**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-QSB**

----

**000-50542**

**HYDROGEN      ENGINE CENTER, INC.**

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

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

|  Large                accelerated filer o   |  Accelerated                filer o |  Non-accelerated                filer x  |
|------------------------------------------------------------|------------------------------------------|----------------------------------------------------|

| **Class** | **Outstanding                at November 7, 2006** |
|-----------|----------------------------------------------------|
| Preferred | 930,000                                            |
| Common    | 26,143,916                                         |

----

**FORM      10-QSB**

**TABLE      OF CONTENTS**

| .                                         |                                                                                                                                                                                                                             | Page          |
|-------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|
| **PART                I**                 | **FINANCIAL                INFORMATION**                                                                                                                                                                                         |          |
|                                      |                                                                                                                                                                                                                             |          |
| Item                1.          | Consolidated                Financial Statements (Unaudited)                                                                                                                                                                     |          |
|                                      |                                                                                                                                                                                                                             |          |
|                                      | Consolidated                Balance Sheets as of September 30, 2006 and December 31,                2005                                                                                                                         | 3             |
|                                      |                                                                                                                                                                                                                             |          |
|                                      | Consolidated                Statements of Operations for the Three Months and Nine MonthsEnded                September 30, 2006 and 2005 and the period from inception (May                19, 2003) through September 30, 2006 |   5 |
|                                      |                                                                                                                                                                                                                             |          |
|                                      | Consolidated                Statements of Stockholders’ Equity (Deficit) for the period                frominception                (May 19, 2003) through September 30, 2006                                              |  6       |
|                                      |                                                                                                                                                                                                                             |          |
|                                      | Consolidated                Statements of Cash Flows for the Three Months and Nine MonthsEnded                September 30, 2006 and 2005 and the period from inception (May                19, 2003) through September 30, 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                                                                                                                                                         | 36            |
|                                      |                                                                                                                                                                                                                             |          |
| Item                4.     | Controls                and Procedures                                                                                                                                                                                           | 38            |
|                                      |                                                                                                                                                                                                                             |          |
| **PART                II.**               | **OTHER                INFORMATION**                                                                                                                                                                                             |          |
|                                      |                                                                                                                                                                                                                             |          |
| Item                1A.    | Risk                Factors                                                                                                                                                                                                      | 39            |
|                                      |                                                                                                                                                                                                                             |          |
| Item                2.     | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                                                                                       | 47            |
|                                      |                                                                                                                                                                                                                             |          |
| Item                6.     | Exhibits                and Reports on Form 8-K                                                                                                                                                                                  | 48            |
|                                      |                                                                                                                                                                                                                             |          |
|                                      | Notes                About Forward-looking Statements                                                                                                                                                                            | 48            |
|                                      |                                                                                                                                                                                                                             |          |
| **SIGNATURES**                            |                                                                                                                                                                                                                             | 49            |

----

**ITEM      1. FINANCIAL INFORMATION**

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

|                                               |   | **September                  30,** |      | **December                  31,** |   |
|----------------------------------------------------|--------|------------------------------------|-----------|-----------------------------------|--------|
| **ASSETS**                                         |   | **2006**                           |      | **2005**                          |   |
|                                               |   | (Unaudited)                        |      |                              |   |
|                                               |   |                               |      |                              |   |
| **Current                  Assets**                |   |                               |      |                              |   |
| Cash                  and cash equivalents         |   | $                                  | 1,882,497 |                              | $      | 2,346,248 |   |
| Accounts                  receivable               |   |                               | 143,100   |                              |   | 3,200 |   |
| Related                  party receivable          |   |                               | -         |                              |   | 26,257 |   |
| Other                  receivables                 |   |                               | 4,153     |                              |   | 103,695 |   |
| Inventories                                        |   |                               | 1,718,153 |                              |   | 206,091 |   |
| Prepaid                  expenses                  |   |                               | 140,487   |                              |   | 77,723 |   |
| Total                  current assets              |   |                               | 3,888,390 |                              |   | 2,763,214 |   |
|                                               |   |                               |      |                              |   |   |   |
| **Property,                  Plant and Equipment** |   |                               |      |                              |   |   |   |
| Building                                           |   |                               | 2,085,539 |                              |   | 282,901 |   |
| Equipment                                          |   |                               | 680,245   |                              |   | 280,780 |   |
| Land                  and improvements             |   |                               | 467,188   |                              |   | 196,124 |   |
| Construction                  in progress          |   |                               | 102,624   |                              |   | 1,322,798 |   |
| Leasehold                  improvements            |   |                               | 17,156    |                              |   | 16,023 |   |
|                                               |   |                               | 3,352,752 |                              |   | 2,098,626 |   |
| Less                  accumulated depreciation     |   |                               | 130,733   |                              |   | 39,818 |   |
| Net                  property and equipment        |   |                               | 3,222,019 |                              |   | 2,058,808 |   |
|                                               |   |                               |      |                              |   |   |   |
| **Total                  Assets**                  |   | $                                  | 7,110,409 |                              | $      | 4,822,022 |   |

----

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

|                                                                                     |   | **September                    30,** |       | **December                    31,** |   |
|------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|-------------------------------------|--------|
| **LIABILITIES                    AND EQUITY**                                            |   | **2006**                             |       | **2005**                            |   |
|                                                                                     |   | (Unaudited)                          |       |                                |   |
|                                                                                     |   |                                 |       |                                |   |
| **Current                    Liabilities**                                               |   |                                 |       |                                |   |
| Notes                    payable, bank                                                   |   | $                                    | 1,137,919  |                                | $      | 262,647 |   |
| Current                    portion long-term debt                                        |   |                                 | 36,912     |                                |   | 24,984 |   |
| Current                    installments of obligation under capital lease                |   |                                 | 792        |                                |   | - |   |
| Accounts                    payable                                                      |   |                                 | 801,136    |                                |   | 236,341 |   |
| Accrued                    expenses                                                      |   |                                 | 191,315    |                                |   | 69,768 |   |
| Accrued                    purchase commitment losses                                    |   |                                 | 321,178    |                                |   | - |   |
| Construction                    payable                                                  |   |                                 | -          |                                |   | 232,208 |   |
| Unearned                    revenue                                                      |   |                                 | 126,772    |                                |   | - |   |
| Total                    current liabilities                                             |   |                                 | 2,616,024  |                                |   | 825,948 |   |
|                                                                                     |   |                                 |       |                                |   |   |   |
| Long-term                    debt, net of current maturities                             |   |                                 | 793,036    |                                |   | 791,541 |   |
| Obligation                    under capital lease, excluding current installments        |   |                                 | 18,372     |                                |   | - |   |
| Total                    liabilities                                                     |   |                                 | 3,427,432  |                                |   | 1,617,489 |   |
|                                                                                     |   |                                 |       |                                |   |   |   |
| **Commitments                    and Contingencies**                                     |   |                                 |       |                                |   |   |   |
|                                                                                     |   |                                 |       |                                |   |   |   |
| **Stockholders'                    Equity**                                              |   |                                 |       |                                |   |   |   |
| Preferred                    stock, $0.001 par value; 10,000,000 shares authorized,      |   |                                 |       |                                |   |   |   |
| 465,000                    and -0- shares issued and outstanding, respectively           |   |                                 | 465        |                                |   | **-** |   |
| Common                    stock, $0.001 par value; 100,000,000 shares authorized,        |   |                                 |       |                                |   |   |   |
| 26,133,916                    and 25,157,905 shares issued and outstanding, respectively |   |                                 | 26,134     |                                |   | 25,158 |   |
| Additional                    paid-in capital                                            |   |                                 | 9,623,840  |                                |   | 4,837,602 |   |
| Unearned                    stock-based compensation                                     |   |                                 | -          |                                |   | (275,332 | ) |
| Accumulated                    other comprehensive income - foreign currency             |   |                                 | (7,057     | )                                   |   | (2,207 | ) |
| Deficit                    accumulated during the development stage                      |   |                                 | (5,960,405 | )                                   |   | (1,380,688 | ) |
| Total                    stockholders' equity                                            |   |                                 | 3,682,977  |                                |   | 3,204,533 |   |
|                                                                                     |   |                                 |       |                                |   |   |   |
| **Total                    Liabilities and Stockholders’ Equity**                  |   | $                                    | 7,110,409  |                                | $      | 4,822,022 |   |

----

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

|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       | **From                    Inception** |   |
|-------------------------------------------------------------|--------|---------------------------------------------------------|------------|--------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|----------|------------|---------------------------------------|--------|
|                                                        |   | **Three                    months ended September 30,** |       | **Nine                    months ended September 30,** |   | **(May                    19, 2003)****to                    September 30,** |   |
|                                                        |   | **2006**                                                |       | **2005**                                               |   | **2006**                                                                     |   | **2005** |       | **2006**                              |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |
| **Sales**                                                   |   | $                                                       | 126,331    |                                                   | $      | 7,287                                                                        |   | $        | 202,040    |                                  | $      | 20,887 |   | $ | 245,600 |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| **Cost                    of sales**                        |   |                                                    | 113,109    |                                                   |   | 7,326                                                                        |   |     | 168,365    |                                  |   | 13,521 |   |   | 191,909 |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| **Gross                    Profit**                         |   |                                                    | 13,222     |                                                   |   | (39                                                                          | )      |     | 33,675     |                                  |   | 7,366 |   |   | 53,691 |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| **Operating                    Expenses**                   |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| Sales                    and marketing                      |   |                                                    | 263,442    |                                                   |   | 68,354                                                                       |   |     | 675,930    |                                  |   | 87,983 |   |   | 797,504 |   |
| General                    and administrative               |   |                                                    | 852,886    |                                                   |   | 256,166                                                                      |   |     | 2,426,617  |                                  |   | 317,766 |   |   | 3,230,120 |   |
| Research                    and development                 |   |                                                    | 438,290    |                                                   |   | 113,637                                                                      |   |     | 943,042    |                                  |   | 156,342 |   |   | 1,396,754 |   |
| Decline                    in market value of inventory     |   |                                                    | 75,980     |                                                   |   | -                                                                            |   |     | 187,460    |                                  |   | - |   |   | 187,460 |   |
| Loss                    on purchase commitments             |   |                                                    | -          |                                                   |   | -                                                                            |   |     | 336,257    |                                  |   | - |   |   | 336,257 |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
|                                                        |   |                                                    | 1,630,598  |                                                   |   | 438,157                                                                      |   |     | 4,569,306  |                                  |   | 562,091 |   |   | 5,948,095 |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| **Operating                    Loss**                       |   |                                                    | (1,617,376 | )                                                      |   | (438,196                                                                     | )      |     | (4,535,631 | )                                     |   | (554,725 | ) |   | (5,894,404 | ) |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| **Other                    Income (Expense)**               |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| Interest                    income                          |   |                                                    | 12,939     |                                                   |   | 9,492                                                                        |   |     | 38,852     |                                  |   | 10,589 |   |   | 70,875 |   |
| Interest                    expense                         |   |                                                    | (32,156    | )                                                      |   | (10,665                                                                      | )      |     | (82,938    | )                                     |   | (23,017 | ) |   | (136,876 | ) |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
|                                                        |   |                                                    | (19,217    | )                                                      |   | (1,173                                                                       | )      |     | (44,086    | )                                     |   | (12,428 | ) |   | (66,001 | ) |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| **Net                    Loss**                             |   | $                                                       | (1,636,593 | )                                                      | $      | (439,369                                                                     | )      | $        | (4,579,717 | )                                     | $      | (567,153 | ) | $ | (5,960,405 | ) |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| **Weighted                    average shares outstanding**  |   |                                                    | 25,180,764 |                                                   |   | 18,954,208                                                                   |   |     | 24,967,619 |                                  |   | 17,192,602 |   |   |   |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
|                                                        |   |                                                    |       |                                                   |   |                                                                         |   |     |       |                                  |   |   |   |   |   |   |
| **Basic                    and diluted net loss per share** |   | $                                                       | (0.06      | )                                                      | $      | (0.02                                                                        | )      | $        | (0.18      | )                                     | $      | (0.03 | ) |   |   |   |

----

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

|                                                     |   | **Preferred****Stock****Shares** |   | **Common****Stock****Shares** |   | **Preferred****Stock****Amount** |   | **Common****Stock****Amount** |   | **Additional****Paid                      - in****Capital** |   | **Unearned****Stock-Based****Compensation** |   | **Accumulated****Other****Comprehensive****Loss** |      | **Deficit****Accumulated****During                      the****Development****Stage** |   | **Total** |   |
|----------------------------------------------------------|--------|----------------------------------|--------|-------------------------------|--------|----------------------------------|--------|-------------------------------|--------|-------------------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------------|-----------|---------------------------------------------------------------------------------------|--------|-----------|--------|
|                                                     |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |
| Issuance                      of common stock to founder |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |
| in                      exchange for equipment and       |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |
| expenses                      incurred by founder        |   |                             | -      |                          |   | 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 merger                 |   |                             | -      |                          |   | 2,816,804                        |   |                          | -      |                                                        |   | 2,817                                       |   |                                              | (2,817    | )                                                                                     |   | -         |   |   | - |   |   | - |   |   | - |   |
|                                                     |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |   |   |   |   |   |   |   |   |   |
| Issuance                      of common stock to the     |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |   |   |   |   |   |   |   |   |   |
| sole                      shareholder of HEC Iowa        |   |                             | -      |                          |   | 16,297,200                       |   |                          | -      |                                                        |   | 14,297                                      |   |                                              | (14,297   | )                                                                                     |   | -         |   |   | - |   |   | - |   |   | - |   |
|                                                     |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |   |   |   |   |   |   |   |   |   |
| Issuance                      of restricted common       |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |   |   |   |   |   |   |   |   |   |
| stock                      to employees and directors    |   |                             | -      |                          |   | 426,000                          |   |                          | -      |                                                        |   | 426                                         |   |                                              | 425,574   |                                                                                  |   | (275,332  | )      |   | - |   |   | - |   |   | 150,668 |   |
|                                                     |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |   |   |   |   |   |   |   |   |   |
| Issuance                      of common stock in         |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |   |   |   |   |   |   |   |   |   |
| connection                      with 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 |   |
|                                                     |   |                             |   |                          |   |                             |   |                          |   |                                                        |   |                                        |   |                                              |      |                                                                                  |   |      |   |   |   |   |   |   |   |   |   |   |
| Consultant                      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 |   |

----

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

|                                                            |   |  **Preferred****Stock****Shares** |    |  **Common******Stock******Shares** |   |  **Preferred****Stock****Amount** |   |   **Common******Stock******Amount** |   |  **Additional****Paid                        - in****Capital** |   |  **Unearned****Stock-Based****Compensation** |   | **Accumulated****Other****Comprehensive****Loss** |      | **Deficit****Accumulated****During                            the****Development****Stage** |   |    **Total** |   |
|-----------------------------------------------------------------|--------|----------------------------------------|---------|-----------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------|-----------|---------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |
| Reclassification                      due to implementation     |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |
| of                      SFAS 123R                               |   |                                   | -       |                                    |   | -                                      |   | $                                             | -      |                                                                | $      | -                                                 |   | $                                                 | (275,332  | )                                                                                           | $      | 275,332                     |   | $ | - |   | $ | - |   | $ | - |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Compensation                      associated with vesting       |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| of                      restricted stock to employees           |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| and                      directors                              |   |                                   | -       |                                    |   | -                                      |   |                                          | -      |                                                                |   | -                                                 |   |                                              | 63,533    |                                                                                        |   | -                           |   |   | - |   |   | - |   |   | 63,533 |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Employee/Director                      compensation             |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| associated                      with issuance or vesting of     |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| stock                      options to employees and directors   |   |                                   | -       |                                    |   | -                                      |   |                                          | -      |                                                                |   | -                                                 |   |                                              | 547,207   |                                                                                        |   | -                           |   |   | - |   |   | - |   |   | 547,207 |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Consultant                      compensation associated         |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| with                      stock options                         |   |                                   | -       |                                    |   | -                                      |   |                                          | -      |                                                                |   | -                                                 |   |                                              | 41,315    |                                                                                        |   | -                           |   |   | - |   |   | - |   |   | 41,315 |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Issuance                      of preferred stock in             |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| connection                      with private placement,         |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| net                      of expenses                            |   |                                   | 465,000 |                                    |   | -                                      |   |                                          | 465    |                                                                |   | -                                                 |   |                                              | 1,389,247 |                                                                                        |   | -                           |   |   | - |   |   | - |   |   | 1,389,712 |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Issuance                      of common stock in                |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| connection                      with private placements,        |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| net                      of expenses                            |   |                                   | -       |                                    |   | 968,011                                |   |                                          | -      |                                                                |   | 968                                               |   |                                              | 3,012,276 |                                                                                        |   | -                           |   |   | - |   |   | - |   |   | 3,013,244 |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Issuance                      of stock related to option        |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| exercises                                                       |   |                                   | -       |                                    |   | 8,000                                  |   |                                          | -      |                                                                |   | 8                                                 |   |                                              | 7,992     |                                                                                        |   | -                           |   |   | - |   |   | - |   |   | 8,000 |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   | 8,267,544 |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| **Comprehensive                      Loss**                     |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Foreign                      currency translation               |   |                                   | -       |                                    |   | -                                      |   |                                          | -      |                                                                |   | -                                                 |   |                                              | -         |                                                                                        |   | -                           |   |   | (4,850 | ) |   | - |   |   | (4,850 | ) |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Net                      loss                                   |   |                                   | -       |                                    |   | -                                      |   |                                          | -      |                                                                |   | -                                                 |   |                                              | -         |                                                                                        |   | -                           |   |   | - |   |   | (4,579,717 | ) |   | (4,579,717 | ) |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| Total                      comprehensive loss                   |   |                                   | -       |                                    |   | -                                      |   |                                          | -      |                                                                |   | -                                                 |   |                                              | -         |                                                                                        |   | -                           |   |   | - |   |   | - |   |   | (4,584,567 | ) |
|                                                            |   |                                   |    |                                    |   |                                   |   |                                          |   |                                                                |   |                                              |   |                                              |      |                                                                                        |   |                        |   |   |   |   |   |   |   |   |   |   |
| **Balance                      at September, 2006 (Unaudited)** |   |                                   | 465,000 |                                    |   | 26,133,916                             |   | $                                             | 465    |                                                                | $      | 26,134                                            |   | $                                                 | 9,623,840 |                                                                                        | $      | -                           |   | $ | (7,057 | ) | $ | (5,960,405 | ) | $ | 3,682,977 |   |

----

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

|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         | **From**      |   |
|------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------------|--------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|----------|--------------|---------------|--------|
|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         | **Inception** |   |
|                                                                                     |   | **Three                        months ended****September                        30,** |         | **Nine                        months ended****September                        30,** |   | ****(May                        19, 2003)******to                        September 30,** |   |
|                                                                                     |   | **2006**                                                                              |         | **2005**                                                                             |   | **2006**                                                                                 |   | **2005** |         | **2006**      |   |
|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |
| **Cash                        Flows from Operating Activities**                          |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |
| Net                        loss                                                          |   | $                                                                                     | (1,636,593   | )                                                                                    | $      | (439,369                                                                                 | )      | $        | (4,579,717   | )             | $      | (567,153 | ) | $ | (5,960,405 | ) |
| Adjustments                        to reconcile net loss to net cash used in operations: |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| Depreciation                                                                             |   |                                                                                  | 46,914       |                                                                                 |   | 7,132                                                                                    |   |     | 90,915       |          |   | 15,524 |   |   | 130,733 |   |
| Compensation                        to directors and employees from restricted stock     |   |                                                                                  | 20,533       |                                                                                 |   | 129,168                                                                                  |   |     | 63,533       |          |   | 129,168 |   |   | 214,201 |   |
| Compensation                        to directors and employees from stock options        |   |                                                                                  | 154,061      |                                                                                 |   | -                                                                                        |   |     | 547,207      |          |   | - |   |   | 547,207 |   |
| Compensation                        to consultants from stock options                    |   |                                                                                  | 4,649        |                                                                                 |   | 97,500                                                                                   |   |     | 41,315       |          |   | 97,500 |   |   | 174,648 |   |
| Impairment                        loss on equipment                                      |   |                                                                                  | -            |                                                                                 |   |                                                                                     |   |     | 103,300      |          |   |   |   |   | 103,300 |   |
| Change                        in assets and liabilities:                                 |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| Accounts                        receivable                                               |   |                                                                                  | (87,402      | )                                                                                    |   | 4,910                                                                                    |   |     | (139,900     | )             |   | (2,900 | ) |   | (143,100 | ) |
| Related                        party receivables                                         |   |                                                                                  | -            |                                                                                 |   | -                                                                                        |   |     | 26,257       |          |   | - |   |   | - |   |
| Other                        receivables                                                 |   |                                                                                  | (4,153       | )                                                                                    |   | 1,058                                                                                    |   |     | (458         | )             |   | - |   |   | (4,153 | ) |
| Inventories                                                                              |   |                                                                                  | (959,299     | )                                                                                    |   | (13,282                                                                                  | )      |     | (1,714,601   | )             |   | (41,840 | ) |   | (1,920,692 | ) |
| Prepaid                        expenses                                                  |   |                                                                                  | 34,988       |                                                                                 |   | (21,998                                                                                  | )      |     | (62,764      | )             |   | (21,998 | ) |   | (140,487 | ) |
| Accounts                        payable                                                  |   |                                                                                  | 280,587      |                                                                                 |   | 81,407                                                                                   |   |     | 779,004      |          |   | 94,520 |   |   | 1,118,981 |   |
| Accrued                        expenses                                                  |   |                                                                                  | 59,612       |                                                                                 |   | 3,176                                                                                    |   |     | 121,547      |          |   | 13,427 |   |   | 191,315 |   |
| Accrued                        purchase commitment losses                                |   |                                                                                  | (15,079      | )                                                                                    |   | -                                                                                        |   |     | 321,178      |          |   | - |   |   | 321,178 |   |
| Unearned                        revenue                                                  |   |                                                                                  | -            |                                                                                 |   | -                                                                                        |   |     | 126,772      |          |   | - |   |   | 126,772 |   |
| Net                        cash used in operating activities                             |   |                                                                                  | (2,101,182   | )                                                                                    |   | (150,298                                                                                 | )      |     | (4,276,412   | )             |   | (283,752 | ) |   | (5,240,502 | ) |
|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| **Cash                        Flows from Investing Activities**                          |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| Purchases                        of property, plant, and equipment                       |   |                                                                                  | (153,370     | )                                                                                    |   | (317,400                                                                                 | )      |     | (446,840     | )             |   | (317,986 | ) |   | (805,012 | ) |
| Payments                        for construction in progress                             |   |                                                                                  | -            |                                                                                 |   | -                                                                                        |   |     | (1,041,617   | )             |   | - |   |   | (2,022,841 | ) |
| Net                        cash used in investing activities                             |   |                                                                                  | (153,370     | )                                                                                    |   | (317,400                                                                                 | )      |     | (1,488,457   | )             |   | (317,986 | ) |   | (2,827,853 | ) |
|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| **Cash                        Flows from Financing Activities**                          |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| Proceeds                        from note payable, bank                                  |   |                                                                                  | -            |                                                                                 |   | -                                                                                        |   |     | 832,690      |          |   | 650,000 |   |   | 1,482,690 |   |
| Payments                        on note payable, bank                                    |   |                                                                                  | -            |                                                                                 |   | -                                                                                        |   |     | -            |          |   | - |   |   | (650,000 | ) |
| Proceeds                        from long-term debt                                      |   |                                                                                  | -            |                                                                                 |   | 309,999                                                                                  |   |     | 100,000      |          |   | 469,999 |   |   | 1,172,052 |   |
| Payments                        on long term debt                                        |   |                                                                                  | (12,057      | )                                                                                    |   | (650,000                                                                                 | )      |     | (37,678      | )             |   | (650,000 | ) |   | (52,678 | ) |
| Proceeds                        from exercise of stock option                            |   |                                                                                  | -            |                                                                                 |   | -                                                                                        |   |     | 8,000        |          |   | - |   |   | 8,000 |   |
| Issuance                        of preferred stock in private placement                  |   |                                                                                  | 1,511,250    |                                                                                 |   | -                                                                                        |   |     | 1,511,250    |          |   | - |   |   | 1,511,250 |   |
| Issuance                        of common stock in private placements                    |   |                                                                                  | 222,831      |                                                                                 |   | 3,948,500                                                                                |   |     | 3,145,965    |          |   | 3,948,500 |   |   | 7,094,465 |   |
| Payments                        of expense in connection                                 |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| with                        preferred stock private placement                            |   |                                                                                  | (121,538     | )                                                                                    |   | -                                                                                        |   |     | (121,538     | )             |   | - |   |   | (121,538 | ) |
| Payments                        of expense in connection                                 |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| with                        common stock private placements                              |   |                                                                                  | (6,888       | )                                                                                    |   | (353,611                                                                                 | )      |     | (132,721     | )             |   | (353,611 | ) |   | (486,332 | ) |
|                                                                                     |   |                                                                                  |    |                                                                                 |   |                                                                                |   |     |    |          |   |    |   |   |   |   |
| Net                        cash provided by financing activities                         |   |                                                                                  | 1,593,598    |                                                                                 |   | 3,254,888                                                                                |   |     | 5,305,968    |          |   | 4,064,888 |   |   | 9,957,909 |   |
|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| **Net                        Increase (Decrease) in Cash and Cash Equivalents**          |   |                                                                                  | (660,954     | )                                                                                    |   | 2,787,190                                                                                |   |     | (458,901     | )             |   | 3,463,150 |   |   | 1,889,554 |   |
|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| **Effect                        of Exchange Rates on Cash and Cash Equivalents**         |   |                                                                                  | (7,779       | )                                                                                    |   | -                                                                                        |   |     | (4,850       | )             |   | - |   |   | (7,057 | ) |
|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| **Cash                        and Cash Equivalents – Beginning of Period**         |   |                                                                                  | 2,551,230    |                                                                                 |   | 695,768                                                                                  |   |     | 2,346,248    |          |   | 19,808 |   |   | - |   |
|                                                                                     |   |                                                                                  |         |                                                                                 |   |                                                                                     |   |     |         |          |   |   |   |   |   |   |
| **Cash                        and Cash Equivalents – End of Period**               |   | $                                                                                     | 1,882,497    |                                                                                 | $      | 3,482,958                                                                                |   | $        | 1,882,497    |          | $      | 3,482,958 |   | $ | 1,882,497 |   |

----

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

|                                                                   |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    | **From**      |   |
|------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|----------|---------|---------------|--------|
|                                                                   |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    | **Inception** |   |
|                                                                   |   | **Three                          months ended****September                          30,** |   | **Nine                          months ended****September                          30,** |   | **(May                              19, 2003)****to                          September 30,** |   |
|                                                                   |   | **2006**                                                                                  |   | **2005**                                                                                 |   | **2006**                                                                                     |   | **2005** |    | **2006**      |   |
|                                                                   |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |
| **Supplemental                          Cash Flow Information**        |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |
|                                                                   |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |
| Interest                          paid                                 |   | $                                                                                         | 9,482  |                                                                                     | $      | 7,106                                                                                        |   | $        | 22,237  |          | $      | 7,190 |   | $ | 60,184 |   |
|                                                                   |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |   |   |   |   |   |
| **Supplemental                          Disclosure of Noncash**        |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |   |   |   |   |   |
| **Investing                          and Financing Activities**        |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |   |   |   |   |   |
|                                                                   |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |   |   |   |   |   |
| Additional                          paid-in capital contribution       |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |   |   |   |   |   |
| for                          expenses paid by founder                  |   | $                                                                                         | -      |                                                                                     | $      | -                                                                                            |   | $        | -       |          | $      | 12,135 |   | $ | 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                             |   | $                                                                                         | 61,746 |                                                                                     | $      | 146,124                                                                                      |   | $        | 112,847 |          | $      | 146,124 |   | $ | 592,018 |   |
|                                                                   |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |   |   |   |   |   |
| Payables                          for construction in progress         |   | $                                                                                         | -      |                                                                                     | $      | -                                                                                            |   | $        | 32,594  |          | $      | - |   | $ | 264,802 |   |
|                                                                   |   |                                                                                      |   |                                                                                     |   |                                                                                         |   |     |    |          |   |   |   |   |   |   |
| Receivable                          for state loan                     |   | $                                                                                         | -      |                                                                                     | $      | -                                                                                            |   | $        | -       |          | $      | - |   | $ | 100,000 |   |

----

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

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

**Notes      to Consolidated Financial Statements**

**(unaudited)**

**September      30, 2006**

**1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Overview      of Companies*

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

*Private      Placement *

*Principles      of Consolidation*

----

*Going      Concern*

*Foreign      Currency Translation*

*Other      comprehensive income (loss).*

----

*Cash      and Cash Equivalents*

*Accounts      Receivable*

*Inventories*

*Property,      Plant and Equipment*

*Unearned      Revenue*

*Revenue      Recognition*

----

*Sales      and Marketing Costs*

*General      and Administrative Costs*

*Research      and Development Costs*

*Net      Loss Per Share*

*Interim      Financial Statements*

*Use      of Estimates*

----

*Fair      Value of Financial Instruments*

*Stock-Based      Compensation*

* *

----

|                                                                                                                                                             |   | Period                from Inception |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                                                                             |   | (May                19, 2003) to     |       |
|                                                                                                                                                             |   | September                30, 2006    |       |
|                                                                                                                                                             |   |                                 |       |
| Net                loss, as reported                                                                                                                             |   | $                                    | (5,960,405 | ) |
|                                                                                                                                                             |   |                                 |       |   |
| Add:                options and restricted stock-based employee and non-employee compensation                expense included in reported net (loss)             |   |                                 | 936,056    |   |
| Deduct:                options and restricted stock-based employee and non-employee compensation                expense determined under fair value based method |   |                                 | (1,121,858 | ) |
|                                                                                                                                                             |   |                                 |       |   |
| Pro                forma net loss                                                                                                                                |   | $                                    | (6,146,207 | ) |

*Warrants*

*Recent      Accounting Pronouncements*

----

**2.      INVENTORY**

|                           |   | September                30,2006 |      | December                31,2005 |   |
|--------------------------------|--------|----------------------------------|-----------|---------------------------------|--------|
|                           |   |                             |      |                            |   |
| Component                parts |   | $                                | 1,365,644 |                            | $      | 109,351 |   |
| Work                in process |   |                             | 168,389   |                            |   | 12,302 |   |
| Finished                goods  |   |                             | 184,120   |                            |   | 84,438 |   |
|  Total                    |   | $                                | 1,718,153 |                            | $      | 206,091 |   |

**3.      CONSTRUCTION IN PROGRESS **

----

**4.      NOTES PAYABLE, BANK**

**5.      LONG-TERM DEBT**

|                                                                                                |   | September                30,2006 |    | December                31,                2005 |   |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------------------------|--------|
|  Note                payable to City of Algona. See (a)                                        |   | $                                | 180,000 |                                            | $      | 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) |   |                             | 65,418  |                                            |   | 70,401 |   |
|                                                                                                |   |                             |    |                                            |   |   |   |
| Notes                payable to Iowa Department of Economic Development. See (d)                    |   |                             | 400,000 |                                            |   | 400,000 |   |
|                                                                                                |   |                             |    |                                            |   |   |   |
| Note                payable to finance company. See (e)                                             |   |                             | 38,406  |                                            |   | - |   |
|                                                                                                |   |                             |         |                                            |   |  |   |
|                                                                                                |   |                             | 829,948 |                                            |   | 816,525 |   |
|  Less                amounts due within one year                                               |   |                             | 36,912  |                                            |   | 24,984 |   |
|  Totals                                                                                        |   | $                                | 793,036 |                                            | $      | 791,541 |   |

| 2007                                |   | $      | 42,846  |   |
|-------------------------------------|--------|--------|---------|--------|
| 2008                                |   |   | 24,171  |   |
| 2009                                |   |   | 24,596  |   |
| 2010                                |   |   | 165,639 |   |
| 2011                                |   |   | 200,594 |   |
| Thereafter                          |   |   | 335,190 |   |
| Total                long-term debt |   | $      | 793,036 |   |

----

|   | · | $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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | $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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Balance                of $10,824 due on June 1, 2015, without interest if paid by that                date. |
|--------|--------|--------------------------------------------------------------------------------------------------------------|

|   | · | Payment                of a wage for the retained jobs that is equal to or greater than                the                average hourly wage for workers in Kossuth County, Iowa as determined                annually by Iowa Workforce                Development. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**6.      OPERATING LEASE**

| 2006   |   | $      | 1,950  |   |
|--------|--------|--------|--------|--------|
| 2007   |   |   | 8,150  |   |
| 2008   |   |   | 3,500  |   |
|   |   | $      | 13,600 |   |

**7.      CAPITALIZED LEASE**

| 2006                                                   |   | $      | 792    |   |
|--------------------------------------------------------|--------|--------|--------|--------|
| 2007                                                   |   |   | 4,750  |   |
| 2008                                                   |   |   | 4,750  |   |
| 2009                                                   |   |   | 4,750  |   |
| 2010                                                   |   |   | 4,750  |   |
| Thereafter                                             |   |   | 3,960  |   |
| Total                minimum lease payments            |   |   | 23,752 |   |
| Less                amount representing interest       |   |   | 4,588  |   |
| Present                value of minimum lease payments |   | $      | 19,164 |   |
| Less                amounts due within one year        |   |   | 792    |   |
| Totals                                                 |   | $      | 18,372 |   |

----

**8.      RELATED PARTY TRANSACTIONS**

**9.      INCOME TAXES**

|                                                        |   | September                30,2006 |       | December                31,2005 |   |
|-------------------------------------------------------------|--------|----------------------------------|------------|---------------------------------|--------|
| Deferred                tax assets:                         |   |                             |       |                            |   |
| Net                operating loss carryforward              |   | $                                | 1,750,000  |                            | $      | 480,000 |   |
| Accrual                and reserve not currently deductible |   |                             | 209,000    |                            |   | - |   |
| Other,                net                                   |   |                             | 19,000     |                            |   | - |   |
|                                                        |   |                             | 1,978,000  |                            |   | 480,000 |   |
| Valuation                allowance                          |   |                             | (1,978,000 | )                               |   | (480,000 | ) |
| Net                deferred tax asset recognized            |   | $                                | -          |                            | $      | - |   |

----

**10.      PREFERRED STOCK**

**11.      COMMON STOCK**

**12.**
**WARRANTS**

**13.**
**STOCK-BASED      COMPENSATION**

----

|                                                                                      |   |   Three                Months EndedSeptember                30, 2006 |                               |   Nine                Months EndedSeptember                30, 2006 |   | Period                from Inception (May                19, 2003) to September                30, 2006 |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|------------------------------------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|
|                                                                                      |   |
| Risk-free                interest rate                                                    |   |                                                                           | 4.60%                              |                                                                          |   | 4.60%                                                                                                   |   |   | 4.10% |   |
| Expected                volatility                                                        |   |                                                                           | 116%                               |                                                                          |   | 116%                                                                                                    |   |   | 164% |   |
| Expected                life (in years)                                                   |   |                                                                           | 5.5%                               |                                                                          |   | 5.5                                                                                      |   |   | 8.4    |   |
| Dividend                yield                                                             |   |                                                                           | -                             |                                                                          |   | -                                                                                                       |   |   | - |   |
| Weighted-average                estimated fair value of options granted during the period |   | $                                                                              | 2.80      |                                                                          | $      | 2.80                                                                                |        | $ | 1.63     |   |

|                                                                               |   |  Options                Outstanding |      |
|------------------------------------------------------------------------------------|--------|------------------------------------------|-----------|
|                                                                               |   | Number                of Shares          |      | Weighted-Average                Exercise Price |   | Weighted-Average                Remaining Contractual Term (in                years) |   | Aggregate                Intrinsic Value (1) |   |
|                                                                               |   |
| Balance                at December 31, 2005                                        |   |                                     | 854,000   |   | $ | 1.18 |   |   |   |   |   |   |   |
| Granted                                                                            |   |                                     | 370,000   |   | $ | 3.50 |   |   |   |   |   |   |   |
| Exercised                                                                          |   |                                     | (8,000    | ) | $ | 1.00 |   |   |   |   |   |   |   |
| Canceled/forfeited/expired                                                         |   |                                     | (178,334  | ) | $ | 1.00 |   |   |   |   |   |   |   |
| Balance                at September 30, 2006                                       |   |                                     | 1,037,666 |   | $ | 2.04 |   |   | 9.4 |   | $ | 1,515,000 |   |
| Vested                and exercisable as of                September 30, 2006      |   |                                     | 380,666   |   | $ | 1.32 |   |   | 9.1 |   | $ | 830,000 |   |
| Vested                and expected to vest as of                September 30, 2006 |   |                                     | 1,022,000 |   | $ | 2.04 |   |   | 9.4 |   | $ | 1,492,000 |   |

|   | (1) | The                aggregate intrinsic value is calculated as approximately the difference                between the weighted-average exercise price of the underlying awards                and                the Company’s closing stock price of $3.50 on September 29, 2006, the last                day of trading in September. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                          |   | Unvested                Restricted Stock |    |
|-----------------------------------------------|--------|------------------------------------------|---------|
|                                          |   |  Number                ofShares     |    | Weighted-AverageGrant-DateFair                Value |   |
|                                          |   |                                     |    |
| Unvested                at December 31, 2005  |   |                                     | 304,000 |   | $ | 1.00 |   |
| Vested                                        |   |                                     | 86,000  |   | $ | 1.00 |   |
| Unvested                at September 30, 2006 |   |                                     | 218,000 |   | $ | 1.00 |   |

|                          |   | Options                Outstanding |      | Options                Exercisable                                                       |   |
|-------------------------------|--------|------------------------------------|-----------|------------------------------------------------------------------------------------------|--------|
| Exercise                Price |   | Options                Outstanding |      | Weighted-Average                Remaining                Contractual                Life |   | Weighted-Average                ExercisePrice |   | Shares Exercisable |   | Weighted-Average                Exercise                Price |   |
| $1.00                         |   |                               | 607,666   |                                                                                     |   | 8.9 |   | $ | 1.00 |   |   | 332,666 |   | $ | 1.00 |   |
| $3.50                         |   |                               | 430,000   |                                                                                     |   | 10.0 |   | $ | 3.50 |   |   | 48,000 |   | $ | 3.50 |   |
|                          |   |                               |      |                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |   |                               | 1,037,666 |                                                                                     |   | 9.4 |   | $ | 2.04 |   |   | 380,666 |   | $ | 1.32 |   |

**14.**
**COMMITMENTS      AND CONTINGENCIES**

|   | · | Funding                for training new employees through a supplemental new jobs withholding                credit equal to 1.5% of gross wages of the new jobs created; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

|   | · | An                investment tax credit equal to 10% of the capital investment. This                Iowa                tax credit may be carried forward for up to seven years. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                order to receive these benefits, the Company must create 59 new full-time                equivalent jobs at the project site within three years of the date                of the                agreement, which was June 28, 2005. The Company must also pay an                average                median wage of $23.89 per hour and pay 80% of the employees' medical                and                dental insurance. Within three years of the effective date of the                agreement, the Company must also make a capital investment of at                least                $1,329,716 within the Enterprise Zone. If the Company does not meet                these                requirements, a portion of the incentives and assistance will have                to be                repaid. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Engine      Certification*

*Product      Performance - Warranty*

*Component      Parts Procurement*

**15.**
**SUBSEQUENT      EVENT**

*Letter      of Credit/Restricted Cash*

----

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

**Going      Concern**

**Merger**

----

|  | · | On                October 15, 2005, we closed the first private placement of our common                stock (“First Private Offering”). We sold 3,948,500 shares of our common                stock, $.001 par value, at $1.00 per share, for a total of $3,948,500                to                93 investors, which represents 14.58% of the 27,073,916 issued and                outstanding shares of common stock (including 930,000 shares of Series                A                Preferred Stock convertible into shares of Common Stock) as of November                7,                2006.   |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | On                September 29, 2006, we sold 465,000 shares of our Series A Preferred                Stock                at $3.25 per share, convertible into an equal number of common stock.                We                closed the private offering of our Series A Preferred Stock (the                “Preferred Offering”) on October 2, 2006, having sold a total of 930,000                shares at $3.25 per share, which number represents 3.44% of the 27,073,916                issued and outstanding shares of common stock (including 930,000                shares of                Series A Preferred Stock convertible into shares of Common Stock)                as of                November 7, 2006.   |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | As                of September 30, 2006, we had sold 968,011 shares of common stock                in our                Second Private Offering of common stock (“Second Private Offering”) at                $3.25 per share. We had initially offered shares in the Second Private                Offering at prices ranging from $9.04 to $10.65 per share. After                our stock                price begin to fall sharply in late August, we repriced all of the                shares                in the Second Private Offering at $3.25. We attribute the decline                in stock                price, in part, from the fact that                shares issued in connection with the First Private Offering first                became                tradable on September 1, 2006, under Rule 144, subject to certain                restrictions for shares held by affiliates of the Company. We                closed the Second Private Offering on October 15, 2006, having sold                a                total of 978,011 shares of common stock for a total of $3,178,464                to 41                investors, which represents 3.61% of the 27,073,916 issued and outstanding                shares of common stock (including 930,000 shares of Series A Preferred                Stock convertible into shares of Common Stock) as of November 7,                2006.  |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Overview**

|   | · | a                zero emission engine; |
|--------|--------|----------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | a                variable speed, permanent magnet generator;                and |
|--------|--------|---------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | an                efficient, durable engine fueled by ammonia, a readily available                and                transportable fuel. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|

**Research      and Development Activities**

|   | · | In                April                2006, the Company received a $179,000 order through its wholly owned                Canadian subsidiary, HEC                Canada~~,~~                from Natural Resources Canada for a 250kW 4+1                power                generator or “genset”. Natural Resources Canada, a                government                agency promoting the sustainable development and responsible use                of                Canada's mineral, energy, and forestry resources, will integrate                this                genset into a wind/hydrogen project on Ramea Island off                the southern coast of Newfoundland,                Canada. With the wind blowing, hydrogen and electric power will be                generated from wind energy and under slack wind conditions hydrogen                will                be used to create electric power. This reduces or eliminates the                need to                use fossil fuels to generate electric power when the wind is not                blowing,                thereby reducing operating costs and making wind projects of this                kind                environmentally clean. The use of hydrogen in wind projects smoothes                out                the peaks and valleys in wind energy production. We expect to deliver                this                genset to Canada prior to the end of                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | In                April 2006, the Company received a purchase order from Xcel Energy                Services Inc. for the purchase of one 50kW hydrogen fueled genset.                This                genset will be used in a wind farm setting in Colorado and the Company                expects to deliver it prior to the end of                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                August 2006, the Company received an order from Grasim Industries                Limited                for one 60 kW hydrogen engine together with a generator and control                system. Grasim Industries, a member of the Aditya Birla Group of                Indian                companies, owns and operates a number of chlor-alkali manufacturing                factories. The Company’s hydrogen engines and gensets are of particular                interest to Grasim Industries because hydrogen is a waste product                of the                chlor-alkali manufacturing process. The Company expects to deliver                this                genset during the first quarter of 2007 for a delivery price of $30,000.                The Company and Grasim have entered into a Memorandum of Understanding                as                a first step toward the goal of working together to develop and market                a                complete electrical generation system for the chlor-alkali manufacturing                industry. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In                September 2006, the Company entered into a letter of intent with                Sawtelle                & Rosprim, Inc. Under the terms of the letter, the two companies will                work together to design and build the world’s first ammonia fueled                irrigation pump system for the purpose of meeting California’s new                emissions requirements scheduled to go into effect in 2010. Plans                include                integrating the Company’s ammonia-powered engines with Sawtelle’s pump                technologies and expertise to complete a prototype system for testing                and                evaluation.  We expect that the prototype system will be tested in                California during the 2007 irrigation season. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                Company will deliver one hydrogen-powered 4.9L hydrogen-fueled engine                to                Hidrener - Hidrogen Enerji Sistemleri A.S. in Turkey. This order                is part                of a United Nations energy project in                Turkey. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | On                November 6, 2006, the Company entered into a Memorandum of Understanding                with ITM Power plc (“ITM”),                one of the UK’s leading innovators within the alternative energy industry.                The parties plan to jointly develop products for a non-polluting,                grid-independent energy system which can undergo early field trial                testing. The Company                anticipates that ITM can offer an assured supply of hydrogen using                ITM’s                low cost electrolyzer technology. ITM anticipates that HEC will provide                an                early route to the provision of a complete system package using HEC's                proven engine technology. The combination of a hydrogen-fueled internal                combustion engine and a low cost electrolyzer could provide the essential                technology to convert low-value, intermittent, renewable energy (wind,                solar) into a reliable, non-fossil energy supply. Subject                to the production of satisfactory results from the field trials,                the                Company and ITM will progress into detailed discussions with the                intention                of entering a more formal commercial exploitation                arrangement. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | The                Company participates in a program called “Carbon Saver Project” in which                it has developed and supplied a hydrogen-natural gas generator of                5kW to                Atlantic Hydrogen in New Brunswick, Canada. This generator is based                on the                controller developed by HEC Canada and can operate on any mixture                of                hydrogen and natural gas. The Company expects to ship one 10kW unit                prior                to the end of 2006 and a 50kW unit some time during 2007.   |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Results      of Operations**

|                                  |   | **2006** |       | **2005** |   |
|---------------------------------------|--------|----------|------------|----------|--------|
| Revenues                              |   | $        | 202,040    |     | $      | 20,887 |   |
|                                  |   |     |       |     |   |   |   |
| Cost                of Sales          |   |     | 168,365    |     |   | 13,521 |   |
|                                  |   |     |       |     |   |   |   |
| Gross                Profit           |   |     | 33,675     |     |   | 7,366 |   |
|                                  |   |     |       |     |   |   |   |
| Operating                Expenses     |   |     | 4,569,306  |     |   | 562,091 |   |
|                                  |   |     |       |     |   |   |   |
| (Loss)                from Operations |   |     | (4,535,631 | )        |   | (554,725 | ) |
|                                  |   |     |       |     |   |   |   |
| Other                Income (Expense) |   |     | (44,086    | )        |   | (12,428 | ) |
|                                  |   |     |       |     |   |   |   |
| Net                Income (Loss)      |   | $        | (4,579,717 | )        | $      | (567,153 | ) |

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**Critical      Accounting Policies **

*Stock-based      Compensation*

**Liquidity      and Capital Resources**

*Short-Term      and Long-Term Debt Sources*

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**Plan      of Operation**

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**Employees**

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**Net      Operating Loss**

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**ITEM      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET      RISK**

**Foreign      Exchange Risk**

**Interest      Rate Risk**

|   | · | We                have a note with Iowa State Bank, Algona, Iowa, in the amount of                $500,000,                of which $495,337 has been drawn as of September 30, 2006, 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. We have a                second                note with Iowa State Bank in the amount of $75,000 of which $32,418                has                been drawn as of September 30, 2006 that carries an interest rate                of 6.49%                and also matures on December 16,                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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%. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**ITEM      4. CONTROLS AND PROCEDURES**

* *

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**ITEM      1A. RISK FACTORS**

**RISK      FACTORS**

***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.***

|  | · | timely                receipt of required financing;      |
|--|--------|------------------------------------------------------------------------------------|

|  | · | successful                pursuit of our research and development efforts;  |
|--|--------|----------------------------------------------------------------------------------|

|  | · | protection                of our intellectual property;   |
|--|--------|----------------------------------------------------------------|

|   | · | reliability                of our suppliers; |
|--------|--------|----------------------------------------------|

|   | · | reasonable                costs of building, maintaining, and expanding our facilities and                our                operations; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | quality                and reliability of our products; |
|--------|--------|---------------------------------------------------------|

|   | · | ability                to attract and retain a qualified work force in a small                town; |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   | · | size                and timing of future customer orders, milestone achievement, product                delivery and customer acceptance; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | success                in maintaining and enhancing existing strategic relationships and                developing new strategic relationships with potential customers; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

***Additional      financing to proceed with our anticipated business activities is required.      There      can be no assurance that financing will be available on terms beneficial to      us,      or at all.***

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***Reliance      on principal suppliers***

***Because      our capital raising has been slower than anticipated and because of problems      with our suppliers, we have changed the initial focus of our business      operations.***

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***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.***

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

***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      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.***

***We      may experience labor shortages.***

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

***Acceptance      of hydrogen and ammonia as alternative fuels will affect our ability to achieve      commercial application of our products and      technologies..***

|   | · | consumer                perception of the safety of hydrogen and willingness to use engines                powered by hydrogen; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                cost competitiveness of hydrogen or ammonia as a fuel relative to                other                fuels; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                future availability of hydrogen as a fuel; |
|--------|--------|---------------------------------------------------------------|

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|   | · | adverse                regulatory developments, including the adoption of onerous regulations                regarding hydrogen, or ammonia, use or storage; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | barriers                to entry created by existing energy providers; and |
|--------|--------|----------------------------------------------------------------------------|

|   | · | 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.***

***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.***

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

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***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.***

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

***Local,      state, national, and international laws or regulations could adversely affect      our business.***

***The      use of hydrogen and ammonia may expose us to certain safety risks and potential      liability claims.***

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

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

***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.***

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

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

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

|   | · | 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; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | There                is no cumulative voting in the election of directors;                and |
|--------|--------|-----------------------------------------------------------------------------------------------|

|   | · | Stockholders                cannot call a special meeting of                stockholders. |
|--------|--------|-------------------------------------------------------------------------------------------|

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

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**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.                      |

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**NOTES      ABOUT FORWARD-LOOKING STATEMENTS**

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**SIGNATURES**

|                                       |                                                             |                                                                                     |
|--------------------------------------------|------------------------------------------------------------------|------------------------------------------------------------------------------------------|
|                                       | **HYDROGEN ENGINE CENTER,              INC.**                    |
|                                  |                                                        |                                                                                |
| Date:              November 16, 2006  | By                                                          |  /s/                THEODORE                G. HOLLINGER                  |
|                                       |                                                             | Theodore                G. HollingerPresident                and Chief Executive Officer |
|                                       |                                                             |                                                                                     |
|                                       |                                                             |                                                                                     |
| Date:              November 16, 2006  | By                                                               |  /s/ Sandra Batt                                           |
|                                       | Sandra                BattChief                Financial Officer |

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