quebec at
      Trois-Rivieres.





*Description
      of Business - A Corporation in the Development Stage*





We
      develop systems and processes used in the design, manufacture and distribution
      of alternative fuel internal combustion engines, engine controls and generator
      systems. These technologies are for use by customers and partners in the
      industrial and power generation markets. We have filed and continue to file
      patents around these next generation systems and processes. These solutions
      and
      the engines using them are designed to run on alternative fuels including but
      not limited to hydrogen, ammonia, ethanol, natural gas, propane and gasoline.
      Our engines and engine products are sold under the brand name Oxx
      Power ® .





Through
      September 30, 2008, we remain in the development stage. Development stage is
      characterized by minimal revenues, with efforts focused on fund raising and
      prioritization of expenditures for the design and development of our products,
      manufacturing processes, intellectual property and strategic sales and
      marketing.





*Interim
      Financial Statements*





The
      unaudited interim financial information included in this report reflects normal
      recurring adjustments that management believes are necessary for a fair
      statement of the results of operations, financial position, and cash flows
      for
      the periods presented. This interim information should be read in conjunction
      with the financial statements and accompanying notes contained in the company’s
      Form 10-KSB/A filed July 23, 2008.





The
      results of operations for the quarterly period ended September 30, 2008 are
      not
      necessarily indicative of the results to be expected for other interim periods
      or the full year.





*Principles
      of Consolidation*





The
      consolidated financial statements include the accounts of our Company and its
      wholly owned subsidiaries, HEC Iowa and HEC Canada. All intercompany balances
      and transactions have been eliminated in consolidation.




8




*Liquidity
      and Going Concern*





Our
      financial statements have been prepared on the basis of accounting principles
      applicable to a going concern. As a result, they do not include adjustments
      that
      would be necessary if we were unable to continue as a going concern and would
      therefore, be obligated to realize assets and discharge our liabilities other
      than in the normal course of operations.





Since
      inception, we have invested in the resources and technology we believe necessary
      to deliver carbon free energy technology. As such, we have incurred substantial
      operating losses. We expect to incur operating losses in 2008. On April 11,
      2008, we entered into a Standby Equity Distribution Agreement (“SEDA”) to sell
      up to a maximum of $4,000,000 in equity securities over twenty-four months
      to an
      investor. The agreement required that we register stock prior to receiving
      any
      funds and subject to certain limitations, allows us to issue shares under the
      SEDA periodically in amounts not to exceed $350,000 at one time. The per share
      price for shares issued under the SEDA will be dependent upon the market value
      of our stock at the time of funding. Our registration statement covering
      4,054,541 of such equity securities, filed on May 20, 2008, was declared
      effective by the Securities and Exchange Commission on August 5, 2008.





It
      has
      been difficult to depend on the SEDA to fund our operations. According to the
      terms of the SEDA, once an advance is requested, the investor can begin selling
      shares which consequently drives the price of the stock lower. We began
      accessing the SEDA funds in August and at November 10, 2008, have sold 247,977
      shares at an average price of $.23 and have received $57,130 in capital. The
      number of shares we can sell under the SEDA has also been adversely affected
      by
      the recent fluctuation and general decline in the trading price of our
      shares.





We
      continue to take steps to lower our monthly cash expenditures and our sales
      have
      increased this quarter and are expected to remain consistent in the fourth
      quarter. As of November 7, 2008, we had cash of $17,944, trade receivables
      of
      $151,032 and $304,658 in trade payables. We have sales orders of $300,123.
      In
      addition, we have access to the SEDA funds mentioned above, however draws are
      subject to limitations, primarily the recent fluctuation and general decline
      in
      the market value of our stock, which restricts the amount of funds that can
      be
      drawn. We also are dependent on the renewal of our loans with our financial
      lenders.





We
      expect
      to secure an agreement to provide hydrogen-fueled engines for ground support
      vehicles at designated airports in the fourth quarter of 2008. We expect to
      continue the sale of our excess inventory. We are pursuing strategic alliances
      to assist us in marketing our wind to hydrogen products. We also expect to
      engage in a capital raise. We believe that the combination of these
      opportunities and potentials can provide needed cash flow to our operations
      for
      three to six months; however there are no assurances that anticipated sales
      will
      occur in the timeframe we anticipate, which would have a negative adverse effect
      on our operations and would accelerate the need for additional funding. We
      are
      dependent on the capital we draw from the SEDA, continued renewal of existing
      debt arrangements as well as anticipated revenue from the expected airport
      project and the sale of our engine inventory to fund our involvement in new
      research and development projects and sustain our operations.





*Fair
      Value of Financial Instruments*





Due
      to
      the short-term nature of cash, cash equivalents, accounts receivable, accounts
      payable and accrued expenses, we believe that the carrying amounts reported
      in
      the balance sheet approximate their fair values at the balance sheet date.
      The
      fair value of long-term debt is estimated based on anticipated interest rates,
      which management believes would currently be available for similar issues of
      debt, taking into account our current credit risk and other market factors,
      which approximate fair value.





*Inventories*





Inventories
      consist mainly of parts, work-in-process and finished goods that are stated
      at
      the lower of cost (determined by the first-in, first out method) or market
      value
      (Note 3). We follow the provisions of Statements of Financial Accounting
      Standards (“SFAS”) 151, “Inventory Costs” that amends the guidance in Accounting
      Research Bulletin No. 43, Chapter 4, “Inventory Pricing” (ARB No. 43). Under
      this guidance, we allocate fixed production overhead to inventory based on
      the
      normal capacity of the production facilities, any expense incurred as a result
      of idle facility expense, freight and handling costs are expensed as period
      costs. For the three months and nine months ended September 30, 2008 we
      allocated approximately $9,000 and $20,000, respectively, of overhead to
      inventory and approximately $65,400 of overhead to inventory from inception
      (May
      19, 2003) to September 30, 2008. For the three months and nine months ended
      September 30, 2007 we allocated approximately $4,700 and $14,200, respectively,
      of overhead to inventory. The balance of fixed production overhead is recorded
      in general and administrative costs.




9




*Prepaid
      Expense*





We
      deferred expenses related to the registration of shares for our Standby
      Equity Distribution Agreement (“SEDA”). These expenses included a commitment fee
      and legal and accounting fees which will be recognized as an expense, as shares
      are issued for the SEDA (Note 9). At September 30, 2008, expenses associated
      with the SEDA recorded as prepaid expense totaled $224,257. At September 30,
      2008, total prepaid expense was $279,606.





*Revenue
      Recognition*





Revenue
      from the sale of our products is recognized at the time title and risk of
      ownership transfer to customers. This occurs upon shipment to the customer
      or
      when the customer picks up the goods.





*Business
      Agreements*





Income
      is
      also derived through business agreements for the development and/or
      commercialization of products based upon our proprietary technology. Some of
      the
      business agreements have stipulated performance milestones and deliverables
      where others require “best efforts” with no performance criteria. The business
      agreements require that payments be made to us as certain milestones are reached
      prior to delivery of the product to the customer. Accordingly, income related
      to
      business agreements are recorded as a reduction in research and development
      expense, when title and risk of ownership transfers to the customer. Expenses
      we
      incur are recorded as research and development costs. During the nine months
      ended September 30, 2008, we did not receive income from business agreements
      and
      therefore did not record a reduction in research and development expense
      resulting from such agreements. From inception (May 19, 2003) to September
      30,
      2008, we recorded $273,913, as a reduction in research and development expense.





*General
      and Administrative Costs*





General
      and administrative costs include payroll, employee benefits, stock-based
      compensation, and other costs associated with general and administrative costs
      including administrative personnel, professional fees, consulting fees and
      office expense. We allocate overhead and direct production expense to products
      manufactured. However, because we have not reached our production capacity,
      excess manufacturing costs are expensed as incurred as general and
      administrative costs. Expenses related to pre-production include salaries for
      production personnel, purchasing costs and the costs associated with production
      ramp up. Total pre-production costs included in general and administrative
      expenses for the three months and nine months ending September 30, 2008 totaled
      $118,827 and $341,849, respectively. For the period from inception (May 19,
      2003) to September 30, 2008 pre-production expense was $1,685,283.





*Research
      and Development Costs*





Research
      and development costs include payroll, employee benefits, stock-based
      compensation, and other costs associated with product development and are
      expensed as they are incurred. Accordingly, our investments in technology and
      patents are recorded at zero in our balance sheets, regardless of their value.





*Stock-Based
      Compensation*





Effective
      January 1, 2006, we adopted the fair value recognition provisions of Statement
      of Financial Accounting Standards No. 123R “Share-Based
      Payment” (“SFAS 123R”). As prescribed in SFAS 123R, we have elected to use the
      modified prospective transition method, and accordingly, prior periods have
      not
      been restated to reflect the impact of SFAS 123R. Under this method, we are
      required to recognize stock-based compensation for all new and unvested
      stock-based awards that are ultimately expected to vest as the requisite service
      is rendered, beginning January 1, 2006. We record stock-based compensation
      expense on a straight-line basis over the requisite period, which is generally
      a
      four-to five-year vesting period. Historically, we applied the intrinsic method
      as provided in Accounting Principles Board (“APB”) Opinion No. 25 (“APB No.
      25”), “Accounting for Stock Issued to Employees,” and related interpretations
      and accordingly, no compensation cost had been recognized for stock options
      issued to employees in years prior to 2006.




10




In
      March
      2005, Staff Accounting Bulletin (“SAB”) 107 provided supplemental implementation
      guidance for SFAS 123R. We applied the provisions of SAB 107 in our adoption
      of
      SFAS 123R. As a result of adopting the fair value method for stock compensation,
      all stock options and restricted stock awards are expensed over the award
      vesting period. These
      awards are expensed under the same approach using the fair value measurements
      which were used in calculating pro forma stock-based compensation expense under
      SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”).





SFAS
      123R
      requires the use of a valuation model (Note 10), to calculate the fair value
      of
      stock-based awards. We have elected to utilize the Black-Scholes option pricing
      model to estimate the fair value of options.





Prior
      to
      the adoption of SFAS 123R, we accounted for stock-based awards to employees
      and
      directors using the intrinsic value method in accordance with APB No. 25 as
      allowed under SFAS No. 123. As permitted by SFAS 123, we chose to follow APB
      No.
      25 and related interpretations for our employee stock-based compensation. Under
      APB No. 25, no compensation expense was recognized at the time of option grant
      if the exercise price of the employee stock option is fixed and equals or
      exceeds the fair value of the underlying common stock on the date of grant
      and
      the number of shares to be issued pursuant to the exercise of such option are
      known and fixed at the date of grant. We use the fair value of common stock
      at
      the close of business on the date the option is approved by our Board of
      Directors.





We
      account for options issued to non-employees (other than directors) under SFAS
      123R and Emerging Issues Task Force (‘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.” Therefore, the fair value of
      options issued to non-employees, as calculated, using the Black Scholes Option
      pricing formula (Note 10), is recorded as an expense over the vesting terms.
      Options issued to non-employees and employees are issued using the same
      methodology and assumptions.





The
      following table illustrates the effect on net loss as if we had applied, prior
      to January 1, 2006, the fair value recognition provisions for stock-based
      employee compensation of SFAS 123, as amended by SFAS No. 148, “Accounting for
      Stock-Based Compensation -- Transition and Disclosure.”





**Period
                from Inception****(May
                19, 2003) to****September
                30, 2008**Net
                loss attributable to common shareholders, as reported
            
            $
            (16,665,253
            )Add:
                options and restricted stock-based employee compensationexpense
                included in reported net loss attributable to common
                shareholders
            
            
            1,654,138Deduct:
                options and restricted stock-based employee compensationexpense
                determined under fair value based method
            
            
            (1,839,940
            )Pro
                forma net loss attributable to common shareholders
            
            $
            (16,851,055
            )





Total
      employee non-cash stock compensation expense, net of forfeitures, for the three
      months and nine months ended September 30, 2008 was $71,672 and
      $279,718.





For
      purposes of pro forma disclosures, the estimated fair value of the options
      granted is amortized to expense over the option vesting periods as services
      are
      performed (Note 10).





11




*Use
      of Estimates*





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenue and expenses during
      the reporting periods. Our actual results could differ from our
      estimates.





*Recent
      Accounting Pronouncements*





In
      February 2008, the FASB issued Financial Staff Positions (“FSP”) FAS 157-2, *Effective
      Date of FASB Statement No. 157* (“FSP
      FAS 157-2”), which delays the effective date of SFAS No. 157, *Fair
      Value Measurement* (“SFAS
      157”), for all nonfinancial assets and nonfinancial liabilities, except those
      that are recognized or disclosed at fair value in the financial statements
      on a
      recurring basis (at least annually). SFAS 157 establishes a framework for
      measuring fair value and expands disclosures about fair value measurements.
      FSP
      FAS 157-2 partially defers the effective date of SFAS 157 to fiscal years
      beginning after November 15, 2008, and interim periods within those fiscal
      years for items within the scope of this FSP. FSP FAS 157-2 is effective for
      us
      beginning January 1, 2009. We are currently evaluating the potential impact
      of the adoption of those provisions of SFAS 157, for which effectiveness was
      delayed by FSP SFAS 157-2, on our consolidated financial position and results
      of
      operations.




In
      May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally
      Accepted Accounting Principles”. SFAS No. 162 identifies the sources of
      accounting principles and the framework for selecting the principles to be
      used
      in the preparation of financial statements of nongovernmental entities that
      are
      presented in conformity with generally accepted accounting principles. SFAS
      No.
      162 is effective 60 days following the Securities and Exchange Commission’s
      approval of the Public Company Accounting Oversight Board Auditing amendments
      to
      AU Section 411, “ *The
      Meaning of* Present
      Fairly in Conformity with Generally Accepted Accounting Principles.” This
      statement will not have an impact on our financial statements.





In
      June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions
      Are
      Participating Securities”. FSP EITF 03-6-1 clarified that all outstanding
      unvested share-based payment awards that contain rights to nonforfeitable
      dividends participate in undistributed earnings with common shareholders. Awards
      of this nature are considered participating securities and the two-class method
      of computing basic and diluted earnings per share must be applied. FSP EITF
      03-6-1 will be applicable to the Company on January 1, 2009. We are
      currently evaluating the impact that FSP EITF 03-6-1 will have on our financial
      statements.





**2.
      FAIR VALUE INSTRUMENTS**




Effective
      January 1, 2008, we adopted SFAS 157, except as it applies to the
      nonfinancial assets and nonfinancial liabilities subject to FSP SFAS 157-2.
      SFAS
      157 clarifies that fair value is an exit price, representing the amount that
      would be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants. As such, fair value is a market-based
      measurement that should be determined based on assumptions that market
      participants would use in pricing an asset or a liability. As a basis for
      considering such assumptions, SFAS 157 establishes a three-tier value hierarchy,
      which prioritizes the inputs used in the valuation methodologies in measuring
      fair value:




**Level 1** -
      Observable inputs that reflect quoted prices (unadjusted) for identical assets
      or liabilities in active markets.




**Level 2** -
      Include
      other inputs that are directly or indirectly observable in the marketplace.




**Level 3** -
      Unobservable inputs which are supported by little or no market activity.




The
      fair
      value hierarchy also requires an entity to maximize the use of observable inputs
      and minimize the use of unobservable inputs when measuring fair value.




When
      determining the fair value measurements for assets or liabilities required
      or
      permitted to be recorded at and/or marked to fair value, we consider the
      principal or most advantageous market in which it would transact and considers
      assumptions that market participants would use when pricing the asset or
      liability. When possible, we look to active and observable markets to price
      identical assets. When identical assets are not traded in active markets, we
      look to market observable data for similar assets. Nevertheless, certain assets
      are not actively traded in observable markets and we must use alternative
      valuation techniques to derive a fair value measurement.




12




We
      classify our money market account using Level I methodology. At September 30,
      2008, we had a $0 balance in this fund.





Effective
      January 1, 2008, we also adopted SFAS 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - including
      an
      Amendment of FASB Statement No. 115* ,
      which
      allows an entity to choose to measure certain financial instruments and
      liabilities at fair value on a contract-by-contract basis. Subsequent fair
      value
      measurement for the financial instruments and liabilities an entity chooses
      to
      measure will be recognized in earnings. As of September 30, 2008, we did not
      elect such option for our financial instruments and liabilities.





**3.
      INVENTORIES**





Inventories
      are stated at the lower of cost or market value. Cost is determined by the
      first-in, first-out method:




**September
                30, 2008**
            
            **December
                31, 2007****(unaudited)**Component
                parts
            
            $
            852,008
            
            $
            1,266,612Work
                in process
            
            
            27,070
            
            
            10,407Finished
                goods
            
            
            183,200
            
            
            378,340Totals
            
            $
            1,062,278
            
            $
            1,655,359





At
      September 30, 2008, we recorded a loss of $248,420 resulting from a markdown
      of
      excess 4.9L Oxx Power ® engine
      parts. For the three months and nine months ending September 30, 2008, we
      recorded a gain or recovery of $142,631 and $233,205, respectively for reman
      and
      new engine components that were marked down in previous years. The net effect
      of
      the inventory transactions for the three months and nine months ending September
      30, 2008, is an inventory markdown for component parts of $105,789 and $15,215,
      respectively. For the period from inception (May 19, 2003) through September
      30,
      2008 we realized a net inventory markdown of component parts and finished goods
      of $977,238.





At
      September 30, 2008, we had a sales orders backlog of approximately $315,000
      for
      new and remanufactured engines. We anticipate that substantially all of our
      remanufactured engine inventory of approximately $282,500 will be depleted
      by
      December 31, 2008.





**4.
      NOTES PAYABLE, BANK**





On
      December 10, 2007 we renewed a note with a bank for $561,304. This note matures
      on December 15, 2008, and carries a variable interest rate equal to prime.
      At
      September 30, 2008, the balance on the note is $544,860 and the note bears
      an
      interest rate of 5.0% with monthly interest and principal payments of $4,484
      until maturity. The loan is secured by real estate.





On
      December 27, 2007, we obtained funding for our yearly D&O insurance premium
      through a loan agency. The original loan amount was $33,374 and requires three
      quarterly payments of $11,626 beginning March 27, 2008. The loan carries an
      interest rate of 8.95%. At September 30, 2008, the balance of the loan has
      been
      paid.





On
      March
      24, 2008, we obtained a line of credit from a bank for $250,000. The line of
      credit is secured by real estate and a business security agreement and was
      originally contracted to expire August 1, 2008. On July 21, 2008, the expiration
      date on this note was extended to December 1, 2008. The line of credit carries
      a
      variable interest rate equal to 1.5% above prime. At September 30, 2008 the
      balance on the line of credit was $250,000 and carried an interest rate of
      6.50%.





On
      March
      27, 2008, we renewed a note with a bank for $591,956. The balance of this note
      on September 30, 2008 was $583,221. This note matures on April 1, 2009, and
      carries a variable interest rate equal to prime. At September 30, 2008, the
      interest rate on the note was 5.0% and requires monthly interest and principal
      payments of $4,340. The loan is secured by real estate.




13




**5.
      LONG-TERM DEBT**





Long-term
      debt consists of the following:




**September
                30, 2008**
            
            **December
                31, 2007****(unaudited)**Note
                payable to City of Algona. See (a)
            
            $
            145,000
            
            $
            160,000Note
                payable to Algona Area Economic Development Corporation. See (b)
            
            
            146,124
            
            
            146,124Note
                payable to Algona Area Economic Development Corporation. See
                (c)
            
            
            58,884
            
            
            61,827Notes
                payable to Iowa Department of Economic Development. See (d)
            
            
            400,000
            
            
            400,000Note
                payable to finance company. See (e)
            
            
            -
            
            
            6,388Note
                payable to bank. See (f)
            
            
            -
            
            
            594,246750,008
            
            
            1,368,585Less
                amounts due within one year
            
            
            24,271
            
            
            30,350Totals
            
            $
            725,737
            
            $
            1,338,235





Future
      maturities of long-term debt at September 30, 2008 are as follows:




2009
            
            $
            6,1232010
            
            
            169,5622011
            
            
            200,3302012
            
            
            148,800Thereafter
            
            
            200,922Total
                long-term debt
            
            $
            725,737





(a)
      In
      September 2005, we obtained $200,000 from the City of Algona. The note requires
      quarterly payments of $5,000 starting January 1, 2006, with the final payment
      due October 1, 2015. There is no interest on this loan provided we create 42
      new
      full-time positions within two years of the agreement. On June 16, 2008, we
      signed an amended agreement to extend the time requirement for job creation
      until July 31, 2010. If job creation requirements are not met, interest on
      the
      loan will be payable at 10% per annum. At this time the requirements have not
      been met. Therefore, as of September 30, 2008, we have accrued interest on
      the
      note in the amount of $53,392. The loan is collateralized by real
      estate.





(b)
      On
      June 27, 2005, we executed a note payable of $146,124 from the Algona Area
      Economic Development Corporation in exchange for land received to be used for
      the construction of a new facility. The loan is a ten-year partially forgivable
      loan with interest at 8%, conditioned upon us achieving performance targets
      as
      follows:


·
            $67,650
                of principal and interest will be forgiven if we certify that we
                have
                created 50 new full-time equivalent jobs by June 1, 2010, and continuously
                retained those jobs in Algona, Iowa until June 1,
                2015. ·
            $67,650
                of principal and interest will be forgiven if we certify that we
                have
                created and continuously retained 50 additional new full-time equivalent
                jobs by June 1, 2015. ·
            Balance
                of $10,824 due on June 1, 2015, without interest if paid by that
                date. ·
            Payment
                of a wage for the retained jobs that is equal to or greater than
                the
                average hourly wage for workers in Kossuth County, Iowa, as determined
                annually by Iowa Workforce
                Development.




14




At
      this
      time the requirements have not been met. Therefore, as of September 30, 2008,
      we
      have accrued interest in the amount of $38,144. The loan is secured by the
      real
      estate.




(c)
      On
      December 16, 2005, we assumed a no-interest note provided by the Algona Area
      Economic Development Corporation in the amount of $117,500 in conjunction with
      the purchase of land and building. This note was recorded at the fair value
      of
      future payments using an interest rate of 10% which amounted to $70,401,
      resulting in a total purchase price of the land and building of $332,901. This
      note is subordinate to a short-term note held by a bank. The note requires
      quarterly payments of $2,500 starting January 1, 2006, with the final payment
      due July 1, 2017.





(d)
      On
      June 28, 2005, the Iowa Department of Economic Development (“IDED”) awarded us a
      Physical Infrastructure Assistance Program (“PIAP”) grant in the amount of
      $150,000. This is a five-year forgivable loan and proceeds are to be used for
      the construction and equipping of the 30,000 square foot manufacturing facility.
      We received payment of this award in December 2005. Other terms of the loan
      include a minimum contribution of $1,543,316 for building construction,
      machinery and equipment, and working capital. In addition, we must create 49
      full-time equivalent positions, with 38 positions at a starting wage exceeding
      $11.76 per hour, and an average wage for all positions of $24.94 per hour.
      In
      order to qualify for the job count, employees must be Iowa residents. We are
      required to maintain the minimum employment level through the thirteenth week
      after the project completion date. If requirements are not met, the balance
      of
      the forgivable loan determined by IDED as due and payable will be amortized
      over
      three years from the agreement expiration date of July 31, 2010, at 6% interest
      per annum with equal quarterly payments. IDED requires end-of-year status
      reports to ensure compliance. At this time the requirements have not been met.
      Therefore, as of September 30, 2008, the total amount of interest accrued was
      $25,496. The note is secured by a security agreement on our assets.





Also
      on
      June 28, 2005, IDED awarded us a Community Economic Betterment Account (“CEBA”)
      forgivable loan in the amount of $250,000. This is a three-year forgivable
      loan
      and proceeds are to be used for the construction of the plant. We received
      $150,000 of this award in December 2005. The balance of the award, $100,000,
      was
      received in January 2006. The terms of this award are the same as the PIAP
      award
      explained in the previous paragraph. At the project completion date, if we
      have
      fulfilled at least 50% of our job creation/retention and wage obligation, $6,579
      will be forgiven for each new full-time equivalent job created and retained
      and
      maintained for at least ninety days past the project completion date. The
      project completion date of this award is July 30, 2010. Any balance (shortfall)
      will be amortized over a two-year period, beginning at the project completion
      date at 6% per annum from the date of the first CEBA disbursement on the
      shortfall amount, with that amount accrued as of the project completion date,
      being due and payable immediately. If we have a loan balance, the shortfall
      balance and existing balance will be combined to reflect a single monthly
      payment. We are accruing interest on this note until the terms of the note
      have
      been met. The total amount of interest accrued at September 30, 2008 was
      $42,493. The note is secured by a security agreement on our assets.





At
                September 30, 2008 we have created 10 jobs to meet the above job
                creation
                requirement.





(e)
      On
      March 20, 2006, we acquired manufacturing equipment through an equipment
      financing agreement with Wells Fargo Financial Leasing, Inc. The note requires
      payments of $2,129 per month for 24 months. The equipment serves as collateral
      for the note. At September 30, 2008, the entire remaining balance has been
      paid.




(f)
                On March 27, 2008, we renewed a note with a bank for $591,956. The
                balance
                of this note on September 30, 2008 was $583,221 and at September
                30, 2008
                was included in notes payable, bank (Note 4). This note matures on
                April
                1, 2009, and carries a variable interest rate equal to the Wall Street
                Journal U.S. Prime Rate. At September 30, 2008, the interest rate
                on the
                note was 5% and requires monthly interest and principal payments
                of
                $4,340. The loan is secured by real estate. The entire remaining
                balance
                at September 30, 2008 is due within one year and considered current.




**6.
      CAPITALIZED LEASES**





We
      have
      entered into three capital lease agreements, to purchase equipment with a net
      book value of $113,749 at September 30, 2008. Amortization of assets held under
      capital lease is included with depreciation expense.




15




The
      following is a schedule, by years of future minimum payments, required under
      the
      lease together with their present value as of September 30, 2008:





2008
            
            $
            14,3622009
            
            
            57,4482010
            
            
            19,8892011
            
            
            11,5862012
            
            
            635Total
                minimum lease payments
            
            
            103,920Less
                amount representing interest
            
            
            11,135Present
                value of minimum lease payments
            
            
            92,785Less
                amounts due within one year
            
            
            49,549Totals
            
            $
            43,236





**7.
      GRANTS AND INCENTIVE PROGRAMS**





On
      June
      28, 2005, we signed an Enterprise Zone (EZ) Agreement with the Iowa Department
      of Economic Development (“IDED”). This agreement was later amended, September
      26, 2006, to include both properties on our production site. This agreement
      provides certain benefits and in order to receive these benefits, we were
      required to create 59 new full-time equivalent jobs at our project site within
      three years of the date of the agreement. We were also required pay a median
      wage of $23.89 per hour and pay 80% of the employees’ medical and dental
      insurance. Within three years of the effective date of the agreement, we were
      also required to make a capital investment of at least $1,329,716 within the
      Enterprise Zone. If we do not meet these requirements, a portion of the
      incentives and assistance will have to be repaid, which will be based on the
      portion of requirements that we have met.





At
      September 30, 2008, we had not met all of our obligations for the EZ agreement
      and we have determined that we will probably not meet all of the requirements
      of
      this agreement. We have recorded most of the benefits we have received from
      this
      program as liabilities estimated to be $165,000. We have notified IDED of our
      inability to meet our job creation obligations and we are in the process of
      providing them with essential information so that the amount due and timing
      of
      the repayments can be determined.





**8.**  **RELATED
      PARTIES**





On
      September 3, 2008, we entered into a Controller Design Agreement with a company
      co-founded by one of our directors. The scope of the agreement includes the
      enhancement of our OxxBoxx controller with wireless technology to produce a
      remote wireless engine controller. The agreement provides for development and
      testing by us and the contractor working to create a production-ready
      controller. The cost of the development work incurred through September 30,
      2008
      was $30,529. We estimate the total cost of the project to be approximately
      $225,000, however the project has been suspended until we can obtain the
      financing needed to sustain the development. In addition, we entered into an
      agreement with this same director’s investment banking firm for consulting
      services. The total cost of the engagement is expected to be $20,000 and through
      September 30, 2008 we have paid $10,000.





**9.**  **COMMON
      STOCK**





Our
      registration statement covering 4,054,541 shares of such equity securities,
      filed on May 20, 2008, was declared effective by the Commission on August 5,
      2008.





We
      entered into a Standby Equity Distribution Agreement (the “SEDA”) with an
      investor on April 11, 2008. For a two-year period beginning on August
      5,
      2008, we will have the right ,
      at our
      discretion, to sell registered shares of our common stock to the Investor for
      up
      to $4,000,000. For each share of common stock purchased under the SEDA, the
      Investor will pay ninety-three (93%) of the lowest daily volume weighted average
      price (“VWAP”) during the five consecutive trading days after the Advance Notice
      Date (as such term is defined in the SEDA). Each such sale (“Advance”) may be
      for an amount not to exceed $350,000 and each
      Advance Notice Date must be no less than five trading days after the prior
      Advance Notice Date .
      The
      Advance request will be reduced to the extent the price of our common stock
      during the five
      consecutive trading days after the Advance Notice Date is less
      than 85% of the VWAP on the trading day immediately
      preceding the Advance Notice Date .




16




Under
      the
      terms of the SEDA, we have paid a structuring fee of $10,000, a due diligence
      fee of $5,000 and issued 386,567 shares of common stock to satisfy a $160,000
      Commitment Fee. We are also obligated to pay a monthly monitoring fee of $3,333
      during the term of the agreement. We may terminate the SEDA upon 15 trading
      days
      notice, provided there are no Advances outstanding and that we have paid all
      amounts then due to the Investor.





We
      began
      accessing the SEDA funds in August and at November 7, 2008, have issued 247,977
      shares at an average price of $.23 and received $57,130 in capital. As of
      September 30, 2008, we had 30,102,849 shares of Common Stock issued and
      outstanding.





**10.**  **STOCK-BASED
      COMPENSATION**





On
      September 1, 2005, we adopted an Incentive Compensation Plan (“Incentive Plan”)
      for the purpose of encouraging key officers, directors, employees and
      consultants to remain with the company and devote their best efforts to the
      business of the company. Under this plan, options may be granted to eligible
      participants, at a price not less than the fair market value of the stock at
      the
      date of grant. Options granted under this plan may be designated as either
      incentive or non-qualified options and vest over periods designated by the
      Board
      of Directors, generally over two to five years, and expire no later than ten
      years from the date of grant. Upon exercise, we issue new shares of Common
      Stock
      to the employee.





We
      may
      also issue restricted stock under the Incentive Plan. Restricted stock awards
      made under this program vest over periods designated by the Board of Directors,
      generally two to four years. The aggregate number of shares authorized for
      employee stock options, non-employee stock options and restricted stock awards
      is 2,000,000. At September 30, 2008, there were 794,584 shares available for
      grant and 1,205,416 shares granted. Of the shares granted, 361,000 were granted
      as restricted stock, 231,666 were granted as non-employee stock options, and
      612,750 were granted as employee and director stock options.





The
      following table presents the weighted-average assumptions post repricing, used
      to estimate the fair values of the stock options granted to employees and
      non-employees in the periods presented, using the Black-Scholes option pricing
      formula. The risk-free interest rate for periods within the contractual life
      of
      the option is based on the U.S. Treasury yield curve in effect at the time
      of
      grant. The expected life is based on our historical data of option exercise
      and
      forfeiture. Expected volatility is based on the average reported volatility
      and
      vesting period of a representative sample of eight comparable companies in
      the
      alternative fuel technology and services niches with market capitalizations
      between $14 million and $1 billion, in addition to our actual history since
      September 2005.




**Period
                from Inception****For
                the three months ending September 30,**
            
            **For
                the nine months ending**
              **September
                30,**
            
            **(May
                19, 2003) to****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **September
                30, 2008**Risk-free
                interest rate
            
            
            -
            %
            
            4.7
            %
            
            3.6
            %
            
            4.7
            %
            
            4.2
            %Expected
                volatility
            
            
            -
            %
            
            96.4
            %
            
            81.0
            %
            
            96.4
            %
            
            146.5
            %Expected
                life (in years)
            
            
            -
            
            
            5.5
            
            
            4.0
            
            
            5.5
            
            
            7.4Dividend
                yield
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Weighted-average
                estimated fair value of options granted during the period
            
            $
            -
            
            $
            .99
            
            $
            .27
            
            $
            .99
            
            $
            .97





No
      options were granted during the three months ending September 30,
      2008.




17




The
      following table summarizes the activity for outstanding employee and
      non-employee stock options for the nine months ended September 30,
      2008:




**Options
                Outstanding****Number
                of Shares**
            
            
            **Weighted-Average
                Exercise Price**
            
            
            **Weighted-Average
                Remaining Contractual Term**
              **(in
                years)**
            
            
            **Aggregate
                Intrinsic Value**
              **(1)**Balance
                at December 31, 2007
            
            
            884,916
            
            $
            1.16Granted
            
            
            50,000
            
            $
            .46Forfeited
            
            
            (98,500
            )
            $
            1.33Balance
                at September 30, 2008
            
            
            836,416
            
            $
            1.09
            
            
            3.56
            
            $
            -Vested
                and exercisable asof
                September 30, 2008
            
            
            719,916
            
            $
            1.08
            
            
            2.90
            
            $
            -Vested
                and expected to vest asof
                September 30, 2008
            
            
            811,324
            
            $
            1.09
            
            
            3.45
            
            $
            -





(1)
            The
                aggregate intrinsic value is calculated as approximately the difference
                between the weighted-average exercise price of the underlying awards
                and
                our closing stock price of $0.23 on September 30, 2008, the last
                day of
                trading in September.





There
      were no stock options exercised during the nine months ending September 30,
      2008.





As
      of
      September 30, 2008, there was approximately $432,010 of unrecognized
      compensation cost related to outstanding stock options, net of forecasted
      forfeitures. This amount is expected to be recognized over a weighted-average
      period of 2.9 years. To the extent the forfeiture rate is different than we
      have
      anticipated, stock-based compensation related to these awards will be different
      from expectations.





The
      following table summarizes the activity for the unvested restricted stock for
      the nine months ended September 30, 2008:




**Unvested
                Restricted Stock****Number
                of**
              **Shares**
            
            **Weighted-Average**
              **Grant
                Date**
              **Fair
                Value**Unvested
                at December 31, 2007
            
            
            92,000
            
            $
            1.00Vested
            
            
            (46,000
            )
            $
            1.00Unvested
                at September 30, 2008
            
            
            46,000
            
            $
            1.00





As
      of
      September 30, 2008, there was approximately $40,902 of unrecognized compensation
      cost related to unvested restricted stock. This amount is expected to be
      recognized over a weighted-average period of .92 years. To the extent actual
      forfeiture rate is different than we have anticipated, the numbers of restricted
      stock expected to vest would be different from expectations.





18




The
      following table summarizes additional information about stock options
      outstanding and exercisable as of September 30, 2008:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Price**
            
            **Options
                Outstanding**
            
            **Weighted-Average
                Remaining Contractual Life**
            
            **Weighted-Average
                Exercise Price**
            
            **Shares
                Exercisable**
            
            **Weighted-Average
                Exercise Price**$0.40
            
            
            20,000
            
            
            9.50
            
            $
            .40
            
            
            10,000
            
            $
            .40$0.50
            
            
            30,000
            
            
            2.38
            
            $
            .50
            
            
            30,000
            
            $
            .50$1.00
            
            
            481,666
            
            
            2.22
            
            $
            1.00
            
            
            455,666
            
            $
            1.00$1.34
            
            
            304,750
            
            
            5.39
            
            $
            1.34
            
            
            224,250
            
            $
            1.34836,416
            
            
            3.56
            
            $
            1.09
            
            
            719,916
            
            $
            1.08





19




**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





THE
      FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE OTHER
      FINANCIAL INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
      APPEARING IN THIS FORM 10-Q. THIS DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS
      THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS WILL DEPEND UPON A
      NUMBER OF FACTORS BEYOND OUR CONTROL AND COULD DIFFER MATERIALLY FROM THOSE
      ANTICIPATED IN THE FORWARD LOOKING STATEMENTS. READERS SHOULD CAREFULLY READ
      OUR
      FINANCIAL STATEMENTS AND THE NOTES THERETO, AS WELL AS THE "RISK FACTORS" DESCRIBED
      IN THE DOCUMENTS WE FILE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
      COMMISSION, INCLUDING OUR ANNUAL REPORT ON FORM 10-KSB/A FOR THE TWELVE MONTHS
      ENDED DECEMBER 31, 2007.





**General**





Hydrogen
      Engine Center, Inc. (“HEC”, “we”, “us”, “our” or the “company”) was organized
      for the purpose of developing and commercializing clean solutions for today’s
      energy needs. We offer technologies that enable spark-ignited internal
      combustion engines and power generation systems to produce clean energy with
      near-zero carbon emissions, using our pr o prietary
      engine controller and software to efficiently distribute ignition spark and
      fuel
      to injectors. Our business plan is centered on a growing portfolio of
      intellectual property that has been designed to play an increasing role in
      addressing turn-key alternative-fuel energy solutions for the industrial and
      power generation markets. HEC’s turn-key solutions enable uninterrupted
      generation of electricity by storing energy through the production of renewable
      fuels such as hydrogen and ammonia. Our mission is to provide the most reliable,
      most efficient and lowest emission energy storage and generation solutions,
      utilizing renewable fuels, to the global industrial market.





We
      are
      focusing our attention on developing and marketing our turn-key, 1MW power
      generation system that can be used to store energy and generate electricity
      with
      wind power. Wind power is the fastest growing electricity source in the world.
      According to Clean Edge Research, Wind power (new installation capital costs)
      is
      projected to expand from $30.1 billion in 2007 to $83.4 billion in 2017. Last
      year’s global wind power installation reached a record 20,000 MW, equivalent to
      20 large-size 1 GW conventional power plants.





In
      line
      with the tremendous opportunities existing in wind storage, our systems, which
      store clean energy and generate electricity, are designed to be tied to the
      power grid. The systems stabilize the peaks and valleys in wind energy
      production. This is a valuable feature to wind power producers, who need to
      prove “constant power” in order to gain access to the grid.





Our
      current involvement with wind-to-hydrogen projects with Xcel Energy and Natural
      Resources Canada provide examples of how our power generation systems can be
      combined with a renewable resource to provide intermittent or continuous power
      generation. In these systems, when the wind blows, the wind turbines provide
      electric power. If the power created exceeds the demand, excess electricity
      will
      be used to create hydrogen through electrolysis (separation of water into
      hydrogen and oxygen). The hydrogen is then stored to be utilized to fuel our
      power generation system during peak usage of electricity or when wind energy
      is
      unavailable. **** On
      August
      15, 2008, we received a purchase order from Newfoundland Labrador Hydro for
      $145,510 for additional work to provide grid connectivity to the 4 + 1® which
      was purchased by Natural Resources Canada.





We
      believe that we are the only company that can provide wind storage for constant
      power generation. Many other technologies, including fuel cells, are in early
      or
      development stage. Our primary target market is on-the-grid and off-the-grid
      wind power facilities, where wind storage could contribute substantially to
      the
      value proposition of this renewable source of energy.





In
      addition, we also expect to sell hydrogen engines for dedicated uses, such
      as
      airport ground support and irrigation pumping. We are, for example, currently
      working, in collaboration with Air Liquide and a number of other participants,
      to finalize an opportunity to sell some of our hydrogen-fueled engines for
      use
      in ground support vehicles at designated airports. Many airports are seeking
      clean-energy solutions for operation of ground support vehicles. We believe
      we
      are uniquely situated to meet the needs of this market. We have developed our
      own proprietary controller that enables our engines to run efficiently on
      hydrogen.




20




The
      accompanying condensed consolidated balance sheets as of September 30, 2008
      and
      December 31, 2007 and the condensed consolidated statements of operations,
      and
      the condensed consolidated statements of cash flows for the three- and
      nine-month periods ended September 30, 2008 and 2007 and for the period from
      inception (May 19, 2003) to September 30, 2008 respectively, consolidate the
      historical financial statements of the company with HEC Iowa after giving effect
      to the 2005 merger with Green Mt. Labs, Inc. pursuant to which HEC Iowa was
      the
      accounting acquirer and after giving effect to our private offerings.




**Overview**




We
      own
      all of the issued and outstanding shares of HEC Iowa and all of the issued
      and
      outstanding shares of Hydrogen Engine Center (HEC) Canada, Inc. HEC Iowa is
      a
      development stage company being built upon the vision of carbon-free, energy
      independence. We are building technologies designed to enable engines and
      gensets to generate and use clean power on demand, where needed.





We
      have
      funded our operations from inception through September 30, 2008, through a
      series of financing transactions, including convertible loans and Private
      Offerings. In April 2008, we entered into a SEDA which provides us the
      opportunity to access additional capital in the maximum amount of Four Million
      Dollars ($4,000,000). The SEDA was subject to our obtaining an effective
      registration statement for shares of our Common Stock sold under the SEDA,
      which
      was declared effective August 5, 2008. Our ability to access the SEDA funds
      has
      been restricted by the recent fluctuation and general decline in the trading
      price or our shares. We have accessed SEDA funds totaling $57,131 as of October
      31, 2008. We view the SEDA as a financial safety net and we do not intend to
      access the full amount that may become available to us unless alternative
      financing on terms deemed acceptable to the company is not available. See
“Liquidity and Capital Resources - Terms of the SEDA”.





**Results
      of Operations**





A
      summary
      statement of our operations, for the three and nine months ended September
      30,
      2008 and 2007 and for the period from inception through September 30, 2008
      follows:




**Three
                months ended**
              **September
                30,**
            
            
            **Nine
                months ended**
              **September
                30,**
            
            
            **From
                Inception**
              **(May
                19, 2003) to****September**
              **30,
                2008****2008**
            
            
            **2007**
            
            
            **2008**
            
            
            **2007**Revenues
            
            $
            352,571
            
            $
            86,047
            
            $
            874,028
            
            $
            527,720
            
            $
            1,936,731Cost
                of Goods Sold
            
            
            432,756
            
            
            313,897
            
            
            824,410
            
            
            667,996
            
            
            2,708,217Gross
                Profit (Loss)
            
            
            (80,185
            )
            
            (227,850
            )
            
            49,618
            
            
            (140,276
            )
            
            (771,486
            )Operating
                Expenses
            
            
            611,440
            
            
            1,035,820
            
            
            2,220,705
            
            
            3,955,938
            
            
            13,721,153Loss
                from Operations
            
            
            (691,625
            )
            
            (1,263,670
            )
            
            (2,171,087
            )
            
            (4,096,214
            )
            
            (14,492,639
            )Other
                Expense
            
            
            (33,442
            )
            
            (22,745
            )
            
            (99,425
            )
            
            (73,238
            )
            
            (283,551
            )Net
                Loss
            
            $
            (725,067
            )
            $
            (1,286,415
            )
            $
            (2,270,512
            )
            $
            (4,169,452
            )
            $
            (14,776,190
            )Series
                A Preferred Stock Beneficial Conversion Feature Accreted as a
                Dividend
            
            
            -
            
            
            -
            
            
            -
            
            $
            (1,889,063
            )
            $
            (1,889,063
            )Net
                Loss Available to Common Stockholders
            
            $
            (725,067
            )
            $
            (1,286,415
            )
            $
            (2,270,512
            )
            $
            (6,058,515
            )
            $
            (16,665,253
            )





Historical
      information for periods prior to the merger is that of HEC Iowa.





We
      continue to operate as a development stage company. We are still developing
      our
      intellectual property and related products and have not realized significant
      revenues to date. As a development stage company we are engaging in the research
      and development of our products, we continue to foster relationships with
      vendors and customers and we are in the process of raising additional capital
      to
      support our business plan.




21




**Revenues**





Revenues
      in the three-month period ended September 30, 2008 were $352,571 as compared
      to
      $86,047 for the same period in 2007. This represents an increase of $266,524,
      or
      310%, as compared to revenues during the same three month period in 2007. We
      expect sales for the fourth quarter 2008 will also show an increase compared
      to
      the fourth quarter of 2007 as we continue to sell off our remanufactured engine
      inventory. For the nine-month period ended September 30, 2008 we realized sales
      of $874,028 for the nine-month period ended September 30, 2008 compared to
      $527,720 for the nine-month period ended September 30, 2007. This represents
      an
      increase of $346,308, or 66% from the same period last year. From inception
      to
      date we have realized revenues of $1,936,731.





We
      also
      derive income through business agreements for the development and/or
      commercialization of our hydrogen and ammonia products, which are not reflected
      in our revenue. We record income related to business agreements as a reduction
      in research and development expense. The expenses we incur are recorded as
      research and development costs. During the three- and nine-month periods ended
      September 30, 2008, we did not record a reduction in research and development
      expense resulting from business agreements.





**Cost
      of Sales and Gross Profit**





We
      realized a loss on our revenues of $80,185 during the three months ending
      September 30, 2008 due to a markdown of excess inventory which, netted with
      recoveries of inventory previously marked down, totaled $105,788. The total
      inventory markdown of $248,420 was netted with inventory recoveries of $142,632.
      We expect minimal gross profit margins during the remainder of 2008 on the
      sale
      of our remanufactured engine inventory.





We
      realized a gross profit of $49,618 for the nine-month period ending September
      30, 2008, as compared to a loss of $140,276 for the same period last year.
      We
      recovered $233,205 from inventory marked down in 2007 and netted with additional
      markdowns of excess inventory of $248,420, which took place during the three
      months ended September 30, 2008, resulted in a net inventory markdown of
      $15,215. The total of cost of sales during the nine-month period ending
      September 30, 2008, including the inventory markdown was $824,410, For the
      period from inception (May 19, 2003) through September 30, 2008 we realized
      a
      net inventory markdown of component parts and finished goods of $977,238.





At
      September 30, 2008, we had sales orders backlogs of approximately $315,000
      for
      new and remanufactured engines. We anticipate that substantially all of our
      remanufactured engine inventory of approximately $282,500 will be depleted
      by
      December 31, 2008.





**Operating
      Expenses**





Our
      sales
      and marketing expenses for the three-month periods ended September 30, 2008
      and
      2007 were $24,829 and $64,488, respectively. Our sales and marketing expenses
      for the nine-month periods ended September 30, 2008 and 2007 were $159,385
      and
      $231,236, respectively and the total expense from inception (May 19, 2003)
      to
      September 30, 2008 is $1,360,421. We have not placed enough emphasis on our
      sales and marketing efforts and are making a concentrated effort to do so at
      this time. We plan to aggressively market our N + 1, 1 MW power generation
      system to generate revenues. Therefore, we expect to realize an increase in
      spending as it relates to the sale and marketing of our N + 1 power
      generation products during 2009.





General
      and administrative expenses decreased from $610,243 for the three months ended
      September 30, 2007 to $378,606 for the three months ended September 30, 2008.
      General and administrative expenses decreased from $2,167,029 for the nine
      months ended September 30, 2007 to $ 1,446,642
      for the nine months ended September 30, 2008. General and administrative
      expenses from inception (May 19, 2003) through September 30, 2008 were
      $7,918,051. Our general and administrative costs include payroll, employee
      benefits, stock-based compensation, and other costs associated with general
      and
      administrative costs such as investor relations, accounting and legal fees
      related to our public filings.




22




Our
      general and administrative expenses also include overhead and direct production
      expense related to pre-production costs, which costs, if we had reached
      production capacity, would be allocated to products manufactured. Expenses
      related to pre-production include salaries for production, personnel, purchasing
      costs and costs associated with production ramp up. Total pre-production
      expenses included in general and administrative expense for the three-month
      periods ended September 30, 2008 and 2007 respectively, were $118,827 and
      $106,019. Total pre-production expenses included in general and administrative
      expense for the nine month-periods ended September 30, 2008 and 2007
      respectively, were $341,849 and $448,734. Pre-production expense from inception
      (May 19, 2003) through September 30, 2008 totaled $1,806,767.




We
      view
      our stock-based compensation as a key tool that allows us to attract talented,
      experienced employees and directors without having to increase cash
      compensation. Although we have been able to preserve cash with this tool, we
      have recognized $71,672 in stock option and in restricted stock expense for
      employees and directors in the three months ended September 30, 2008 and
      $153,759 in stock option and restricted stock expense for the three months
      ended
      September 30, 2007. We have recognized $279,718 in stock option and restricted
      stock expense for employees and directors in the nine months ended September
      30,
      2008 and $478,795 in stock option and restricted stock expense for the nine
      months ended September 30, 2007. Total stock option compensation for employees
      and directors from inception (May 19, 2003) through September 30, 2008 was
      $1,654,137. Stock option expense is allocated among sales and marketing expense,
      general and administrative expense and research and development expense.





Since
      inception (May 19, 2003), we have accrued $66,649 in accrued property taxes
      and
      $51,772 in accrued program costs related to forgivable loans and grants from
      state and local government sponsored programs. These expenses have also been
      recorded as general and administrative expenses. Expenses related to forgivable
      loans and grants will continue to accrue until we meet certain criteria for
      job
      creation. If we can comply with the job creation criteria, these expenses would
      be recorded, at the time of forgiveness, as other income.




Costs
      related to research and development were $208,004 and $361,089 for the
      three-month periods ended September 30, 2008 and 2007, respectively. Costs
      related to research and development were $614,678 and $1,109,662 for the
      nine-month periods ended September 30, 2008 and 2007, respectively. Total
      expense for research and development expense from inception (May 19, 2003)
      to
      September 30, 2008 is $3,865,181. Management believes that, assuming receipt
      of
      additional capital, research and development expenses will increase in the
      fourth quarter of 2008 and the first half of 2009.




**Loss
      from Operations**




We
      recorded an operating loss of $691,625 for the three months ended September
      30,
      2008 compared to an operating loss of $1,263,670 for the three months ended
      September 30, 2007. We recorded an operating loss of $2,171,087 for the nine
      months ended September 30, 2008 compared to an operating loss of
      $ 4,096,214
      for the nine months ended September 30, 2007. We
      recorded operating losses totaling $14,492,639 from inception (May 19, 2003)
      through September 30, 2008. We expect to continue to operate at a loss during
      the fourth quarter of 2008 and during the first half of 2009.





During
      the three month and nine month periods ended September 30, 2008 we did not
      recognize any stock dividends attributable to stockholders. During the nine
      months ended September 30, 2007, we accreted a beneficial conversion dividend
      to
      the holders of Series A Preferred Stock of $1,889,063. The stock dividend
      resulted in a net loss to common stockholders of $6,058,515 for the nine months
      ended September 30, 2007 and did not have an affect on the net loss to common
      stockholders at September 30, 2008. We recorded net losses attributable to
      common stockholders totaling $16,665,253 from inception (May 19, 2003) through
      September 30, 2008.





**Other
      Income (Expense)**




We
      had
      minimal interest income for the three months ended September 30, 2008 of $107
      compared to interest income of $24,935 for the three months ended September
      30,
      2007. We had total interest income for the nine months ended September 30,
      2008
      of $6,749 as compared to interest income of $60,681 for the nine months ended
      September 30, 2007. We realized interest income from inception (May 19, 2003)
      to
      September 30, 2008 of $170,802.




23




Interest
      expense for the three months ended September 30, 2008 was $33,549 and $46,653
      for the three months ended September 30, 2007. Interest expense for the nine
      months ended September 30, 2008 was $106,174 and $132,892 for the nine months
      ended September 30, 2007. Our interest expense from inception (May 19, 2003)
      to
      September 30, 2008 totaled $447,619. We accrue interest expense related to
      forgivable loans and grants from state and local government sponsored programs.
      From inception (May 19, 2003) through September 30, 2008 we have accrued
      $160,977 in accrued interest expense related to our forgivable loans and grants
      and will continue to accrue these expenses until we meet certain criteria for
      job creation. If we can comply with the job creation criteria, these amounts
      would be recorded, at the time of forgiveness, as other income.





**Critical
      Accounting Policies**




Our
      discussion and analysis of our financial position and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these consolidated financial statements requires
      us
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities, and the disclosure of contingent assets and liabilities at the
      date
      of the consolidated financial statements and the reported revenues and expenses
      during the period.





*Inventories*





Our
      inventories consist mainly of parts, work-in-process and finished goods that
      are
      stated at the lower of cost or market. Certain inventory items have been written
      down to the estimated sales price.





*Warranty
      Reserve*





We
      record
      a warranty reserve at the time products are sold or at the time revenue is
      recognized. We estimate the liability for product warranty costs based upon
      industry standards and best estimate of future warranty claims. Due to a lack
      of
      actual warranty history to use as a basis for our reserve estimate, it is
      possible that actual claims may vary significantly from the estimated
      amounts.





*Revenue
      Recognition*





Revenue
      from the sale of our products is recognized at the time title and risk of
      ownership transfer to customers. This occurs upon shipment to the customer
      or
      when the customer picks up the goods.





*Stock-based
      Compensation*





We
      consider certain accounting policies related to stock-based compensation to
      be
      critical to our business operations and the understanding of our results of
      operations. See Note 1 of Notes to Condensed Consolidated Financial
      Statements.





**Liquidity
      and Capital Resources**





Operating
      Budget and Financing of Operations





We
      have
      financed our operations since inception primarily through equity and debt
      financings and loans from our officers, directors, and stockholders. Our sales
      are beginning to increase steadily and we have reduced our operating expenses.





On
      April
      11, 2008, we entered into a Standby Equity Distribution Agreement with YA Global
      Investments, L.P. (“YA Global”), which provides us the opportunity to access
      additional capital in the maximum amount of Four Million Dollars ($4,000,000)
      in
      increments not to exceed $350,000 each. We have access to these funds over
      a
      two-year period beginning on August 5, 2008, the date on which the SEC declared
      effective our registration statement registering the resale of our shares by
      YA
      Global. The per share price for shares issued under the SEDA is dependent upon
      the market value of our stock at the time of funding. Our registration statement
      covered 4,054,541 shares. Assuming, by way of example, a per share price of
      $.20, the maximum amount that we could receive from YA Global under this
      registration statement would be $754,000.




24




It
      has
      been difficult to depend on the SEDA to fund our operations. According to the
      terms of the SEDA, once an advance is requested, the investor can begin selling
      shares which consequently drives the price of the stock lower. We began
      accessing the SEDA funds in August and at November 10, 2008, have sold 247,977
      shares at an average price of $.23 and have received $57,130 in capital. See
      “Liquidity and Capital Resources - Terms of the SEDA” below. The number of
      shares we can sell under the SEDA has also been adversely affected by the recent
      fluctuation and general decline in the trading price of our shares.





We
      continue to take steps to lower our monthly cash expenditures and our engine
      sales have increased this quarter and are expected to remain consistent in
      the
      fourth quarter. As of November 7, 2008, we had cash of $17,944, trade
      receivables of $151,032 and $304,658 in trade payables. We have sales orders
      of
      $300,123. In addition, we have access to the SEDA funds mentioned above, however
      draws are subject to limitations, primarily the market value of our stock,
      which
      restrict the amount of funds that can be drawn. We also are dependent on the
      renewal of our loans with our financial lenders.





We
      expect
      to secure an agreement to provide hydrogen-fueled engines for ground support
      vehicles at designated airports in the fourth quarter of 2008. We expect to
      continue the sale of our excess inventory. We are pursuing strategic alliances
      to assist us in marketing our wind to hydrogen products. We also expect to
      engage in a capital raise. We believe that the combination of these
      opportunities and potentials can provide needed cash flow to our operations
      for
      three to six months; however there are no assurances that anticipated sales
      will
      occur in the timeframe we anticipate, which would have a negative adverse effect
      on our operations and would accelerate the need for additional funding. We
      are
      dependent on the capital we draw from the SEDA, continued renewal of existing
      debt arrangements as well as anticipated revenue from the expected airport
      project and the sale of our engine inventory to fund our involvement in new
      research and development projects and sustain our operations.





Going
      Concern





Our
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates our continuation of operations, realization
      of
      assets, and liquidation of liabilities in the ordinary course of business.
      Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses over the next several months. As of September 30,
      2008, we had an accumulated deficit of approximately $14.8 million. Our
      accompanying financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.




Terms
      of the SEDA





On
      April
      11, 2008, we entered into a Standby Equity Distribution Agreement with YA
      Global. The SEDA provides us the opportunity, for a two-year period beginning
      August 5, 2008, the date on which the SEC first declared effective the
      registration statement registering the resale of 4,054,541 of our shares by
      YA
      Global, to sell shares of our Common Stock to YA Global for a total purchase
      price of up to Four Million Dollars ($4,000,000). For each share of Common
      Stock
      purchased under the SEDA, YA Global will pay 93% of the lowest daily VWAP during
      the five (5) consecutive trading days after the Advance Notice date. Each
      Advance may be for an amount not to exceed $350,000 and each Advance Notice
      date
      must be no less than five (5) trading days after the prior Advance Notice date.
      The Advance request will be reduced to the extent the price of our Common Stock
      during the five (5) consecutive trading days after the Advance Notice date
      is
      less that 85% of the Volume Weighted Average Price (“VWAP”) on the trading day
      immediately preceding the Advance Notice date.





We
      have
      paid $15,000 to YA Global as a structuring and due diligence fee and on June
      10,
      2008 we issued 386,567 shares to YA Global as a commitment fee. We are obligated
      to pay a monthly monitoring fee of $3,333 during the term of the SEDA. We may
      terminate the SEDA upon fifteen (15) trading days of prior notice to YA Global,
      as long as there are no Advances outstanding and we have paid to YA Global
      all
      amounts then due. A copy of the SEDA is attached as Exhibit 10.3 to the
      company’s Annual Report on Form 10-K as filed with the SEC on April 15,
      2008.





We
      engaged Growth Energy Capital Advisors (GenCap) of Dallas, TX, an unaffiliated
      registered broker-dealer, to act as placement agent in connection with the
      SEDA.
      GenCap is entitled to receive a fee equal to seven percent (7%) of the gross
      proceeds of the SEDA and warrants to purchase a number of shares of Common
      Stock
      equal to five percent (5%) of the total number of shares issued under the SEDA.
      If we drew down on the entire Four Million Dollars ($4,000,000) available under
      the SEDA, GenCap would receive an aggregate placement fee equal to $280,000
      plus
      warrants to purchase common stock.




25





We
      claim
      an exemption from the registration requirements of the Securities Act for the
      private placement of our shares in the SEDA pursuant to Section 4(2) of the
      Securities Act and/or Rule 506 of Regulation D promulgated thereunder. The
      transaction does not involve a public offering, YA Global is an “accredited
      investor” and/or qualified institutional buyer and YA Global has access to
      information about the company and its investment.





**Cash
      Flow From Operations**





The
      following table depicts cash flow information for the three- and nine-month
      periods ended September 30, 2008 and 2007 and from inception (May 19, 2003)
      to
      September 30, 2008:




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,**
            
            **From
                Inception**
              **(May
                19, 2003)**
              **to
                September**
              **30,
                2008****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                cash used inoperating
                activities
            
            $
            (101,928
            )
            $
            (844,703
            )
            $
            (913,214
            )
            $
            (3,228,178
            )
            $
            (12,081,297
            )Net
                cash provided by(used
                in) investing activities
            
            
            -
            
            
            (33,836
            )
            
            115,157
            
            
            (143,700
            )
            
            (2,976,408
            )Net
                cash provided by(used
                in) financingactivities
            
            
            20,762
            
            
            (26,031
            )
            
            139,016
            
            
            3,780,168
            
            
            15,115,365





Net
      cash
      used in operating activities was $101,928 during the three months ended
      September 30, 2008 compared to $844,703 during the same period in 2007, which
      constitutes a decrease of approximately 87.9%. During the nine months ended
      September 30, 2008 the net cash used in operating activities was $913,214
      compared to $3,228,178 during the same period in 2007, resulting in a decrease
      of approximately 71.7%. The decrease for these periods is primarily the result
      of a decrease in inventory purchasing activity and enhanced efforts to reduce
      our operating expenses. From inception (May 19, 2003) through September 30,
      2008
      we have used $12,081,297 to fund our operating activities.





At
      September 30, 2008 we had cash on hand of $50,492 compared to cash on hand
      of
      $1,563,728 at September 30, 2007, and $713,289 at December 31, 2007.





Cash
      Flow From (Used in) Investing Activities




Net
      cash
      used in investing activities for the three months ended September 30, 2008
      was
      $0 compared to $33,836 used in investing activities for the three months ended
      September 30, 2007. Net cash provided by investing activities for the nine
      months ended September 30, 2008 was $115,157 compared to $143,700 used in
      investing activities for the nine months ended September 30, 2007. The decrease
      in cash used in investing activities is primarily the result of a decrease
      in
      purchases of property and equipment. We have used $3,012,908 for the purchase
      of
      property and equipment from inception (May 19, 2003) through September 30,
      2008.
      Net cash from investing activities for the period from inception (May 19, 2003)
      through September 30, 2008 was $2,976,408.





Cash
      Flow From Financing Activities





Net
      cash
      used to pay short term and long term debt during the three months ended
      September 30, 2008 and 2007, respectively was $40,844 and $26,031. Net cash
      used
      to pay short term and long term debt during the nine months ended September
      30,
      2008 and 2007, respectively was $118,590 and $64,927. We received proceeds
      of
      $54,000 from our line of credit during the three months ended September 30,
      2008
      and a total of $250,000 from the line of credit during the nine months ending
      September 30, 2008. We also received net proceeds of $7,606, during the three
      months ended September 30, 2008 from our SEDA fund. During the nine months
      ending September 30, 2007, we received net proceeds from a private placement
      of
      our Series B stock of $3,595,095 and proceeds of $250,000 from
      borrowings.




26




During
      the nine months ended September 30, 2008, we renewed our note with Farmers
      State
      Bank in the principal amount of $591,956. In addition, on March 24, 2008, we
      obtained a line of credit with Iowa State Bank in the amount of $250,000. As
      of
      September 30, 2008, we have drawn $250,000 from this line of credit. This line
      of credit has an expiration date of December 1, 2008 and carries an interest
      rate of 1.5% above the Wall Street journal U.S. Prime Rate. The interest rate
      at
      September 30, 2008 was 6.5%.





At
      September 30, 2008, we received $7,606, net of expenses from the issuance of
      common stock under the SEDA. We issued 193,272 shares of common stock and
      received approximately $22,131 which, netted with expenses related to the SEDA
      registration of $14,525, totaled $7,606.




At
      September 30, 2008 we had total assets of $4,683,188 and stockholders equity
      of
      $1,594,346 compared to total assets of $5,985,477 and stockholders’ equity of
      $3,381,158 at December 31, 2007. We began accessing the SEDA funds in August
      2008 and at November 7, 2008, we have issued 247,977 shares at an average price
      of $.23 and received $57,130 in capital.





**Plan
      of Operation**





Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses in the foreseeable future. We have financed
      operations since inception primarily through equity and debt financings. We
      anticipate our expenses will increase significantly only if we obtain sufficient
      capital to expand our operations. Until such time, we intend to curtail our
      operations and restrict our monthly expenditures.





We
      expect
      to continue our efforts to raise additional capital resources during 2008.
      We
      are currently exploring a variety of opportunities to obtain additional capital.
      There is no assurance that we will be able to raise the necessary capital or
      that the capital, if available, will be available on terms that will be
      acceptable to us.





We
      are a
      development stage enterprise and, as such, our continued existence is dependent
      upon our ability to resolve our liquidity problems, principally by obtaining
      additional debt or equity financing. We have yet to generate a positive internal
      cash flow, and until meaningful sales of our products begin, we are dependent
      upon debt and equity funding.





We
      believe that the manufacture and sale of our current Oxx Power ® engines,
      open power units and gensets were merely the first steps toward our vision
      of a
      carbon-free, energy independent future. We have not received the amount of
      capital we anticipated receiving from investors to date. We have also
      experienced delays in the receipt of quality parts for our engines and we have
      experienced delays in initiating the certification process of our engines.
      Our
      long-term vision has narrowed and we are focusing our efforts around two major
      markets: hydrogen airport ground support vehicle engines and the sale of
      hydrogen systems to the wind energy market. Capital constraints have delayed
      our
      efforts to commercialize our intellectual property. However, we anticipate
      that
      revenue from these sources will continue to help support our continuing
      operations and assist with funding for our research and development
      efforts.





We
      believe that the airport ground support industry is a realistic near-term
      opportunity for our hydrogen fueled engines. Hydrogen-fueled engines could
      address environmental concerns at airports, and hydrogen delivery constraints
      could be minimized if the system is installed in a controlled environment such
      as an airport. Our Oxx Power ® engines
      have been configured to conform to the same form, fit and function as engines
      currently in common use in certain ground support equipment, such as baggage
      tractors. Thus our engines can be used as replacement engines in most
      traditional ground support vehicles and can be maintained by existing personnel
      with minimal additional training. We are currently working, in collaboration
      with Air Liquide and a number of other participants, to finalize an opportunity
      to sell some of our hydrogen-fueled engines for use in ground support vehicles
      at designated airports. Such an opportunity could also allow us to achieve
      a
      safety certification for hydrogen usage at airports.




27




We
      have
      also been working on enhancements to our “Wind to Hydrogen” power storage system
      by designing a system which can reach 1MW of power. We plan to have our first
      system available for delivery in May 2009, and we plan to aggressively market
      and sell the system provided we can obtain needed capital. It is widely
      recognized that wind power will play an increasingly important role in future
      energy generation. However, wind power must be both reliable and cost-effective
      before it can enter the mainstream electricity market. Until then it will be
      limited to providing supplementary power to the grid. To enter the mainstream
      electricity market, wind power must be dispatchable, being able to operate
      at
      any time on demand to provide instant power to the grid. We believe that we
      can
      deliver such a system to the wind energy market.





On
      September 3, 2008, we entered into a design agreement with a company co-founded
      by one of our directors. The scope of the agreement includes the enhancement
      of
      our OxxBoxx controller with wireless technology to produce a remote wireless
      engine controller. The agreement provides for development and testing by us
      and
      the contractor working to create a production-ready controller. The cost of
      the
      development work incurred through September 30, 2008 was $30,529. We estimate
      the total cost of the project to be approximately $225,000, however the project
      has been suspended until we can obtain the financing needed to sustain the
      development.





In
      addition, we entered into an agreement with this same director’s investment
      banking firm for consulting services to assist us with the preparation of a
      business plan which can be used in a capital raise. The total cost of the
      engagement is expected to be $20,000, with costs incurred through September
      30,
      2008 of $10,000.





Our
      business plan is based upon the development of our intellectual property and
      the
      commercialization of our technologies. We currently have ten patents pending
      in
      the United States and two patents pending internationally. We expect to file
      several more during the next several months.





We
      are
      constantly seeking synergistic collaborations with others in the development
      and
      marketing of our technologies. In addition to our efforts related to the ground
      support industry and the wind industry, as discussed above, we have entered
      into
      a number of collaborative projects around the world for the purpose of testing
      hydrogen and ammonia as fuels and promoting the use of our technology.





Why
      hydrogen and ammonia? Hydrogen and ammonia are the only renewable fuels that
      can
      be produced onsite, with the use of only water and electricity. Federal and
      local governments in the US are enacting policies like the Hydrogen Fuel
      Initiative to encourage the use of alternative fuel, and establish goals for
      potentially requiring the use of alternatives. California’s Executive Order S704
      orders building up a network of hydrogen fueling stations sufficient to make
      hydrogen available in the State by 2010. We believe that ammonia is the only
      fuel other than hydrogen that produces no greenhouse gases on combustion.
      Ammonia will partially power diesel and spark-ignited internal combustion
      engines, direct ammonia fuel cells, and even combustion turbines. It can be
      manufactured from simple water and air using clean renewable energy. We are
      not
      as far along in the ammonia fueled development process as we are with hydrogen,
      and we expect that hydrogen will become accepted before ammonia is.





Concerns
      motivating increased hydrogen acceptance include national security, the economy
      and the environment. An alternative fuel such as hydrogen would not be subject
      to the price volatility risk inherent in fossil fuels, and could materially
      reduce the country’s dependency on foreign fuels.





So
      far,
      we have been able to raise the capital necessary to reach this stage of product
      development and have been able to obtain funding for operating requirements
      and
      for construction of our manufacturing facilities, but there can be no assurance
      that we will be able to continue to do so.





We
      do not
      anticipate expanding our manufacturing facilities in 2008. We do not anticipate
      spending any of our resources on capital expenditures in 2008. However, we
      do
      anticipate spending approximately $350,000, on equipment to support our
      production of wind to hydrogen storage systems in 2009, which expenditures
      will
      be subject to sufficient capital from anticipated financing.





Our
      research and development costs incurred through September 2008, totaled $614,678
      and we expect that we will incur additional costs in the fourth quarter of
      approximately $150,000, primarily to support the production of our 1 MW wind
      to
      hydrogen energy storage system.




28




**Grants
      and Government Programs**





The
      Iowa
      Department of Economic Development has provided the following funding assistance
      to us:




·Community
                Economic Betterment Account Forgivable Loan (“CEBA”)
            
            $
                250,000·Physical
                Infrastructure Assistance Program Forgivable Loan (“PIAP”)
            
            $
                150,000·Enterprise
                Zone (estimated value)
            
            $
                142,715





The
      CEBA
      and PIAP programs provide that the loan amounts will be forgiven if we meet
      certain requirements, including the creation of 49 jobs in Iowa by July 2010.
      As
      of November 7, 2008, we have a total of fourteen (12) employees in Iowa, all
      of
      whom are now working full-time, as well as two (2) part-time and one (1)
      full-time employee in Canada.





Under
      the
      Enterprise Zone program, we are eligible for the following benefits provided
      we
      continue to meet certain Program requirements:





§
            Funding
                for training new employees through a supplemental new jobs withholding
                credit equal to 3% of gross wages of the new jobs created;




§
            A
                refund of 100% of the sales, service and use taxes paid to contractors
                and
                subcontractors during the construction phase of the plant (excluding
                local
                option taxes);




§
            A
                6.5% research activities tax credit based on increasing research
                activities within the State of Iowa;




§
            An
                investment tax credit equal to 10% of our capital investment. This
                Iowa
                tax credit may be carried forward for up to seven
                years.




§
            A
                value-added property tax exemption. Our community has approved an
                exemption from taxation on a portion of the property in which our
                business
                is located.




In
      order
      to receive the benefits of the Enterprize Zone program, we were required to
      meet
      a number of requirements, including the creation of 59 new full-time equivalent
      jobs at the company’s headquarters by June 28, 2008. We have not met this
      requirement and are in discussions with the department about possible
      alternatives.





We
      received a partially forgivable loan in the amount of $146,124 from the Algona
      Area Economic Development Corporation (“AAEDC”), used for purchase of land and
      construction of our manufacturing facility. If we create 50 new jobs in Algona,
      Iowa by June 1, 2010 and retain those jobs through June 1, 2015, $67,650 of
      this
      loan will be forgiven. If we create and retain 50 additional new jobs in Algona,
      Iowa (total of 100 jobs) by June 1, 2015 another $67,650 of this loan will
      be
      forgiven. The balance of $10,824 will be the only amount we repay to AAEDC,
      if
      we are successful in creating 100 new jobs. A wage must be paid equal to or
      greater than the average hourly wage for workers in Kossuth County, Iowa, as
      determined annually by Iowa Workforce Development. If we are unsuccessful we
      must repay the loan with 8% interest. We are accruing interest on this loan
      until we meet the terms.





**Employees**





We
      currently have 15 employees, 12 of whom are in Algona, Iowa and 3 of whom are
      in
      Canada. We plan to maintain lean staffing and will only add key skill sets
      as
      required - mainly in the technical and sales disciplines.




**Inflation**





In
      our
      opinion, inflation has not and will not have a material effect on our operations
      in the immediate future. Management will continue to monitor inflation and
      evaluate the possible future effects of inflation on our business and
      operations.




29




**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements.




30




**ITEM
      4T. CONTROLS AND PROCEDURES**





EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES.





Under
      the
      supervision and with the participation of our management, including our Acting
      Chief Executive Officer and Chief Financial Officer, we have evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as such term is defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934 (the "Exchange Act")). Disclosure controls and procedures
      are the controls and other procedures that we designed to ensure that we record,
      process, summarize and report in a timely manner the information we must
      disclose in reports that we file with or submit to the Securities and Exchange
      Commission under the Exchange Act. Based on this evaluation, we have concluded
      that our disclosure controls and procedures were effective in ensuring that
      material information related to us is recorded, processed, summarized and
      reported as of the end of the period covered by this report.





Our
      management, consisting of our Chief Executive Officer and Chief Financial
      Officer, have reviewed and evaluated any changes in our internal control over
      financial reporting that occurred as of September 30, 2008 and there has been
      no
      change that has materially affected or is reasonably likely to materially affect
      our internal control over financial reporting.




31




**PART
      II OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





We
      are
      not a party to any pending legal proceeding. We are not aware of any pending
      legal proceeding to which any of our officers, directors, or any beneficial
      holders of 5% or more of our voting securities are adverse to us or have a
      material interest adverse to us.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





On
      June
      10, 2008 we issued 386,567 shares to YA Global as a commitment fee under the
      Standby Equity Distribution Agreement (“SEDA”) with YA Global dated April 11,
      2008. Under the SEDA we have the right, for a two-year period beginning August
      5, 2008, to sell registered shares of our Common Stock to YA Global for a total
      purchase price of up to Four Million Dollars ($4,000,000). For each share of
      Common Stock purchased under the SEDA, YA Global will pay 93% of the lowest
      daily VWAP during the five (5) consecutive trading days after the Advance notice
      date.





In
      addition to the shares issued as a commitment fee, we have paid $15,000 to
      YA
      Global as a structuring and due diligence fee. We are obligated to pay a monthly
      monitoring fee of $3,333 during the term of the SEDA. We received no proceeds
      from the issuance of these shares and, except as described above, paid no fees
      or other commissions in relation to the private placement of these shares.





These
      securities were offered and sold without registration under the Securities
      Act
      of 1933 in reliance upon the exemption provided by Section 4(2) of the
      Securities Act and Rule 506 of Regulation D promulgated thereunder, and may
      not
      be offered or sold in the United States in the absence of an effective
      registration statement or exemption from the registration requirements under
      the
      Securities Act.  An appropriate legend was placed on the securities issued.





Beginning
      in August 2008, we began accessing the SEDA funds from YA Global and issued
      shares for the following draws:




Advance
                Notice Date
            
            Amount
                Requested
            
            Amount
                Received
            
            Shares
                Issued
            
            Purchase
                Price of Shares IssuedAugust
                11, 2008
            
            $
            10,000
            
            $
            8,131
            
            
            27,093
            
            $
            .3001September
                3, 2008
            
            
            15,000
            
            
            6,000
            
            
            21,444
            
            $
            .2798September
                15, 2008
            
            
            20,000
            
            
            8,000
            
            
            29,155
            
            $
            .2744September
                22, 2008
            
            
            25,000
            
            
            25,000
            
            
            115,580
            
            $
            .2163October
                2, 2008
            
            
            25,000
            
            
            10,000
            
            
            54,705
            
            $
            .1828Total
            
            $
            95,000
            
            $
            57,131
            
            
            247,977




We
        claim
        an exemption from the registration requirements of the Securities Act of
        1933,
        as amended for the private sale of our shares in the SEDA pursuant to Section
        4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated
        thereunder. The sale of the shares to YA Global does not involve a public
        offering, YA Global is an “accredited investor” and/or qualified institutional
        buyer and YA Global has access to information about the Company and its
        investment. Resale of the SEDA shares has been registered under our registration
        statement declared effective on August 5, 2008.


32




**ITEM
      6. EXHIBITS AND REPORTS ON FORM 8-K**




**Exhibit No.**
            
            **Description**31.1
            
            Certification
                pursuant to Item 601(b) (31) of Regulation S-K, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002, by Theodore G. Hollinger,
                the company's Acting President and Chief Executive Officer (Principal
                Executive Officer).31.2
            
            Certification
                pursuant to Item 601(b) (31) of Regulation S-K, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002, by Sandra Batt, the
                company's Chief Financial Officer (Principal Financial
                Officer).32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002, by Theodore G. Hollinger, the company's
                Acting President and Chief Executive Officer (Principal Executive
                Officer).32.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002, by Sandra Batt, the company's Chief
                Financial Officer (Principal Financial
                Officer).









**NOTES
      ABOUT FORWARD-LOOKING STATEMENTS**





Statements
      contained in this current report which are not historical facts, including
      some
      statements regarding the effects of the Merger, may be considered
      "forward-looking statements" under the Private Securities Litigation Reform
      Act
      of 1995. Forward-looking statements are based on current expectations and the
      current economic environment. We caution readers that such forward-looking
      statements are not guarantees of future performance. Unknown risks and
      uncertainties as well as other uncontrollable or unknown factors could cause
      actual results to materially differ from the results, performance or
      expectations expressed or implied by such forward-looking
      statements.  Readers
      should carefully review the our financial statements and the notes thereto,
      as
      well as the " **risk
      factors** " described in the documents we file from time to time with the Securities and
      Exchange Commission, including our annual report on Form 10-KSB/A for the year
      ended December 31, 2007.




33




**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 hereunto
      duly authorized.





**HYDROGEN
                ENGINE CENTER, INC.**Date:
              November 14, 2008
            By
            /s/ THEODORE
              G. HOLLINGERTheodore
              G. HollingerActing
                President and Chief Executive Officer
              (Principal
                Executive Officer)




Date:
                November 14, 2008
              By
              /s/ SANDRA
                BATTSandra
                  Batt
                Chief
                  Financial Officer
                (Principal
                  Financial Officer)
  34