UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-QSB

[X]  QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
     OF 1934

                  For the quarterly period ended March 31, 2006


[ ]  TRANSITION 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 Employer
of incorporation)                                        Identification No.)

                    602 East Fair 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  non-accelerated  filer.  See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.

(Check one):

Large accelerated filer [ ]  Accelerated filer [ ]  Non-accelerated filer [X]


State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest  practicable  date:  25,162,905 shares of Common Stock,
par value $.001 outstanding at April 21, 2006.
<PAGE>
<TABLE>
<CAPTION>

                                   FORM 10-QSB

                                TABLE OF CONTENTS

                                                                                                Page
                                                                                                ----
<S>                                                                                             <C>
PART I.    FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . .       3

     Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005. . . . . . . . .       3

     Consolidated Statements of Operations for the Three Months Ended
     March 31, 2006 and 2005 and the period from inception (May 19, 2003)
     through March 31, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       5

     Consolidated Statements of Stockholders' Equity (Deficit) for the period
     from inception (May 19, 2003) through March 31, 2006. . . . . . . . . . . . . . . . . .       6

     Consolidated Statements of Cash Flows for the Three Months Ended
     March 31, 2006 and 2005 and the period from inception (May 19, 2003)
     through March 31, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       8

     Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . .      10

Item 2.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      25

Item 3.  Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . .      32

Item 4.  Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      34

PART II.   OTHER INFORMATION

Item 1A.  Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      35

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds . . . . . . . . . . . .      44

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . .      45

Notes About Forward-looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . .      45

Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . .      46

</TABLE>

                                      -2-
<PAGE>


ITEM 1.  FINANCIAL INFORMATION


                  HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
                    (a corporation in the development stage)

                           Consolidated Balance Sheets


                                            March 31,           December 31,
ASSETS                                        2006                 2005
                                           ----------           ----------
                                           (Unaudited)

Current Assets
   Cash and cash equivalents               $  969,506           $2,346,248
   Accounts receivable                         82,102                3,200
   Related party receivable                      --                 26,257
   Other receivables                             --                103,695
   Inventories                                384,353              206,091
   Prepaid expenses                           166,108               77,723
                                           ----------           ----------
     Total current assets                   1,602,069            2,763,214

Property, Plant and Equipment
   Land                                       196,124              196,124
   Building                                   282,901              282,901
   Equipment                                  452,998              280,780
   Leasehold improvements                      17,156               16,023
   Construction in progress                 1,606,417            1,322,798
                                           ----------           ----------
                                            2,555,596            2,098,626
   Less accumulated depreciation               58,395               39,818
                                           ----------           ----------
     Net property and equipment             2,497,201            2,058,808
                                           ----------           ----------

     Total Assets                          $4,099,270           $4,822,022
                                           ==========           ==========







                             See accompanying notes.


                                      -3-
<PAGE>


<TABLE>
<CAPTION>

                  HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
                    (a corporation in the development stage)

                           Consolidated Balance Sheets


                                                                      March 31,           December 31,
LIABILITIES AND EQUITY                                                  2006                 2005
                                                                     ----------           ----------
                                                                     (Unaudited)

Current Liabilities
<S>                                                                   <C>            <C>
    Current portion long-term debt                                    $    48,967         $    24,984
    Note payable, bank                                                    262,647             262,647
    Accounts payable                                                      349,014             236,341
    Accrued expenses                                                       92,904              69,768
    Construction payable                                                   22,649             232,208
    Deferred revenue                                                       51,408                --
                                                                      -----------         -----------
     Total current liabilities                                            827,589             825,948

Long-term debt, net of current maturities                                 805,334             791,541

Commitments and Contingencies

Stockholders' Equity
   Preferred  stock, $0.001 par  value; 10,000,000 shares
     authorized, none issued                                                 --                  --
   Common stock,  $0.001 par value;  100,000,000 shares authorized,
     25,162,905 shares issued and outstanding                              25,163              25,158
   Additional paid-in capital                                           5,443,461           4,837,602
   Unearned stock-based compensation                                     (700,914)           (275,332)
   Accumulated other comprehensive income - foreign currency               (2,218)             (2,207)
   Deficit accumulated during the development stage                    (2,299,145)         (1,380,688)
                                                                      -----------         -----------
     Total stockholders' equity                                         2,466,347           3,204,533
                                                                      -----------         -----------

     Total Liabilities and Stockholders' Equity                       $ 4,099,270         $ 4,822,022
                                                                      ===========         ===========

</TABLE>

                             See accompanying notes.


                                      -4-
<PAGE>

<TABLE>
<CAPTION>
                  HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
                    (a corporation in the development stage)

                      Consolidated Statements of Operations
                                   (Unaudited)




                                            Three months ended            From
                                                 March 31,              Inception
                                       ----------------------------   May 19, 2003)
                                           2006            2005     to March 31, 2006
                                       ------------    ------------    ------------

<S>                                    <C>             <C>             <C>
Sales                                  $     28,590    $     12,000    $     72,150


Cost of Sales                                15,676           4,761          39,220
                                       ------------    ------------    ------------

Gross Profit                                 12,914           7,239          32,930
                                       ------------    ------------    ------------

Operating Expenses
   Sales and marketing                      240,288            --           361,862
   General and administrative               607,969          39,550       1,411,472
   Research and development                  83,652           9,713         537,364
                                       ------------    ------------    ------------

                                            931,909          49,263       2,310,698
                                       ------------    ------------    ------------

Operating Loss                             (918,995)        (42,024)     (2,277,768)

Other Income (Expense)
   Interest income                           13,498            --            45,521
   Interest expense                         (12,960)         (4,566)        (66,898)
                                       ------------    ------------    ------------
                                                538          (4,566)        (21,377)
                                       ------------    ------------    ------------

Net Loss                               $   (918,457)   $    (46,590)   $ (2,299,145)
                                       ============    ============    ============


Weighted-average shares outstanding      24,858,905      16,297,200
                                       ============    ============


Basic and diluted net loss per share   $      (0.04)   $      (0.00)
                                       ============    ============
</TABLE>

                             See accompanying notes.

                                      -5-
<PAGE>

<TABLE>
<CAPTION>

                  HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
                    (a corporation in the development stage)
            Consolidated Statements of Stockholders' Equity (Deficit)
                                                                                                             Deficit
                                                                                              Accumulated     Accum.
                                           Common       Common      Additional    Unearned    Other Com-   During the
                                            Stock        Stock       Paid-in     Stock-Based   prehensive  Development
                                           Shares       Amount       Capital    Compensation      Loss       Stage         Total
                                          -----------  -----------  -----------  -----------  -----------  -----------  -----------

<S>                                         <C>        <C>          <C>          <C>          <C>          <C>          <C>
Issuance of common stock to founder in
exch. for equip. & expenses incurred        2,000,000  $     2,000  $    98,165  $      --    $      --    $      --    $   100,165

Net loss                                         --           --           --           --           --        (65,642)     (65,642)
                                          -----------  -----------  -----------  -----------  -----------  -----------  -----------


Balance at December 31, 2003                2,000,000        2,000       98,165         --           --        (65,642)      34,523

Company-related expenses paid by
founder                                          --           --         39,187         --           --           --         39,187

Net loss
                                                 --           --           --           --           --       (192,476)    (192,476)
                                          -----------  -----------  -----------  -----------  -----------  -----------  -----------

Balance at December 31, 2004                2,000,000        2,000      137,352         --           --       (258,118)    (118,766)

Company-related expenses paid by
founder                                          --           --         12,135         --           --           --         12,135

Exchange of previous shares by sole
shareholder of HEC Iowa                    (2,000,000)        --           --           --           --           --           --

Shares in Green Mt.  Labs  acquired  in
reverse merger                              1,006,000        1,006       (1,006)        --           --           --           --

Stock split of 3.8 to 1 prior to the        2,816,804        2,817       (2,817)        --           --           --           --


Issuance of common stock to sole
shareholder of HEC Iowa                    16,297,200       14,297      (14,297)        --           --           --           --

Issuance of restricted common stock to
employees & directors                         426,000          426      425,574     (275,332)        --           --        150,668

Issuance of common stock in  connection
with  the  private  placement,  net  of
expenses                                    3,948,500        3,949    3,590,940         --           --           --      3,594,889

Issuance of common stock in  connection
with conversion of debt
                                              663,401          663      556,388         --           --           --        557,051

Consultants compensation associated
with stock options
                                                 --           --        133,333         --           --           --        133,333
                                                                                                                        -----------
                                                                                                                          4.329,310
                                                                                                                        -----------
Comprehensive Loss

  Foreign currency translation
                                                 --           --           --           --         (2,207)        --         (2,207)

  Net loss                                       --           --           --           --           --     (1,122,570)  (1,122,570)
                                                                                                                         ----------

Total comprehensive loss                                                                                                 (1,124,777)
                                           -----------  -----------  -----------  -----------  -----------  -----------  -----------


Balance at December 31, 2005               25,157,905       25,158    4,837,602     (275,332)      (2,207)   (1,380,688)  3,204,533
</TABLE>


                                  - Continued -


                             See accompanying notes.

                                      -6-
<PAGE>


<TABLE>
<CAPTION>

                  HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
                    (a corporation in the development stage)
            Consolidated Statements of Stockholders' Equity (Deficit)
                                   -Continued-
                                                                                                           Deficit
                                                                                           Accumulated      Accum.
                                           Common       Common     Additional    Unearned     Other       During the
                                            Stock       Stock       Paid-in    Stock-Based Comprehensive Development
                                           Shares      Amount       Capital   Compensation    Loss          Stage         Total
                                        -----------  ----------- -----------  -----------  -----------   -----------   -----------


<S>                                      <C>         <C>         <C>          <C>          <C>           <C>           <C>
Balance at December 31, 2005             25,157,905  $    25,158 $ 4,837,602  $  (275,332) $    (2,207)  $(1,380,688)  $ 3,204,533

Compensation expense related to stock
options since inception
                                               --           --       579,197     (579,197)        --            --            --

Compensation  associated  with issuance
of  restricted  stock to employees  and
directors                                      --           --          --         21,500         --            --          21,500

Employee compensation associated with
stock options
                                               --           --          --        132,115         --            --         132,115

Consultant compensation associated
with stock options
                                               --           --        21,667         --           --            --          21,667
Issuance of stock related to option
exercises                                     5,000            5       4,995         --           --            --           5,000

                                               --           --          --           --           --            --       3,394,815
Comprehensive Loss

  Foreign currency translation                 --           --          --           --            (11)         --             (11)


  Net loss                                     --           --          --           --           --        (918,457)     (918,457)
                                                                                                                        ----------
Total comprehensive loss                                                                                                  (918,468)
                                        -----------  ----------- -----------  -----------  -----------   -----------    -----------

Balance at March 31, 2006 (Unaudited)    25,162,905  $    25,163 $ 5,443,461  $  (700,914)      (2,218)   (2,299,145)   $2,466,347
                                        ===========  ===========  ===========  ===========  ===========   ===========   ============
</TABLE>



                                                        See accompanying notes.


                                      -7-
<PAGE>
<TABLE>
<CAPTION>


                  HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
                    (a corporation in the development stage)

                      Consolidated Statements of Cash Flows
                                   (Unaudited)




                                                               Three months
                                                             ended March 31,       From Inception
                                                        --------------------------  (May 19, 2003)
                                                           2006          2005      to March 31, 2006
                                                        -----------    -----------    -----------
<S>                                                     <C>            <C>            <C>
Cash Flows from Operating Activities
  Net loss                                              $  (918,457)   $   (46,590)   $(2,299,145)

  Adjustments to reconcile net loss to net cash
   used in operations:
   Depreciation                                              18,577          4,182         58,395
   Compensation to directors and employees from
   restricted stock                                          21,500           --          172,168
   Compensation to directors and employees from stock
   options                                                  132,115           --          132,115
   Compensation to consultants from stock options            21,667           --          155,000
   Change in assets and liabilities:
     Accounts receivable                                    (78,902)          --          (82,102)
     Related party receivables                               26,257           --             --
     Other receivables                                        3,695           --             --
     Inventories                                           (178,262)        (8,114)      (384,353)
     Prepaid expenses                                       (88,385)          --         (166,108)
     Accounts payable                                       112,673          6,468        452,650
     Accrued expenses                                        23,136          4,484         92,904
     Deferred revenue                                        51,408           --           51,408
                                                        -----------    -----------    -----------
      Net cash used in operating activities                (852,978)       (39,570)    (1,817,068)

Cash Flows from Investing Activities
  Purchases of property, plant and equipment               (131,997)          --         (380,803)
  Payments for construction in process                     (483,431)          --       (1,574,021)
                                                        -----------    -----------    -----------
      Net cash used in investing activities                (615,428)          --       (1,954,824)

Cash Flows from Financing Activities
  Proceeds from note payable, bank                             --             --          650,000
  Payments on note payable, bank                               --             --         (650,000)
  Proceeds from long-term debt                              100,000         30,000      1,172,052
  Payments on long-term debt                                (13,325)          --          (28,325)
  Proceeds from exercise of stock options                     5,000           --            5,000
  Issuance of common stock in private placement                --             --        3,948,500
  Payments of expense in connection with private               --             --         (353,611)
  placement
                                                        -----------    -----------    -----------
      Net cash provided by financing activities              91,675         30,000      4,743,616
                                                        -----------    -----------    -----------

Net Increase (Decrease) in Cash and Cash Equivalents     (1,376,731)        (9,570)       971,724

Effect of Exchange Rates on Cash and Cash Equivalents           (11)          --           (2,218)

Cash and Cash Equivalents - Beginning of Period           2,346,248         19,808           --
                                                        -----------    -----------    -----------

Cash and Cash Equivalents - End of Period               $   969,506    $    10,238    $   969,506
                                                        ===========    ===========    ===========
</TABLE>



                                  - Continued -


                             See accompanying notes.



                                      -8-
<PAGE>


<TABLE>
<CAPTION>
                  HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
                    (a corporation in the development stage)

                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                                   -Continued-


                                               Three months ended March 31,     From Inception
                                             ---------------------------------  (May 19, 2003)
                                                  2006               2005     to March 31, 2006
                                             ----------------   --------------   ------------


Supplemental Cash Flow Information
<S>                                          <C>                <C>              <C>
   Interest paid                             $          6,835   $        4,566   $     44,782
                                             ================   ==============   ============



Supplemental Disclosure of Non-cash
 Investing and Financing Activities

   Additional paid-in capital contribution
     for expenses paid by founder            $           --     $        5,263   $    103,636
                                             ================   ==============   ============

   Issuance of common stock for equipment    $           --     $         --     $     47,851
                                             ================   ==============   ============

   Issuance of common stock for conversion
     of debt                                 $           --     $         --     $    557,051
                                             ================   ==============   ============

   Acquisition of property, plant and
     equipment through financing             $         51,101   $         --     $    530,272
                                             ================   ==============   ============

   Payables for construction in progress     $         22,649   $         --     $    254,857
                                             ================   ==============   ============

   Receivable for state loan                 $           --     $         --     $    100,000
                                             ================   ==============   ============
</TABLE>

                             See accompanying notes.




                                      -9-

                  HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES
                    (a corporation in the development stage)
                   Notes to Consolidated Financial Statements
                                 March 31, 2006


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview of Companies
---------------------

Hydrogen  Engine Center,  Inc.,  formerly  known as Green  Mountain  Labs,  Inc.
("Green  Mt.   Labs"),   is  a  Nevada   corporation.   Green  Mt.  Labs  was  a
public-reporting   shell  company  and,  in  connection  with  the  Transactions
described  below,  changed  its  name  to  Hydrogen  Engine  Center,  Inc.  (the
"Company"). Also, as a result of the Transactions described below, the Company's
operations are those of 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 ultimate
purpose of commercializing  internal combustion  industrial engines.  HEC Iowa's
operations are located in Algona, Iowa.

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

Green Mt. Labs was  originally  organized to acquire and develop  mining claims;
however, these operations were discontinued in 1997.

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

The  Company  is a  manufacturer  of  engines  and  generators  for  use  in the
industrial and power  generation  markets.  These engines are designed to run on
alternative fuels including but not limited to gasoline,  propane,  natural gas,
ethanol and hydrogen.  The engines and engine  products are sold under the brand
name  Oxx  Power  TM.  Through  March  31,  2006,  the  Company  remains  in the
development  stage. This stage is characterized by minimal revenues with efforts
focused  on  fund  raising  and  significant  expenditures  for the  design  and
development of the Company's products and manufacturing  processes,  and for the
construction of the Company's new facilities.

The Company has  established a  distribution  system to sell its  products.  The
distribution  system  for  the  Company's  engines  is  comprised  of  eight  US
distributors and two Canadian  distributors.  Distributed generation systems are
sold direct.

                                      -10-
<PAGE>

Merger and Private Placement (the "Transactions")
-------------------------------------------------

On August 30, 2005,  Green Mt. Labs  completed the  acquisition of HEC Iowa. The
acquisition was made pursuant to an agreement and plan of merger entered into on
June 3,  2005,  and  revised  on July 6,  2005 and July 29,  2005  (the  "Merger
Agreement").  To  accomplish  the  acquisition,  Green Mt. Labs merged its newly
created,  wholly-owned subsidiary,  Green Mt. Acquisitions,  Inc., with and into
HEC Iowa, with HEC Iowa being the surviving  entity. As part of the acquisition,
Green Mt. Labs  completed  a 3.8 share to 1 share  stock  split which  increased
outstanding  shares of common stock from 1,006,000 to 3,822,804.  Also under the
terms  of  the  Merger  Agreement,  the  Company  issued  16,297,200  shares  of
post-split  common  stock  (representing  81% of the  total  outstanding  shares
immediately  following the  transaction) to Theodore G.  Hollinger,  who was the
sole  stockholder  of HEC Iowa,  in exchange for 100% of HEC Iowa's  outstanding
capital  stock  (2,000,000  shares).  As stated above,  in  connection  with the
Transactions, Green Mt. Labs changed it name to Hydrogen Engine Center, Inc.

The  Transactions  have  been  accounted  for as a  recapitalization,  which  is
accounted for similar to the issuance of stock by HEC Iowa for the net assets of
Green Mt. Labs with no goodwill or other intangibles being recorded.

On October 11, 2005, the Company closed a private placement of the common stock.
The Company sold 3,948,500 shares of common stock,  $.001 par value, for a total
of $3,948,500.  Costs related to this offering amounted to $353,611. The Company
sold the shares in a private  transaction  at $1.00 per share,  and the  Company
relied on an  exemption  from  registration  pursuant  to  Regulation  D,  Rules
Governing the Limited Offer and Sale of Securities  without  Registration  under
the Securities Act of 1933.

Principles of Consolidation
---------------------------

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

Going Concern
-------------

The  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 the Company was unable to continue as a
going  concern and was therefore  obligated to realize  assets and discharge its
liabilities other than in the normal course of operations.

Since  inception,  the Company has  incurred  substantial  operating  losses and
expects to incur additional  operating losses into the foreseeable  future.  The
Company has financed  operations since inception,  primarily  through equity and
debt financings.  At March 31, 2006, the Company has reported accumulated losses
of $2,299,145 and has cash and cash equivalents  available to fund future losses
and  developments  of  $969,506.  The  Company  anticipates  its  expenses  will
significantly  increase  as it  commences  operations  in its new  manufacturing
facility,  including  additional  personnel,   product  development,   inventory


                                      -11-
<PAGE>

purchases,  and additional  construction  costs.  Based on current  projections,
existing  capital will fund the  Company's  operations  through June 2006.  This
timeframe may be shorter if events occur which  negatively  effect the Company's
operations.


Continuing operations is dependent upon obtaining significant further financing.
Although the Company plans to offer its common stock or debt securities for sale
in 2006, there can be no assurance that the Company will  successfully  complete
an offering or that these proceeds, if completed,  will be sufficient to satisfy
capital requirements. Also, there are no assurances that additional funding will
be  available  at  terms  acceptable  to the  Company.  These  conditions  raise
substantial doubt about the ability to continue as a going concern.

Sales of the Company's  products through March 31, 2006 have amounted to $72,150
and consisted of customized  engines and parts. The Company is in the process of
completing Phase 1 of its manufacturing facility. Completion of this facility is
needed before production  begins.  The  manufacturing  facility is substantially
complete;  however,  the Company expects that the dyno room will not be complete
until June 2006. Even if the Company is able to manufacture its products,  there
are no assurances  they will be accepted by the market place.  Also, the Company
estimates  it may cost  approximately  $1 million per engine type to certify its
engines to meet certain laws and regulations. Currently, there are three engines
the Company plans to certify.

As the  Company  continues  to  ramp  up its  operations,  it has  entered  into
significant  commitments as described in Notes 3 and 13. The Company has entered
into several  research and development  arrangements  with other  organizations.
Each research and  development  agreement  requires the Company to incur upfront
costs prior to receiving reimbursements from the other organizations.

Foreign Currency Translation
----------------------------

Results of operations and cash flows of foreign  subsidiaries  are translated to
U.S. dollars at average period currency  exchange rates.  Assets and liabilities
are translated at end-of-period  exchange rates.  Foreign  currency  translation
adjustments  related to foreign  subsidiaries  using the local currency as their
functional currency are included in Other comprehensive income (loss).

Cash and Cash Equivalents
-------------------------

The Company  considers  highly-liquid  investments  with a original  maturity of
ninety  days or less to be cash  equivalents.  The  Company  maintains  its cash
balances in three institutions. At times throughout the year, the Company's cash
and cash equivalents  balances may exceed amounts insured by the Federal Deposit
Insurance Corporation. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.

Accounts Receivable
-------------------

Accounts  receivable are recorded at their estimated net realizable  value.  The
Company  plans  to  follow a policy  of  providing  an  allowance  for  doubtful
accounts.  However, based on the evaluation of receivables at March 31, 2006 and


                                      -12-
<PAGE>

December 31, 2005,  the Company  believes that such accounts will be collectible
and thus, an allowance is not  necessary.  Accounts are  considered  past due if
payment is not made on a timely basis in accordance  with the  Company's  credit
policy.  Accounts  considered  uncollectible  are written off.  Credit terms are
extended to customers in the normal  course of  business.  The Company  performs
ongoing credit evaluations of its customers' financial condition and, generally,
requires no collateral.

Inventories
-----------

Inventories  consist  mainly of parts,  finished  engines and  gensets  that are
stated at the lower of cost  (determined by the first-in,  first-out  method) or
market value.

Property, Plant and Equipment
-----------------------------

Property,  plant and equipment  are recorded at cost.  Once assets are placed in
service,  depreciation  is provided  over  estimated  useful lives by use of the
straight-line  method.  Leasehold  improvements are depreciated over the life of
the lease  (Note 6).  Depreciation  expense was $18,577 and $4,182 for the three
months ended March 31, 2006 and 2005,  respectively,  and $58,395 from inception
(May 19,  2003) to March 31,  2006.  Maintenance  and  repairs  are  expensed as
incurred; major improvements and betterments are capitalized.

Long-Lived Assets
-----------------

The Company  reviews its  property,  plant,  and  equipment  for  indicators  of
impairment  when events or changes in  circumstances  indicate that the carrying
value may not be recoverable. Cash flows expected to be generated by the related
assets are estimated over the asset's useful life based on updated  projections.
If the  evaluation  indicates  that the carrying  amount of the asset may not be
recoverable,   the  potential  impairment  is  measured  based  on  a  projected
discounted cash flow model. If an impairment loss exists, the amount of the loss
will be recorded in the consolidated  statements of income.  The Company has not
incurred any impairment losses.

Revenue Recognition
-------------------

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

Sales and Marketing Costs
-------------------------

Sales and marketing  expenses include payroll,  employee  benefits,  stock-based
compensation,  and other costs associated with sales and marketing personnel and
advertising,  promotions,  tradeshows,  seminars,  and  other  marketing-related
programs. Sales and marketing expenses for the three months ended March 31, 2006
were $240,288.  There were no sales and marketing  expenses for the three months
ended March 31, 2005.  There has been a total of $361,862 in sales and marketing
costs for the  period  from  inception  (May 19,  2003) to March 31,  2006.  The
Company expenses advertising costs as they are incurred.

                                      -13-
<PAGE>

Research and Development Costs
------------------------------

The  Company's  research and  development  expenses  include  payroll,  employee
benefits,  stock-based  compensation,  and other costs  associated  with product
development.  The Company has determined that technological  feasibility for the
engines is reached  shortly  before the products are released to  manufacturing.
Research  and  development  costs were  $83,652 and $9,713 for the three  months
ended March 31, 2006 and 2005,  respectively,  and $537,364 from  inception (May
19, 2003) to March 31, 2006.

Income Taxes
------------

The Company recognizes  deferred taxes by the asset and liability method.  Under
this method,  deferred income taxes are recognized for  differences  between the
financial statement and tax bases of assets and liabilities at enacted statutory
tax rates in  effect  for the years in which the  differences  are  expected  to
reverse.  The effect on deferred taxes of a change in tax rates is recognized in
income in the period that  includes the enactment  date. In addition,  valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amounts  expected to be realized.  The primary sources of temporary  differences
are depreciation and net operating loss carryforwards.

Net Loss Per Share
------------------

The Company  computes  net loss per share under the  provisions  of Statement of
Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings Per Share" ("SFAS
128"), and Securities and Exchange  Commission Staff Accounting  Bulletin No. 98
("SAB 98").

Under the provisions of SFAS 128 and SAB 98, basic loss per share is computed by
dividing the Company's net loss for the period by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per share
excludes potential common shares since the effect is anti-dilutive.

The Company  assumed the effects of the  recapitalization,  described in Note 1,
were  effective  at  the  beginning  of  the  earliest   reporting  period  when
calculating weighted-average shares outstanding.

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. Actual results could differ from those estimates.


                                      -14-
<PAGE>

Fair Value of Financial Instruments
-----------------------------------

The  carrying   amounts  reported  in  the  balance  sheet  for  cash  and  cash
equivalents,   accounts  receivable,   accounts  payable  and  accrued  expenses
approximate their fair value due to the short-term nature of these instruments.

Stock-Based Compensation
------------------------

On January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial  Accounting Standards (SFAS) No. 123(R). As prescribed in
SFAS No. 123(R), "Share-Based Payment," the Company elected to use the "modified
prospective  method." The modified  prospective  method  requires  expense to be
recognized for all awards granted,  modified or settled in the year of adoption.
Historically, the Company applied the intrinsic method as provided in Accounting
Principles  Board {"APB") Opinion ("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 the prior year.  In
March  2005,  the SEC issued  Staff  Accounting  Bulletin  No.  107 ("SAB  107")
providing supplemental  implementation guidance for SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R). As a result of
adopting the fair value method for stock compensation, all future awards will be
expensed  over the stock  options  vesting  period.  The  Company  utilized  the
Black-Scholes option pricing model to estimate the fair value of options.

The Company has determined,  based on the Black-Scholes  option pricing formula,
the  weighted-average  fair value of stock options granted at March 31, 2006 was
$5.24 per share, using a risk-free interest rate of 4.37% - 4.55%, expected life
of 5.5 years,  1.5%  forfeiture  rate,  zero  expected  dividends  and estimated
volatility of 112%.

The volatility  calculation of 112 % is based on the 365-day average  volatility
of a representative  sample of eight (8) comparable companies in the alternative
fuel  technology  and services  niches with market  capitalizations  between $45
million and $1.5 billion ("Representative Sample"), in addition to the Company's
actual history over an eight-month period.  Because the Company has only a short
trading  history,  the Company  has been  required  to  estimate  the  potential
volatility  of its common stock  price.  The Company has referred to the 365-day
volatility of the  Representative  Sample because  management  believes that the
volatility of these companies, along with the Company's history, is a reasonable
benchmark to use in estimating the expected  volatility for the Company's common
stock.

Prior to the  adoption of SFAS 123(R),  the Company  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,  "Accounting  for  Stock-Based
Compensation"  ("SFAS  123").  As  permitted  by SFAS No.  123,  the Company has
elected  to  follow  APB No. 25 and  related  interpretations  for its  employee
stock-based  compensation.   Under  APB  No.  25,  no  compensation  expense  is
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.  The
Board of Directors determines the fair value of common stock.

                                      -15-
<PAGE>

The Company accounts for options issued to non-employees  under SFAS No. 123 and
Emerging  Issues Task Force Issue  ("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  is recorded  as an expense  and  periodically
remeasured over the vesting terms.

The Company records  restricted stock awards at the fair value as of the date of
grant  and  amortizes  the  expense  over the  vesting  period as  services  are
performed.

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

                                                        Period from Inception
                                                          (May 19, 2003) to
                                                            March 31, 2006

             Net loss, as reported                            $  (2,299,145)

             Deduct: stock-based employee
                compensation expense determined
                under fair value based method                      (185,802)
                                                              --------------

             Pro forma net loss                               $  (2,484,947)
                                                              ==============

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.

See Note 12 for further discussion of stock-based compensation.

Warrants
--------

As described in Note 11, the Company has granted  warrants to certain finders in
the private placement,  entitling the finders to purchase 69,640 shares at $1.00
per share. Based on EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and  Potentially  Settle in, a Company's Own Stock," the sale of the
warrants was reported in permanent equity and accordingly, there is no impact on
the Company's financial position and results of operation. Subsequent changes in
fair  value  will  not be  recognized  as long as the  warrants  continue  to be
classified as an equity instrument.


                                      -16-
<PAGE>

Recent Accounting Pronouncements
--------------------------------

In November  2004,  the FASB issued SFAS 151,  "Inventory  Costs." The Statement
requires  that  abnormal  amounts of idle facility  expense,  freight,  handling
costs,  wasted materials and overhead expense be recognized as period costs. The
primary basis of accounting for inventory is cost.  This Statement  standardizes
the amount of idle  facility  expense that could be  classified as inventory and
requires  these  expenses  be  recognized  as  period  costs.  The  Company  has
implemented SFAS 151 as of January 1, 2006. There was no effect on the financial
statements.

2. INVENTORY

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

                                          March 31,    December 31,
                                            2006           2005
                                        ------------   ------------

                      Component parts   $    285,899   $    109,351
                      Work in process         20,984         12,302
                      Finished goods          77,470         84,438
                                        ------------   ------------

                               Total    $    384,353   $    206,091
                                        ============   ============

3. CONSTRUCTION IN PROGRESS

The Company has incurred  construction costs related to construction of a 30,000
square foot manufacturing  facility of $1,495,832 at March 31, 2006,  $1,473,184
of which had been paid, with an additional $22,648 in construction  payable. The
Company had also incurred  costs of $110,585 at March 31, 2006 for  construction
improvements on another 30,000 square foot distribution/power generator facility
located adjacent to the manufacturing facility.

At May 15,  2006 the  Company had  incurred  additional  costs of $5,434 for the
manufacturing  building  and  $202,780  for  the  distribution/power   generator
building.  The  Company  anticipates  there  will be  approximately  $30,000  in
additional  costs for a fire alarm system and an exhaust system in the dyno room
of the manufacturing  facility.  The Company also estimates  additional costs of
approximately  $250,000 for  improvements  on the  distribution/power  generator
facility.

4. NOTES PAYABLE, BANK

On December 19, 2005, the Company obtained a short-term note for $500,000 from a
bank, of which $262,647 was used for the purchase of a building located adjacent
to the  manufacturing  building  site.  As of May 17, the Company  had  received
addition proceeds from this note in the amount of $190,314.  The balance on this
note on May 15, 2006 is $452,961. The additional available funds are required to
be used for building  improvements.  Borrowings on this  short-term  note mature
December 16, 2006 and accrue  interest at 5.89% with monthly  interest  payments
until maturity. The building serves as collateral for this note.

                                      -17-
<PAGE>

5. LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                           March 31,     December 31,
                                                                             2006           2005
                                                                         ------------   ------------

<S>                                                                      <C>            <C>
Note payable to City of Algona.  See (a)                                 $    190,000   $    200,000


Note payable to Algona Area Economic Development Corporation. See (b)         146,124        146,124

Note payable to Algona Area Economic Development Corporation.  See (c)         67,076         70,401


Notes payable to Iowa Department of Economic Development. See (d)             400,000        400,000

Note payable to finance company. See (e)                                       51,101           --
                                                                         ------------   ------------

                                                                              854,301        816,525

Less amounts due within one year                                               48,967         24,984
                                                                         ------------   ------------

         Totals                                                          $    805,334   $    791,541
                                                                         ============   ============
</TABLE>

Future maturities of long-term debt at March 31, 2006 are as follows:

                  2007                                  $      49,314
                  2008                                         24,171
                  2009                                         24,595
                  2010                                        165,639
                  2011                                        200,593
                  Thereafter                                  341,022
                                                        -------------
                              Total long-term debt      $     805,334
                                                        =============

         (a) The Company obtained  $200,000 from the City of Algona in September
         2005. 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 the Company creates and retains at least
         42 new full-time positions for five years. If such requirements are not
         met, interest on the loan will be payable at 10% per annum. The Company
         is accruing interest on this note until the terms of the note have been
         met. The loan is collateralized by land and building.

         (b) On June 27, 2005,  the Company  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 the new facility.  The
         loan is a  ten-year  partially  forgivable  loan with  interest  at 8%,
         conditioned upon the Company achieving performance targets as follows:

                                      -18-
<PAGE>

     o   $67,650 of principal  and interest  will be forgiven if the Company has
         certified that it has created 50 new full-time  equivalent jobs by June
         1, 2010 and continuously retained those jobs in Algona, Iowa until June
         1, 2015.
     o   $67,650 of principal  and interest  will be forgiven if the Company has
         certified that it has created and  continuously  retained 50 additional
         new full-time equivalent jobs by June 1, 2015.
     o   Balance of $10,824 due on June 1, 2015 without interest if paid by that
         date.
     o   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.

         The  Company is  accruing  interest on this note until the terms of the
         note have been met. The loan is secured by the real estate.

         (c) On  December  16,  2005,  the Company  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  as  described  in note 4. 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  secondary  and  subordinate  to a
         short-term  note held by a bank (Note 4). The note  requires  quarterly
         payments of $2,500 starting  January 1, 2006 with the final payment due
         July 1,  2017.  The  Company  plans  to use  this  building  for  parts
         distribution and for distributed  power generation  manufacturing.  The
         Company must maintain the building,  provide adequate  insurance and is
         responsible for the payment of property taxes.

         (d) On June 28,  2005,  the Iowa  Department  of  Economic  Development
         ("IDED")  awarded  the  Company 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. The Company
         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,  the Company 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.  The Company is
         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  mid-year and  end-of-year  status
         reports to ensure compliance.  The Company is accruing interest on this
         note until the terms of the note have been met.  The note is secured by
         a security agreement on its assets.

                                      -19-
<PAGE>

         Also on June 28, 2005,  IDED  awarded the Company 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.  The Company  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 the Company has fulfilled at least 50% of its 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 the
         Company has a current loan balance,  the shortfall balance and existing
         balance  will be  combined  to reflect a single  monthly  payment.  The
         Company is  accruing  interest on this note until the terms of the note
         have been met.  The note is  secured  by a  security  agreement  on its
         assets.

         (e) On March 20, 2006,  the Company  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.

6. OPERATING LEASES

The Company leases a building which is used for  production,  storage and office
space. The Company is responsible for insurance and repairs. This lease requires
monthly  rental  payments of $600 and expires on May 30,  2006.  The Company has
extended  this lease for an  additional  year.  The lease will  require  monthly
payments of $650 per month from June 1, 2006 through May 31,  2007.  The Company
has the option to extend the lease an  additional  year to May 31, 2008 for $700
per month.  Rent expense under this lease was $1,800 for the three months ending
March 31, 2006 and 2005,  and $21,000  for the period  from  inception  (May 19,
2003) to March 31, 2006, respectively.

The following is a schedule of future  non-cancelable  lease obligations for the
building at March 31:

                          2007                     $     7,700
                          2008                           8,300
                          2009                           1,400
                                                   -----------
                                                   $    17,400



                                      -20-
<PAGE>



7. RELATED PARTY TRANSACTIONS

One of the  members of the  Company's  Board of  Directors  is the manager of an
engine  parts  distributor  from  which  the  Company  purchases  engine  parts.
Purchases  from this  company  totaled  $17,685 and $4,589 for the three  months
ending  March 31,  2006 and 2005,  respectively  and $53,319 for the period from
inception  (May 19, 2003) to March 31,  2006.  The Company also has a payable of
$10,736 from this company at March 31, 2006.

Another  member  of the  Board  of  Directors  was a senior  partner  in a parts
distribution  company  prior to his  employment  with HEC.  The Company has made
purchases  from this  company of $19,394 and $2,715 for the three  months  ended
March 31, 2006 and 2005,  respectively and $93,185 for the period from inception
(May 19,  2003) to March 31,  2006.  As of March 31, 2006 $80,205 was payable to
this parts company.

8. INCOME TAXES

The tax effects of significant  items  comprising the Company's net deferred tax
asset and the related valuation  allowance as of March 31, 2006 and December 31,
2005 are as follows:

                                                    March 31,    December 31,
                                                      2006           2005
                                                -------------    -------------

           Deferred tax assets:
              Net operating loss carryforward   $     840,000    $     480,000
              Other                                      --               --
                                                -------------    -------------
                                                      840,000          480,000
           Valuation allowance                       (840,000)        (480,000)
                                                -------------    -------------
           Net deferred tax asset recognized    $        --      $        --
                                                =============    =============


Due to the  Company's  operating  loss  and  lack  of  operating  experience,  a
valuation  allowance  was provided for the  Company's net deferred tax assets at
March 31, 2006 and December 31, 2005.

As of March 31,  2006,  the  Company has net  operating  loss and  research  and
development   carryforwards  for  federal  and  state  income  tax  purposes  of
approximately  $2,050,000,  which will  begin to expire in 2018.  The amount and
availability  of the net operating loss  carryforwards  may be subject to annual
limitations set forth by the Internal Revenue Code.

The effective  tax rate differs from the statutory  rate of 34% primarily due to
certain stock-based  compensation and merger-related  costs not being deductible
for tax purposes and the increase in the deferred tax asset valuation allowance.

9. PREFERRED STOCK

The Company is authorized  to issue  10,000,000  shares of preferred  stock with
such designations, voting and other rights and preferences, as may be determined
from time to time by the Board of Directors.

                                      -21-
<PAGE>

10. COMMON STOCK

On September 1, 2005, the Company  issued 426,000 shares of restricted  stock to
directors and employees.  122,000 shares vested immediately,  86,000 shares vest
September 1, 2006,  86,000  shares vest  September 1, 2007,  66,000  shares vest
September 1, 2008, and 66,000 shares vest September 1, 2009. All unvested shares
of restricted  stock are subject to a risk of forfeiture upon termination of the
participant's service as a full-time consultant or employee prior to vesting.

During  September 2005, the Company issued 3,948,500 shares in connection with a
private offering.

Unsecured  convertible long-term debt payable to a stockholder and various other
parties  totaling  $557,051 was  converted to 663,401  shares of common stock on
November 15, 2005, thus satisfying the debt requirements.

At  March  31,  2006,  of the  25,162,905  outstanding  shares,  23,559,405  are
restricted.

11. WARRANTS

In August 2005, the Company issued  warrants to purchase up to a total of 69,640
shares,  for services rendered in connection with the private offering of stock.
These are  warrants to purchase  Company  stock,  for $1 per share for the first
three years, and $1.50 for years four and five. The warrants expire on the fifth
anniversary date from issuance.

12. STOCK-BASED COMPENSATION

The  Company  has  an  incentive  stock-based   compensation  plan  under  which
participants  may be granted options to purchase shares of the Company's  common
stock or receive  restricted stock.  Restricted stock and options may be granted
with respect to 2,000,000  shares.  During the three months ended March 31, 2006
the  Company  awarded  grants for  121,000  shares.  At March 31, 2006 the total
grants made under the plan  totaled  1,381,000  shares  leaving  619,000  shares
available  for  future  grants.  Of the shares  which were the  subject of these
grants,  426,000 were restricted stock,  595,000 were qualified  incentive stock
options  ("ISOs") and 360,000 were non  qualified  stock options  ("NSOs").  The
shares of  restricted  stock vest as  described  above in Note 10. The ISOs that
have been granted under the Company's plan vested immediately as 106,000 shares,
and will vest as to 97,000 shares in 2006,  as to 124,750  shares in 2007, as to
119,750  shares in 2008 and as to 119,750  shares in 2009 and  27,750  shares in
2010 and expire ten years from the date of grant. The NSOs vested immediately as
100,000  shares,  and will vest as to 80,000 shares in 2006, as to 60,000 shares
in 2007, as to 60,000 shares in 2008 and as to 60,000 shares in 2009. NSOs as to
20,000 shares have been terminated.  All options were granted at exercise prices
that either  equaled or exceeded  fair market value at the  respective  dates of
grant.

Total non-cash stock  compensation  expense for the three months ended March 31,
2006 was  $175,282,  which  consisted  of $132,115 of incentive  stock  options,
$21,667 of  non-qualified  stock options and $21,500 of restricted stock expense
recognized under SFAS 123(R).

                                      -22-
<PAGE>

A summary  of ISOs and NSOs  granted  to  employees  and  consultants  under the
Company's incentive compensation plan at March 31, 2006 and December 31, 2005 is
presented below:

                                                                   Weighted
                                                                   Average
                                                                Exercise Price
                                                  Option Shares   Per Share
                                                  ------------- ---------------
Options granted September 1, 2005                    794,000    $    1.00
Options granted during the three months ended
December 31, 2005                                     60,000    $    5.88
                                                  ----------
Options outstanding December 31, 2005                854,000    $    1.34
                                                  ----------
Options granted during the three months ended
March 31, 2006                                       121,000    $    6.32
Exercised                                             (5,000)   $    1.00
Cancelled or forfeited                               (20,000)   $    1.00
                                                  ----------
Options outstanding March 31, 2006                   950,000    $    1.46
                                                  ==========

The following table summarizes  information about stock options  outstanding and
exercisable as of March 31, 2006:

<TABLE>
<CAPTION>
                             Options Outstanding                        Options Exercisable
          ----------------------------------------------------    -----------------------------
                                    Weighted
                                    -Average      Weighted-
                                    Remaining      Average                          Weighted-
       Exercise     Options        Contractual     Exercise           Shares         Average
         Price    Outstanding          Life          Price          Exercisable   Exercise Price
      ----------  -----------      -----------    -----------      ------------   --------------
<S>   <C>             <C>              <C>        <C>                   <C>       <C>
      $     1.00      769,000          9.4        $      1.00           199,000   $    1.00
      $     5.38       71,000          9.8        $      5.38              --     $    5.38
      $     5.88       60,000          9.7        $      5.88            12,000   $    5.88
      $     7.65       50,000          9.9        $      7.65            10,000   $    7.65
                  -----------                                       -----------
                      950,000          9.5        $      1.46           221,000   $    2.79
                  ===========                                       ===========
</TABLE>


13. COMMITMENTS AND CONTINGENCIES

Engine Certification
--------------------

The Company plans to begin the  certification  of the 4.9 liter engine in second
quarter 2006. To certify an engine to meet regulations for exhaust emissions, an
engine  must  successfully  pass  stringent  third-party  testing.  The  Company
anticipates the cost of the testing to be  approximately  $1,000,000 per engine.
The Company expects to begin the certification  process for the 7.5 liter engine
and the 2.45 liter engine in late 2006 or 2007.

Although  engine  certification  is necessary for the Company to sell engines to
original  equipment  manufacturers,  certification is not necessary for existing
equipment applications.

                                      -23-
<PAGE>

Product Performance - Warranty
------------------------------

Estimated  warranty costs and additional  service actions will be accrued at the
time an  engine is sold to a  distributor  or  end-user  customer.  Included  in
warranty  cost  accruals  will be costs for basic  warranty  coverage on engines
sold. The Company has not accrued  warranty costs at March 31, 2006 and December
31, 2005 because of its limited history and the limited number of sales to date.

Component Parts Procurement
---------------------------

In November 2005, the Company issued purchase orders totaling approximately $1.7
million to an unrelated  party for engine parts and mold and tooling  fees.  The
Company agreed to take shipments of parts over the next twelve months. As of May
15,  2006,  the  majority  of the  component  parts  appear to have met  Company
specifications,  and the  Company  anticipates  deliveries  to  begin in July or
August  2006.  The Company is dependent on this vendor for delivery of parts for
its 4.9 liter new engine  program.  Delivery of final  products  may be delayed,
thus delaying sales of new 4.9 liter engines to its distributor network.

14. SUBSEQUENT EVENTS

On April 4, 2006, the Company  secured a $600,000  short-term  note from a bank.
The note  matures  on  April  4,  2007  and  bears  interest  at the rate of 6%.
Principal and interest on the note are due April 4, 2007. The loan is secured by
real estate.

On May 15, 2006, the Company  executed a statement of intent  acknowledging  its
commitment  to provide  $120,000 in funding over a three-year  period to support
research by Propulsion  Sciences Co. relating to the use of ammonia emulsions in
diesel fuels.

                                      -24-
<PAGE>
>


ITEM 2.   MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL  CONDITION  AND
          RESULTS OF 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 March 31, 2006, we had an  accumulated  deficit of  approximately
$2.3  million.  Our  accompanying   financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

            We have financed our operations  since inception  primarily  through
equity  and  debt  financings  and  loans  from  our  officers,   directors  and
stockholders.  Continuing our  operations is dependent  upon  obtaining  further
financing in June 2006.  Although we intend to either register securities of the
Company to be offered for sale or enter into another  private  placement,  there
can be no assurance that we will  successfully  complete this  registration  and
offering  or that  the  proceeds  of  either  offering  if  completed,  would be
sufficient  to  satisfy  our  capital   requirements.   These  conditions  raise
substantial doubt about our ability to continue as a going concern.

         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-QSB.  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.  SOME OF THESE FACTORS
ARE DISCUSSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-QSB.

Merger

         On August 30, 2005,  Hydrogen Engine Center,  Inc, an Iowa  corporation
("HEC Iowa") merged with our newly formed subsidiary (the "Merger").  The Merger
was made  pursuant  to an  agreement  entered  into on June 3, 2005,  whereby we
agreed  to  merge  our  newly  created,   wholly-owned  subsidiary,   Green  Mt.
Acquisitions,  Inc.,  with and into HEC Iowa,  with HEC Iowa being the surviving
entity.  Following the Merger,  we changed our name from Green Mt. Labs, Inc. to
Hydrogen Engine Center, Inc.

         On July 6, 2005, we revised  certain terms of the proposed  Merger and,
accordingly,  executed a revised and amended  agreement  and plan of merger.  On
July 29,  2005,  we added an addendum to the  agreement.  The revised  agreement
provided  for  effecting  a 3.8 shares for 1 share  forward  stock  split of our
issued and  outstanding  common stock,  instead of the previously  announced 1.5
shares for 1 share split.  The split was payable August 17, 2005 to stockholders
of record on August 16, 2005.  As a result of the revised  forward  stock split,
our  outstanding  shares of common  stock  increased  from  1,006,000  shares to
approximately 3,822,804 shares, representing 19% of the total outstanding shares


                                      -25-
<PAGE>

following  consummation of the Merger.  Under the terms of the merger agreement,
we issued 16,297,200 shares of post-split common stock  (representing 81% of our
total  outstanding  shares  (post-split)   following  the  transaction)  to  Ted
Hollinger, who was prior to the Merger HEC Iowa's sole stockholder,  in exchange
for 100% of HEC Iowa's then  outstanding  capital stock, and HEC Iowa has become
our wholly-owned subsidiary.  In connection with the Merger, we have changed our
name to Hydrogen Engine Center, Inc.

         We also  commenced a private  placement of up to four million shares of
our common stock at the offering  price of $1.00 per share,  which  offering was
closed as of October 11, 2005 (the "Private Offering"). We sold 3,948,500 shares
of our common stock, $.001 par value, for a total of $3,948,500 to 93 investors,
which  represents  15.69% of the  25,162,905  issued and  outstanding  shares of
common  stock of the  Company  as of April 21,  2006.  The  shares  were sold in
reliance  upon an exemption  from  registration  pursuant to Regulation D, Rules
Governing the Limited Offer and Sale of Securities  without  Registration  under
the Securities Act of 1933.

         The accompanying  consolidated  balance sheets as of March 31, 2006 and
December  31,  2005,   and  the   consolidated   statements  of  operations  and
consolidated  statements of cash flows for the three months ended March 31, 2006
and 2005, and from inception (May 19, 2003) to March 31, 2006,  consolidate  the
historical financial statements of the company with HEC Iowa after giving effect
to the Merger where HEC Iowa is the accounting  acquirer and after giving effect
to the Private Offering.

Overview

         As a result of the  Merger,  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 Canada"). HEC Iowa is a development stage
company engaged in design,  manufacture and  distribution of flex-fuel  internal
combustion engines for the industrial and power generation markets.  The engines
run efficiently, with minor adjustments, on hydrogen, gasoline, propane, natural
gas or ethanol  interchangeably  or, with the  addition of a fuel  reformer,  on
biodiesel  ("flex-fuels").  The engines can run on regular grade hydrogen, or on
mixed  gases such as natural  gas and  hydrogen.  HEC Iowa  expects to file core
technology patents covering the use of hydrogen fuel in any internal  combustion
engine with zero or near zero emissions.

         The Company has funded its operations from inception  through March 31,
2006 through a series of financing  transactions,  including  an  investment  of
$151,487  by Ted  Hollinger;  $3,948,500  in gross  proceeds  from  the  Private
Offering, and convertible loans in the amount of $662,401.

Results of Operations

         Historical information prior to the Merger is that of HEC Iowa.

         Because  we are still  developing  our  flex-fuel  internal  combustion
engines and related  products,  and just  completed our  manufacturing  facility
during first quarter 2006,  we have not realized  significant  revenues to date.


                                      -26-
<PAGE>

During the quarter  ended March 31,  2006 we realized  $28,590  from the sale of
four 4.9L gasoline  remanufactured engines and one 6.8 L hydrogen engine. During
the quarter  ended March 31,  2005,  we  realized  $12,000  from the sale of one
hydrogen  generator.  Management believes that we may begin to realize increased
sales revenues by the third quarter of 2006,  subject to timely receipt of parts
ordered from suppliers.

         We are continuing our efforts toward  commencement of full  operations.
We expect to reach full  production  of our 4.9 L engines  during third  quarter
2006. The  manufacturing  portion of our new building was completed during first
quarter 2006. The dynamometer  room is substantially  complete,  but has not yet
been  approved for use by the Iowa State Fire  Marshall.  We expect to have that
approval by the end of second  quarter  2006.  We continue the process of hiring
new  personnel  and  purchasing  the  inventory of parts we need to  manufacture
engines in our new building.

         Sales and marketing  expense for the quarters  ended 2006 and 2005 were
$240,288 and $0  respectively.  We expect this number to increase  significantly
during 2006 as we pursue national and international sales opportunities.

         General and administrative expenses increased $568,419 from $39,550 for
the quarter  ended March 31,  2005 to $607,969  for the quarter  ended March 31,
2006.  Management  expects  similar or  greater  increases  for the year  ending
December 31, 2006 in general and administrative  expenses due to the anticipated
hiring of additional personnel,  purchase of inventory, costs related to the new
facility and other  efforts  related to the  commencement  and  expansion of our
operations.

         Costs related to research and development increased $73,939 from $9,713
for the quarter  ended March 31, 2005 to $83,652 for the quarter ended March 31,
2006.  We have incurred  $537,364 in costs  related to research and  development
since inception.  Management  expects research and development costs to continue
to increase during the remainder of 2006.

         We recorded a net loss of $918,457 for the quarter ended March 31, 2006
compared  to a net loss of $46,590  for the quarter  ended  March 31,  2005.  We
recorded a net loss of $2,299,145  from  inception  (May 19, 2003) through March
31,  2006.  We expect to continue to operate at a net loss until such time as we
can  complete  development  of our  initial  engines  and  begin  to  realize  a
substantial increase in sales.

Critical Accounting Policies

         Our  discussion  and analysis of our financial  position and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting  principles  generally accepted
in the United States of America. The preparation of these condensed 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  condensed  consolidated  financial
statements and the reported revenues and expenses during the period.

                                      -27-
<PAGE>

Merger and Stock-based Compensation

         We consider certain accounting policies related to the recapitalization
of the  Company and  stock-based  compensation  to be  critical to our  business
operations and the understanding of our results of operations.

Liquidity and Capital Resources

Short-Term and Long-Term Debt Sources
-------------------------------------

         From inception  through March 31, 2006, we have used $1,817,068 in cash
in our operating activities and $1,954,824 in capital expenditures. Cash for our
operations came from various  financing  transactions,  including  $3,948,500 in
gross proceeds from the Private Offering and convertible  loans in the amount of
$662,401. We also received $400,000 in forgivable loans from the Iowa Department
of Economic  Development,  $200,000 from the City of Algona  revolving loan fund
and $862,647 from bank  financing.  We incurred  expenses in connection with the
merger of $353,611.  Our aggregated  net loss from  inception  through March 31,
2006 was  $2,299,145.  Our  cumulative  net loss has resulted  principally  from
expenditures related to research and development, as well as the commencement of
operations.

         We have available credit with Iowa State Bank, secured by a mortgage on
Lot 1 of Snap-on Industrial Park in Algona, and represented by a promissory note
in the maximum amount of $500,000. As of March 31, 2006, $262,647 has been drawn
on the note. The note carries interest at the annual rate of 5.890%. Interest is
payable  monthly and the note will mature on December  16, 2006.  We  anticipate
that this note will be rolled over into permanent  financing upon maturity,  but
cannot provide assurance that such financing will be available.

         As of March 31, 2006, we had  available  credit with Farmers State Bank
in Algona, Iowa, to be secured by a mortgage on Lot 2 of Snap-on Industrial Park
in  Algona,  and  represented  by a  promissory  note in the  maximum  amount of
$600,000 at an annual  adjustable rate of 6.00%. The Company drew on this credit
and executed a $600,000 promissory note on April 4, 2006. Principal and interest
on the note are due April 4, 2007.

         At March 31, 2006, we had cash on hand of $969,506,  and  $2,346,248 at
December 31, 2005.

         Inventories increased from $206,091 at December 31, 2005 to $384,353 at
March 31, 2006 due to the purchase of engines and parts.

         Our accounts  payable  increased  from $236,341 at December 31, 2005 to
$349,014 on March 31,  2006  primarily  because of  inventory  and supply  costs
associated with the start up.

         We had  accrued  expenses  of $92,904  at March 31,  2006  compared  to
$69,768 at December 31, 2005.


                                      -28-
<PAGE>

         At  March  31,  2006,  we  had  current   assets  of   $1,602,069   and
stockholders' equity of $2,466,347, compared to current assets of $2,763,214 and
total a stockholders' equity of $3,204,533 at December 31, 2005.

Plan of Operation
-----------------

         We anticipate that our expenses will continue to increase significantly
as we work toward  full  operations,  including  additional  personnel,  product
development,   inventory   purchases,   and  construction  costs.   Accordingly,
management believes that current cash on hand will only be sufficient to satisfy
our cash  requirements  through  June 2006.  We will likely be required to raise
significant  amounts of additional  capital resources during the next quarter of
2006. We anticipate  that a significant  increase in sales of our products could
commence  during the third quarter of 2006,  subject to timely  receipt of parts
ordered from suppliers and timely  completion of our new  facilities,  which may
add to cash reserves.  Additional cash will be needed to sustain operations,  or
if  management  determines to accelerate  the  expansion of our  operations.  We
intend to seek  additional  funds through  private or public  sources and/or the
sale of securities.  We anticipate  offering  shares of our Common Stock or debt
securities under a registered offering or a private placement during fiscal year
2006. There is no assurance that we will be able to raise the necessary  capital
from such an offering,  that funds will be available from any other source,  or,
that even if they are available,  that they 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 totally dependent upon debt and equity funding.

         In the event that we are unable to obtain debt or equity  financing  or
we are unable to obtain financing on terms and conditions that are acceptable to
us, we may have to cease or severely curtail our operations. These factors raise
substantial  doubt about our ability to continue as a going concern.  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  anticipate  that we can produce  10,000  base 4.9L  engines at full
capacity,  in our 30,000 square foot manufacturing  facility and expect to be at
full capacity  during third quarter 2006.  Initial  contact with our distributor
network has given us indications that we may not have the capacity to meet their
demands.  We anticipate  that if we are  successful  in obtaining  funds through
private or public  sources,  we plan to explore  the  expansion  of our  present
facilities.  An  expansion  will be  necessary  to provide  needed space for the
assembly of our 7.5L engines and our 2.45L  engines.  We anticipate the cost for
an  expansion  of  our  production  facilities,   including  equipment,   to  be
approximately  $2.5  million.  We also  expect  during the next 24 months to add
administrative  facilities for an approximate cost of $1.5 million, an expansion
of our generator  building for an approximate  cost of $500,000,  and possibly a


                                      -29-
<PAGE>

research  facility for an  approximate  cost of $1.6 million.  We anticipate our
capital  expenditures  for 2006 will be approximately  $6.2 million,  subject to
sufficient capital from anticipated financing.

         The Validated  for form and fit and  durability of the 4.9L engine will
commence during second quarter 2006. We anticipate testing the durability of our
engines by running them on a  dynamometer  for a minimum of three  hundred hours
before they are offered to our distributors for sale into the industrial  engine
market.  Durability  testing  will be ongoing from this point until a minimum of
3000 hours are  achieved.  Typically,  durability  testing would be considered a
success, once the stated production warranty hours are surpassed.  We anticipate
the warranty on our 4.9L engines will be 3 years or 3,000 hours, whichever comes
first.

         Our  distributors  will not be able to offer  our  engines  for sale to
original equipment  manufacturers for mobile applications until the engines have
passed  U.S.  Emissions  Regulations  which  are  defined  and  enforced  by the
Environmental Protection Agency and California Air Resources Board. Stand-by and
replacement  engines  are not  subject  to  these  requirements.  We  anticipate
beginning the emissions  certification  process of our 4.9L engine in the second
quarter of 2006. It will cost approximately $1,000,000 to certify each engine in
our product line. We also anticipate beginning the certification process for our
7.5L and 2.45L  engines in 2007.  This testing  procedure  will be an expense of
research and development.  We anticipate that our research and development costs
could be approximately  $5.7 million (including $1.6 million in expenditures for
additional  facilities) in 2006,  subject to sufficient capital from anticipated
financing.

         We are  presently  dependent  on one vendor to supply a majority of the
components  for our 4.9L  engine.  We are in the process of lining up second and
third  sources for these  components.  We have issued  blanket  purchase  orders
totaling  approximately  $1.7 million to this vendor for engine parts,  and mold
and tooling fees. We anticipate that we will purchase  approximately  $3 million
in  component  parts  from this  vendor  in 2006.  We  expect  product  flow and
production   of  the  new  4.9L   engines  to  begin   during   third   quarter,
however,delivery of final products could be delayed,  thus delaying sales of new
4.9 liter  engines  to our  distributor  network  and  delaying  our  ability to
generate revenue.

         We are expanding our search for vendors who can  manufacture  component
parts to our  specifications.  We anticipate having other sources for our engine
parts by the end of 2006.

Employees
---------

         We had 15  employees as of March 31, 2006 and 20 employees as of May 1,
2006.  We  expect  to  have  30-35  employees  on or  about  July  1,  2006,  in
anticipation  of  achieving  full  production  of our  4.9L  engines  in our new
production facilities in Algona, Iowa during third quarter 2006.

                                      -30-
<PAGE>

Net Operating Loss
------------------

         We have accumulated  approximately  $2.05 million of net operating loss
and research and development  carryforwards  as of March 31, 2006,  which may be
offset against taxable income and income taxes in future years. The use of these
losses to reduce future income taxes will depend on the generation of sufficient
taxable income prior to the expiration of the net operating loss  carryforwards.
The  carryforwards  will  begin to  expire  in the year  2018.  The  amount  and
availability  of the net operating loss  carryforwards  may be subject to annual
limitations set forth by the Internal  Revenue Code.  Factors such as the number
of shares ultimately issued within a three-year look-back period;  whether there
is a deemed more than 50 percent change in control; the applicable long-term tax
exempt bond rate;  continuity of historical  business;  and subsequent income of
the  Company  all  enter  into  the  annual   computation  of  allowable  annual
utilization of the carryforwards.


                                      -31-
<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We are  exposed to the risk of loss  arising  from  adverse  changes in
foreign exchange rates and interest rates to a limited degree.

Foreign Exchange Risk

         We are  subject  to  foreign  currency  exchange  rate  risk  from  the
operations  of HEC Canada,  our Canadian  subsidiary.  Based on the size of this
subsidiary and our corresponding exposure to changes in the Canadian/U.S. dollar
exchange  rate,  we do not  consider  our market  exposure  relating to currency
exchange to be material at this time.

Interest Rate Risk

         We are exposed to interest  rate risk  primarily on long-term  debt. As
more fully  described  below and in our  discussion  of  liquidity  and  capital
resources  above in Item 2, we have the risk of  increased  interest on two bank
notes in the  aggregate  amount of $1.1  million.  Also as more fully  described
below and in our discussion of liquidity and capital  resources above in Item 2,
we have received  governmental  forgivable  loans and  no-interest  loans in the
aggregate amount of $863,624 that could, upon certain  circumstances,  result in
interest expense for the company.

     o   We have a note with Iowa State  Bank,  Algona,  Iowa,  in the amount of
         $500,000  that  carries a fixed  annual  rate of  5.890%.  Interest  is
         payable  monthly  and the note will  mature on December  16,  2006.  We
         anticipate that this note will be rolled over into permanent  financing
         upon maturity, but cannot provide assurance that such financing will be
         available or on what terms.

     o   As of April 4, 2006,  we have a loan from Farmers  State Bank,  Algona,
         Iowa, in the amount of $600,000 that provides for interest at an annual
         adjustable  rate of 6.00%.  Principal  and interest on the note are due
         April 4, 2007.

     o   The  Company  obtained  $200,000  from the City of Algona in  September
         2005.  There is no interest on this loan  provided the Company  creates
         and retains at least 42 new full-time positions for five years. If such
         requirements  are not met,  interest on the loan will be payable at 10%
         per annum.  The  Company is  accruing  interest  on this note until the
         terms of the note have been met.

     o   On June 27, 2005, the Company  executed a note payable of $146,124 from
         the  Algona  Area  Economic  Development  Corporation.  The  loan  is a
         ten-year  partially  forgivable  loan with interest at 8%,  conditioned
         upon the Company achieving certain performance  targets. The Company is
         accruing  interest  on this note  until the terms of the note have been
         met.

     o   On December 16, 2005,  the Company  assumed a no interest note provided
         by the Algona Area Economic  Development  Corporation  in the amount of
         $117,500.  This note was recorded at the fair value of future  payments
         using an interest rate of 10%.

                                      -32-
<PAGE>

     o   On June 28, 2005, the Iowa Department of Economic  Development ("IDED")
         awarded  the  Company a grant in the  amount of  $150,000.  If  certain
         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. The Company is accruing interest on this
         note until the terms of the note have been met.

     o   Also on June 28, 2005,  IDED  awarded the Company a Community  Economic
         Betterment Account ("CEBA")  forgivable loan in the amount of $250,000.
         If certain  conditions  are not met,  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.  The
         Company is  accruing  interest on this note until the terms of the note
         have been met.


                                      -33-
<PAGE>


ITEM 4.  CONTROLS AND PROCEDURES

         Our management,  including our Chief  Executive  Officer (the principal
executive officer),  Theodore G. Hollinger, and our Chief Financial Officer (the
principal  financial  officer),  Sandra Batt,  have  reviewed and  evaluated the
effectiveness  of our  disclosure  controls and  procedures  (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31,
2006. Based upon this review and evaluation,  these officers have concluded that
our disclosure  controls and procedures are effective to ensure that information
required  to be  disclosed  in the  reports  that we file or  submit  under  the
Exchange Act is recorded,  processed,  summarized  and reported  within the time
periods  required  by the  forms  and  rules  of  the  Securities  and  Exchange
Commission;  and to ensure that the  information  required to be disclosed by an
issuer  in the  reports  that it files or  submits  under  the  Exchange  Act is
accumulated and communicated to our management including our principal executive
officers,  or persons  performing  similar  functions,  as  appropriate to allow
timely decisions regarding required disclosure.

         Our  President  and our Board of Directors are currently in the process
of  working  with our  Chief  Financial  Officer  to  complete  the  design  and
implementation  of internal  control and  disclosure  controls and procedures in
accordance  with  Sarbanes  Oxley  404.  Although  this  process,  has not  been
formalized we believe that the controls and procedures in place during the first
quarter have allowed us to secure information  required to be disclosed,  within
the time  periods  specified  in the  SEC's  rules for the  preparation  of this
report.



                                      -34-
<PAGE>


PART II.  OTHER INFORMATION

ITEM 1A.  RISK FACTORS

                                  RISK FACTORS

YOU SHOULD  CAREFULLY  CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH THE RISK
FACTORS  DISCLOSED IN OUR FORM 10-KSB FOR THE YEAR ENDED  DECEMBER 31, 2005. YOU
SHOULD ALSO  CONSIDER ALL OF THE OTHER  INFORMATION  INCLUDED IN OUR FORM 10-KSB
AND IN THIS FORM 10-QSB WHEN EVALUATING THE COMPANY AND ITS BUSINESS.  IF ANY OF
THE RISKS ACTUALLY  OCCURS,  OUR BUSINESS,  FINANCIAL  CONDITION,  OR RESULTS OF
OPERATIONS  COULD  SUFFER.  IN THAT CASE,  THE PRICE OF OUR COMMON  STOCK  COULD
DECLINE AND OUR STOCKHOLDERS MAY LOSE ALL OR PART OF THEIR INVESTMENT.

     We have a limited  operating  history and have not  recorded  an  operating
     profit  since our  inception.  Continuing  losses may  exhaust  our capital
     resources and force us to discontinue operations.
     ---------------------------------------------------------------------------

         HEC Iowa was  incorporated on May 19, 2003 and has a limited  operating
history and has  incurred  net losses  since  inception,  including  $918,457 of
losses  incurred  during the quarter ended March 31, 2006.  Prior to the Merger,
the Company (then known as "Green Mt. Labs, Inc.") had been inactive for several
years.  The  potential  for us to  generate  profits  depends  on many  factors,
including the following:

     o   the reliability of our suppliers;

     o   the costs of building,  maintaining,  and expanding our  facilities and
         our operations; and

     o   our  ability to attract  and retain a  qualified  work force in a small
         town.

     o   the size and timing of future customer orders,  milestone  achievement,
         product delivery and customer acceptance;

     o   success in maintaining and enhancing existing  strategic  relationships
         and developing new strategic relationships with potential customers;

     o   our ability to protect our intellectual property;

     o   actions  taken  by  competitors,  including  suppliers  of  traditional
         engines,  hydrogen fuel cells and new product introductions and pricing
         changes;

         We cannot  assure you we will achieve any of the  foregoing  factors or
realize profitability in the immediate future or at any time.

                                      -35-
<PAGE>

     Additional  financing to proceed with our anticipated  business  activities
     will be required during second quarter 2006. There can be no assurance that
     financing will be available on terms beneficial to us, or at all.
     ---------------------------------------------------------------------------

         In order to proceed with our  anticipated  business  activities we will
need to obtain additional  financing.  If we raise additional capital by selling
equity or equity-linked securities,  these securities would dilute the ownership
percentage of our existing stockholders.  Also, these securities could also have
rights,  preferences  or  privileges  senior  to  those  of  our  common  stock.
Similarly,  if we raise  additional  capital by issuing debt  securities,  those
securities may contain covenants that restrict us in terms of how we operate our
business,  which  could  also  affect  the value of our  common  stock.  We have
financed  our  operations  since  inception  primarily  through  equity and debt
financings and loans from our officers, directors and stockholders.  Although we
expect to offer  securities of the Company for sale during 2006, there can be no
assurance  that we will  successfully  complete  such an  offering  or that  the
proceeds of the  offering,  if  completed,  would be  sufficient  to satisfy our
capital requirements.

         We  anticipate  that if we are  successful  in obtaining  funds through
private or public  sources,  we plan to explore  the  expansion  of our  present
facilities.  An  expansion  will be  necessary  to provide  needed space for the
assembly of our 7.5L engines and our 2.45L engines.

         If we are not able to obtain  the  needed  financing,  our  ability  to
fulfill our business plans and reach full production capacity will be materially
impaired.

     Reliance on principal supplier and contract manufacturer.
     ---------------------------------------------------------------------------

         We  contract  the  manufacture  of our  products to third  parties.  In
certain cases,  we do not have an  alternative  source of  manufacturing,  and a
suitable  replacement would be time-consuming  and expensive to obtain.  If, for
any reason, one of our third party manufacturers is unable or refuses to produce
our products, our business,  financial condition and results of operations would
be materially and adversely affected

         We are  presently  dependent  on one vendor to supply a majority of the
components  for our 4.9L  engine.  We are in the process of lining up second and
third  sources for these  components.  We have issued  blanket  purchase  orders
totaling  approximately  $1.7 million to this vendor for engine parts,  and mold
and tooling fees. We anticipate that we will purchase  approximately  $3 million
in  component  parts  from this  vendor  in 2006.  We  expect  product  flow and
production  of the new 4.9L  engines to begin  during  third  quarter,  however,
delivery of final  products  could be delayed,  thus  delaying  sales of new 4.9
liter  engines to our  distributor  network and delaying our ability to generate
revenue.

     We may experience significant and rapid growth if we are able to capitalize
     on the expansion of the  industrial  engine and genset  markets.  If we are
     unable to hire and train staff to produce our  products,  handle  sales and
     marketing  of our  products  and manage our  operations,  such growth could
     materially and adversely affect us.
     ---------------------------------------------------------------------------

                                      -36-
<PAGE>

         We intend to proceed with  initiatives  intended to  capitalize  on the
need for more efficient  industrial engines,  engines that use alternative fuels
and the interest in more  environmentally  friendly sources of power. This could
potentially  lead to significant and rapid growth in the scope and complexity of
our business.  Any inability on our part to manage such growth  effectively will
have a material adverse effect on our product development,  business,  financial
condition and results of  operations.  Our ability to manage and sustain  growth
effectively  will  depend,  in part,  on the  ability  of our  relatively  small
management team to implement appropriate  management,  operational and financial
systems and  controls  and to  successfully  hire,  train,  motivate  and manage
employees.  As of March 31, 2006 we had 15 employees.  As of May 1, 2005, we had
20 employees. We hope to have 30-35 employees by July 1, 2006.

     We may not be able to manage our growth effectively,  which could adversely
     affect our operations and financial performance.
     ---------------------------------------------------------------------------

         The  ability to manage  and  operate  our  business  as we execute  our
development and growth  strategy will require  effective  planning.  Significant
rapid  growth  could  strain  our  management  and other  resources,  leading to
increased  cost of  operations,  an  inability  to ship  enough  product to meet
customer  demand and other  problems that could  adversely  affect our financial
performance.  We expect that our efforts to grow will place a significant strain
on personnel, management systems, infrastructure and other resources. We believe
that our management team is currently under considerable strain with the current
level  of our  growth  and  expansion.  Our  ability  to  manage  future  growth
effectively will require us to successfully attract, train, motivate, retain and
manage new  employees  and  continue  to update  and  improve  our  operational,
financial and management controls and procedures. If we do not manage our growth
effectively,  our operations  could be adversely  affected,  resulting in slower
growth and a failure to achieve or sustain profitability.

     If we are unable to  effectively  and  efficiently  implement the necessary
     internal  controls and procedures,  there could be an adverse effect on our
     operations or financial results.
     ---------------------------------------------------------------------------

         Our  President  and our Board of Directors are currently in the process
of  working  with our  Chief  Financial  Officer  to  complete  the  design  and
implementation  of internal  controls and disclosure  controls and procedures in
accordance  with  Sarbanes  Oxley  404.  Although  this  process,  has not  been
formalized  we believe  that the  controls  and  procedures  in place during the
fourth quarter have allowed us to secure  information  required to be disclosed,
within the time periods specified in the SEC's rules for the preparation of this
report.

     Our future  success  depends on retaining  our existing key  employees  and
     hiring and assimilating new key employees. The loss of key employees or the
     inability to attract new key  employees  could limit our ability to execute
     our growth strategy, resulting in lost sales and a slower rate of growth.
     ---------------------------------------------------------------------------


                                      -37-
<PAGE>

         Our  future  success  depends  in part on our  ability  to  retain  key
employees  including our executive officers and, in particular,  our founder Ted
Hollinger.  We  currently do not carry "key man"  insurance  on our  executives;
however, we are in the process of securing such insurance. It would be difficult
for us to replace any one of these individuals.  In addition, as we grow we will
need  to  hire  additional  key  personnel.  We  may  experience  difficulty  in
recruiting  experienced  engineers,  management  personnel  and  others  who are
interested in living and working in the Algona area.

     We may experience labor shortages.
     ----------------------------------

         Our production  facilities  are located in Algona,  Iowa, a town with a
population of approximately  5,500 people.  We may find it difficult to hire and
retain a  workforce  sufficient  to meet our  production  needs  and  allow  for
sustained  growth of our  operations.  Our ability to hire and retain  qualified
employees  for  our  production  facilities  will  be key to  our  success.  Our
inability to do this may have a materially adverse effect on our future results.

     We  may  experience  production  gaps  or  delays  in the  commencement  of
     production,  which  could  materially  and  adversely  impact our sales and
     financial results and the ultimate acceptance of our products.
     ---------------------------------------------------------------------------

         We are in the  process  of  transitioning  to  production  in our newly
constructed facility. Because all of the production procedures and processes, as
well  as the  facility,  are  new to us and  all  of  our  employees,  we  could
experience unexpected delay in production during fiscal year 2006. Additionally,
it is possible that we could experience  unforeseen quality control issues as we
ramp up to full  production.  Should  any  such  delay  or  disruption  occur in
transitioning to production, our anticipated sales will likely be materially and
adversely affected.

         The products  produced in our new  facility  could  contain  undetected
design faults  despite our testing.  We may not discover  these faults or errors
until  after a product has been used by our  customers.  Any faults or errors in
our products may cause delays in product  introduction  and  shipments,  require
design  modifications  or  harm  customer  relationships,  any  of  which  could
adversely affect our business and competitive position.

     We cannot  assure you that there will be an active  trading  market for our
     common stock.
     ---------------------------------------------------------------------------

         Even though our common stock is quoted on the OTC Bulletin Board,  most
shares  outstanding,   including  those  issued  pursuant  to  the  Merger,  are
"restricted  securities"  within the meaning of Rule 144  promulgated by the SEC
and are therefore  subject to certain  limitations  on the ability of holders to
resell such shares.  Restricted shares may not be sold or otherwise  transferred
without registration or reliance upon a valid exemption from registration. Thus,
holders of restricted shares of our common stock may be required to retain their
shares for a long period of time.

         If we cannot achieve commercial  application of our hydrogen engine and
         other products and technologies, we may not achieve profitability.
         -----------------------------------------------------------------------

                                      -38-
<PAGE>

         Members of the  public may be wary of  hydrogen  because  hydrogen,  as
compared  to other  fuels,  has the  largest  flammability  limit  (4% to 77% of
hydrogen in air). This means that it takes very little hydrogen to start a fire.
On the other  hand,  hydrogen  is a light gas.  As such,  if there is a hydrogen
leak,  it will  immediately  diffuse  into  the  surrounding  air.  With  proper
precaution  hydrogen  could be as safe as any other  fuel.  The main  benefit of
hydrogen as a fuel is that it produces no pollution or greenhouse  gases when it
is used in an internal  combustion  engine.  The development of a market for our
engines is dependent in part upon the  development of a market for hydrogen as a
fuel, which may be impacted by many factors, including:

     o   consumer  perception of the safety of hydrogen and  willingness  to use
         engines powered by hydrogen;

     o   the cost competitiveness of hydrogen as a fuel relative to other fuels;

     o   the future availability of hydrogen as a fuel;

     o   adverse  regulatory  developments,  including  the  adoption of onerous
         regulations regarding hydrogen use or storage;

     o   barriers to entry created by existing energy providers; and

     o   the emergence of new competitive technologies and products.

     Certain   government   regulations   concerning   electrical  and  hydrogen
     generation,  delivery  and storage of fuels and other  related  matters may
     negatively impact our business.
     ---------------------------------------------------------------------------

         Our  business is subject to and effected by federal,  state,  local and
foreign  laws and  regulations.  These may  include  state and local  ordinances
relating to building codes, public safety,  electrical and hydrogen  production,
delivery and refueling infrastructure, hydrogen storage and related matters. The
use of hydrogen  inside a building will require  architectural  and  engineering
changes in the  building  to allow the  hydrogen  to be handled  safely.  We are
currently  awaiting  the  approval of the State Fire  Marshall for us to use the
dynamometer  room where we intend to test our engines.  As our engines and other
new products are introduced into the market commercially, governments may impose
new  regulations.  We do not know the extent to which any such  regulations  may
impact our business or the  businesses  of our  customers'  businesses.  Any new
regulation may increase costs and could reduce our potential to be profitable.

     The industry in which we operate is highly competitive and such competition
     could affect our results of operations, which would make profitability even
     more difficult to achieve and sustain.
     ---------------------------------------------------------------------------

         The  power   generation  and   alternative   fuel  industry  is  highly
competitive and is marked by rapid technological  growth.  Other competitors and
potential competitors include Ford Power Products,  H2Car Co., Cummins,  Daimler
Chrysler,  General  Motors,  Mazda,  Koehler  and  Generac.  Many  existing  and
potential competitors have greater financial resources, larger market share, and
larger production and technology research  capability,  which may enable them to


                                      -39-
<PAGE>

establish a stronger  competitive position than we have, in part through greater
marketing opportunities. The governments of the United States, Canada, Japan and
certain European  countries have provided funding to promote the development and
use of fuel cells.  Tax incentives  have also been initiated in Japan,  and have
been proposed in the United States and other countries,  to stimulate the growth
of the fuel cell  market by  reducing  the cost of these  fuel cell  systems  to
consumers.  Our business does not currently  enjoy any such  advantages and, for
that reason, may be at a competitive  disadvantage to the fuel cell industry. If
we fail to address competitive developments quickly and effectively, we will not
be able to grow.

     Our  business  could  be  adversely   affected  by  any  adverse   economic
     developments  in the  power  generation  industry  and/or  the  economy  in
     general.
     ---------------------------------------------------------------------------

         We depend on the perceived demand for the application of our technology
and resulting products. Our products are focused on reducing CO(2) emissions and
upon the use of alternative  fuels for industrial  uses,  such as ground support
vehicles,  and for the power  generation  business.  Therefore,  our business is
susceptible  to downturns in the airline  industry and the genset portion of the
distributed power industry and the economy in general.  Any significant downturn
in the market or in general economic conditions would likely hurt our business.

     We believe that we carry a reasonable  amount of  insurance.  However there
     can be no assurance that our existing  insurance coverage would be adequate
     in term and scope to protect us against material  financial  effects in the
     event of a successful claim.
     ---------------------------------------------------------------------------

         We could be subject to claims in  connection  with the products that we
sell.  There can be no  assurance  that we would have  sufficient  resources  to
satisfy any liability resulting from any such claim, or that we would be able to
have our customers indemnify or insure us against any such liability.  There can
be no assurance that our insurance  coverage would be adequate in term and scope
to protect us against material  financial  effects in the event of a successful.
claim. We currently do not carry directors and officers insurance. We may in the
future obtain such insurance,  provided it can be obtained at reasonable prices.
However,  there can be no assurance  that such coverage,  if obtained,  would be
adequate in term and scope to protect us.

     If we fail to keep up with changes affecting our technology and the markets
     that we will ultimately service, we will become less competitive and future
     financial performance would be adversely affected.
     ---------------------------------------------------------------------------

         In order to  remain  competitive  and  serve  our  potential  customers
effectively,  we must respond on a timely and cost-efficient basis to changes in
technology,  industry standards and procedures and customer preferences. We need
to  continuously  develop new  technology,  products and services to address new
technological  developments.  In some cases these changes may be significant and
the cost to comply with these changes may be  substantial.  We cannot assure you
that we will be able to adapt to any  changes in the future or that we will have
the financial  resources to keep up with changes in the  marketplace.  Also, the
cost of adapting our  technology,  products and services may have a material and
adverse effect on our operating results.

                                      -40-
<PAGE>

     Our business could be adversely  affected by local,  state,  national,  and
     international laws or regulations.
     ---------------------------------------------------------------------------

         Our future success depends in part on laws and regulations  that exist,
or are expected to be enacted around the world. Should these laws or regulations
take an adverse turn, this could negatively  affect our business and anticipated
revenues. We cannot guarantee a positive outcome in direction,  timing, or scope
of laws and regulations that may be enacted which will affect our business.

         Our  distributors  will not be able to offer  our  engines  for sale to
original equipment  manufacturers for mobile applications until the engines have
passed  U.S.  Emissions  Regulations  which  are  defined  and  enforced  by the
Environmental Protection Agency and California Air Resources Board. Stand-by and
replacement  engines  are not  subject  to  these  requirements.  We  anticipate
beginning the emissions certification process of our 4.9L engine during 2006. It
will cost  approximately  $1,000,000 to certify each engine in our product line.
We also anticipate  beginning the  certification  process for our 7.5L and 2.45L
engines in 2007.

     The hydrogen and power generation  business may expose us to certain safety
     risks and potential liability claims.
     ---------------------------------------------------------------------------

         Our business will expose us to potential  product liability claims that
are inherent in hydrogen and products that use hydrogen. Hydrogen is a flammable
gas and therefore a potentially  dangerous product.  Any accidents involving our
engines or other  hydrogen-using  products could  materially  impede  widespread
market acceptance and demand for our hydrogen-fueled  engines.  In addition,  we
might  be held  responsible  for  damages  beyond  the  scope  of our  insurance
coverage.  We also  cannot  predict  whether  we will  be able to  maintain  our
insurance coverage on acceptable terms, or at all.

     We may be unable to protect our  intellectual  property  adequately or cost
     effectively, which may cause us to lose market share or reduce prices.
     ---------------------------------------------------------------------------

         Our  future  success  depends in part on our  ability  to  protect  and
preserve  our  proprietary  rights  related  to  our  technology  and  resulting
products.  We cannot  assure you that we will be able to prevent  third  parties
from  using  our  intellectual   property  rights  and  technology  without  our
authorization.  We do not  currently  own any  patents,  although  one patent is
pending related to our technology.  We anticipate making patent  applications in
the future. We rely on trade secrets,  common law trademark rights and trademark
registrations. We intend to protect our intellectual property via non-disclosure
agreements,   contracts,  and  limited  information  distribution,  as  well  as
confidentiality  and  work  for  hire,  development,   assignment,  and  license
agreements with our employees,  consultants,  third party developers,  licensees
and customers. However, these measures afford only limited protection and may be
flawed or inadequate.  Also,  enforcing  intellectual  property  rights could be
costly  and  time-consuming  and  could  distract  management's  attention  from
operating business matters.


                                      -41-
<PAGE>

     Our intellectual  property may infringe on the rights of others,  resulting
     in costly litigation.
     ---------------------------------------------------------------------------

         In recent years,  there has been  significant  litigation in the United
States involving patents and other intellectual  property rights. In particular,
there has been an  increase  in the  filing of suits  alleging  infringement  of
intellectual property rights, which pressure defendants into entering settlement
arrangements quickly to dispose of such suits, regardless of their merits. Other
companies  or  individuals  may allege that we  infringe  on their  intellectual
property rights.  Litigation,  particularly in the area of intellectual property
rights,  is costly and the outcome is inherently  uncertain.  In the event of an
adverse result, we could be liable for substantial  damages and we may be forced
to discontinue  our use of the subject matter in question or obtain a license to
use those rights or develop  non-infringing  alternatives.  Any of these results
would  increase  our  cash  expenditures,   adversely  affecting  our  financial
condition.

     Being a public company involves increased administrative costs, which could
     result in lower net income and make it more difficult for us to attract and
     retain key personnel.
     ---------------------------------------------------------------------------

         As a public company,  we incur significant legal,  accounting and other
expenses  that HEC Iowa did not incur as a private  company.  In  addition,  the
Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the
SEC,  have  required  changes  in  corporate   governance  practices  of  public
companies.  We expect that these new rules and  regulations  will  increase  our
legal  and  financial  compliance  costs  and make  some  activities  more  time
consuming.  For example,  in connection with being a public company, we may have
to create several board committees,  implement  additional internal controls and
disclose controls and procedures, retain a transfer agent and financial printer,
adopt an insider  trading  policy and incur  costs  relating  to  preparing  and
distributing  periodic public reports in compliance  with our obligations  under
securities  laws.  These  new  rules  and  regulations  could  also make it more
difficult  for us to  attract  and  retain  qualified  members  of our  board of
directors, particularly to serve on our audit committee, and qualified executive
officers.

     We do not anticipate paying dividends in the foreseeable future. This could
     make our stock less attractive to potential investors.
     ---------------------------------------------------------------------------

         We  anticipate  that we will retain any future  earnings and other cash
resources for future operation and development of our business and do not intend
to declare  or pay any cash  dividends  in the  foreseeable  future.  Any future
payment of cash  dividends  will be at the  discretion of our board of directors
after  taking into  account  many  factors,  including  our  operating  results,
financial  condition and capital  requirements.  Corporations that pay dividends
may be viewed as a better investment than corporations that do not.

     Future sales or the potential for sale of a substantial number of shares of
     our common  stock could cause our market  value to decline and could impair
     our ability to raise capital through subsequent equity offerings.
     ---------------------------------------------------------------------------

         During  2006,  we expect to  register  some or all of the  unregistered
outstanding  shares of our Common Stock. Sales of a substantial number of shares
of our common stock in the public  markets,  or the perception  that these sales
may occur, could cause the market price of our common stock to decline and could


                                      -42-
<PAGE>

materially  impair our ability to raise  capital  through the sale of additional
equity securities. In addition to the shares of our common stock actually issued
and outstanding,  another 619,000 shares are reserved for issuance under our new
incentive compensation plan, subject to shareholder approval.

     The authorization  and issuance of blank-check  preferred stock may prevent
     discourage a change in our management.
     ---------------------------------------------------------------------------

         Our  amended  certificate  of  incorporation  authorizes  the  board of
directors  to  issue  up  to  10  million  shares  of  preferred  stock  without
stockholder  approval  having  terms,   conditions,   rights,   preferences  and
designations as the board may determine. The rights of the holders of our common
stock will be subject to, and may be  adversely  affected  by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
preferred  stock,  while  providing  desirable  flexibility  in connection  with
possible  acquisitions  and other corporate  purposes,  could have the effect of
discouraging a person from acquiring a majority of our outstanding common stock.

     It may be difficult for a third party to acquire us, and this could depress
     our stock price.
     ---------------------------------------------------------------------------

         Nevada  corporate law includes  provisions  that could delay,  defer or
prevent a change in control of our company or our management.  These  provisions
could  discourage  information  contests and make it more  difficult for you and
other  stockholders to elect directors and take other  corporate  actions.  As a
result, these provisions could limit the price that investors are willing to pay
in the future for shares of our common stock. For example:

     o   Without  prior  stockholder  approval,  the board of directors  has the
         authority to issue one or more  classes of preferred  stock with rights
         senior to those of common stock and to determine the rights, privileges
         and preferences of that preferred stock;

     o   There is no cumulative voting in the election of directors; and

     o   Stockholders cannot call a special meeting of stockholders.


                                      -43-
<PAGE>



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

         During the quarter  ended March 31,  2006,  the  Company  issued  5,000
shares to an employee who exercised  options under the Company's  2005 Incentive
Compensation  Plan. During fiscal year 2005 the Company issued 426,000 shares of
restricted  stock to officers and directors  under the Company's  2005 Incentive
Compensation  Plan.  Further  information  about awards under the 2005 Incentive
Compensation Plan is included in our Annual Report on Form 10-KSB filed with the
Commission on March 31, 2006, which report is incorporated  herein by reference.
Information  regarding  unregistered  sales of other equity securities under our
private  placement  of shares and use of  proceeds  is  included  in our Current
Report on Form 8-K filed with the Commission on September 6, 2005 and amended on
September 7, 2005 which report is incorporated herein by reference.



                                      -44-
<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

Exhibit No.           Description

31.1              Certification  pursuant to Item  601(b)(31) of Regulation S-B,
                  as adopted pursuant to Section 302 of the  Sarbanes-Oxley  Act
                  of  2002,  by  Theodore  G.  Hollinger,  the  Company's  Chief
                  Executive Officer.

31.2              Certification  pursuant to Item  601(b)(31) of Regulation S-B,
                  as adopted pursuant to Section 302 of the  Sarbanes-Oxley  Act
                  of  2002,  by  Sandra  Batt,  the  Company's  Chief  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 Chief 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.

----------------


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.



                                      -45-
<PAGE>


                                   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:  May 19, 2006         By         /s/ THEODORE G. HOLLINGER
                                ------------------------------------------------
                                        Theodore G. Hollinger
                                        President and Chief Executive Officer



Date:  May 19, 2006         By         /s/ Sandra Batt
                                ------------------------------------------------
                                        Sandra Batt
                                        Chief Financial Officer



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