**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**FORM
      10-Q**





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





**For
      the quarterly period ended March 31, 2008**





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





For
      the
      transition period from __________ to __________.





Commission
      File Number: **000-50542**





**HYDROGEN
      ENGINE CENTER, INC.**


(Exact
      name of registrant as specified in its charter)





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





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


(Address
      of principal executive offices)





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





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




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




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





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





**Class**
            
            **Outstanding
                at April 28, 2008**Series
                B Preferred
            
            1,932,846Common
            
            27,590,164







**FORM
      10-Q**





**TABLE
      OF CONTENTS**





.
            
            
            
            Page**PART
                I**
            
            **FINANCIAL
                INFORMATION**Item
                1.
            
            Condensed
                Consolidated Financial StatementsCondensed
                Consolidated Balance Sheets as of March 31, 2008 (unaudited)
              and
                December 31, 2007
            
            3Condensed
                Consolidated Statements of Operations for the Three Months
              Ended
                March 31, 2008 and 2007 and the period from inception
              (May
                19, 2003) through March 31, 2008 (unaudited)
            
            5Condensed
                Consolidated Statements of Cash Flows for the Three Months
              Ended
                March 31, 2008 and 2007 and the period from inception
              (May
                19, 2003) through March 31, 2008 (unaudited)
            
            6Notes
                to Consolidated Financial Statements (unaudited)
            
            8Item
                2.
            
            Management's
                Discussion and Analysis of Financial Condition
              and
                Results of Operations
            
            18Item
                4T.
            
            Controls
                and Procedures
            
            27**PART
                II.**
            
            **OTHER
                INFORMATION**Item
                1.
            
            Legal
                Proceedings
            
            28Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            28Item
                6.
            
            Exhibits
                and Reports on Form 8-K
            
            29Notes
                About Forward-looking Statements
            
            29**SIGNATURES**
            
            
            
            30





**ITEM
      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





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


(a
      corporation in the development stage)





Condensed
      Consolidated Balance Sheets





**March 31,**
            
            **December 31,****2008**
            
            **2007****(Unaudited)****ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            $
            161,578
            
            $
            713,289Restricted
                cash
            
            
            116,454
            
            
            115,157Accounts
                receivable
            
            
            112,135
            
            
            134,237Inventories
            
            
            1,578,085
            
            
            1,655,359Prepaid
                expenses
            
            
            78,786
            
            
            89,901Total
                current assets
            
            
            2,047,038
            
            
            2,707,943**Property,
                Plant and Equipment**Building
            
            
            2,271,209
            
            
            2,271,209Equipment
            
            
            899,391
            
            
            908,999Land
                and improvements
            
            
            472,504
            
            
            472,5043,643,104
            
            
            3,652,712Less
                accumulated depreciation
            
            
            431,285
            
            
            375,178Net
                property and equipment
            
            
            3,211,819
            
            
            3,277,534**Total
                Assets**
            
            $
            5,258,857
            
            $
            5,985,477





See
      accompanying notes


3


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


(a
      corporation in the development stage)





Condensed
      Consolidated Balance Sheets





**March 31,**
            
            **December 31,****2008**
            
            **2007****(Unaudited)****LIABILITIES
                AND EQUITY****Current
                Liabilities**Notes
                payable, banks
            
            $
            580,046
            
            $
            594,677Current
                portion long-term debt
            
            
            43,337
            
            
            30,350Current
                installments of obligation under capital lease
            
            
            46,637
            
            
            45,247Accounts
                payable
            
            
            156,207
            
            
            146,585Accrued
                expenses
            
            
            221,964
            
            
            207,328Accrued
                interest
            
            
            141,220
            
            
            129,965Unearned
                grants
            
            
            24,184
            
            
            30,977Total
                current liabilities
            
            
            1,213,595
            
            
            1,185,129**Long-term
                debt, net of current maturities**
            
            
            1,310,625
            
            
            1,338,235**Obligation
                under capital lease, excluding current
                installments**
            
            
            68,761
            
            
            80,9551,379,386
            
            
            1,419,190Total
                liabilities
            
            
            2,592,981
            
            
            2,604,319**Commitments
                and Contingencies****Stockholders'
                Equity**Preferred
                stock - Series B, $0.001 par value; 5,000,000 shares authorized,
                1,932,846
                shares issued and outstanding
            
            
            1,933
            
            
            1,933Common
                stock, $0.001 par value; 100,000,000 shares authorized, 27,590,164
                shares
                issued and outstanding
            
            
            27,590
            
            
            27,590Additional
                paid-in capital
            
            
            17,898,075
            
            
            17,749,788Accumulated
                other comprehensive loss - foreign currency
            
            
            (7,938
            )
            
            (3,412
            )Deficit
                accumulated during the development stage
            
            
            (15,253,784
            )
            
            (14,394,741
            )Total
                stockholders' equity
            
            
            2,665,876
            
            
            3,381,158**Total
                Liabilities and Stockholders’ Equity**
            
            $
            5,258,857
            
            $
            5,985,477





See
      accompanying notes


4


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


(a
      corporation in the development stage)





Condensed
      Consolidated Statements of Operations


(Unaudited)





**Three months ended**
            
            **From Inception****March 31,**
            
            **(May 19, 2003) to****2008**
            
            **2007**
            
            **March 31, 2008****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)****Sales**
            
            $
            161,685
            
            $
            238,290
            
            $
            1,224,388**Cost
                of sales**
            
            
            150,367
            
            
            202,664
            
            
            1,072,151**Gross
                Profit**
            
            
            11,318
            
            
            35,626
            
            
            152,237**Operating
                Expenses**Sales
                and marketing
            
            
            84,065
            
            
            88,514
            
            
            1,285,101General
                and administrative
            
            
            570,904
            
            
            823,422
            
            
            7,042,312Research
                and development
            
            
            191,266
            
            
            407,357
            
            
            3,441,769Losses
                (recovery) related to inventory
            
            
            (11,904
            )
            
            448,011
            
            
            1,527,619834,331
            
            
            1,767,304
            
            
            13,296,801**Operating
                Loss**
            
            
            (823,013
            )
            
            (1,731,678
            )
            
            (13,144,564
            )**Other
                Income (Expense)**Interest
                income
            
            
            4,429
            
            
            11,501
            
            
            168,481Interest
                expense
            
            
            (40,459
            )
            
            (41,637
            )
            
            (381,904
            )Loss
                on sale of asset
            
            
            -
            
            
            -
            
            
            (6,734
            )(36,030
            )
            
            (30,136
            )
            
            (220,157
            )**Net
                Loss**
            
            $
            (859,043
            )
            $
            (1,761,814
            )
            $
            (13,364,721
            )Series
                A Preferred stock beneficial conversion feature accreted as a
                dividend
            
            $
            -
            
            $
            (1,889,063
            )
            $
            (1,889,063
            )**Net
                Loss Attributable To Common Stockholders**
            
            $
            (859,043
            )
            $
            (3,650,877
            )
            $
            (15,253,784
            )**Weighted
                -average shares outstanding**
            
            
            27,498,164
            
            
            25,472,024**Basic
                and diuluted net loss per share**
            
            
            (0.03
            )
            
            (0.14
            )




See
      accompanying notes


5


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


(a
      corporation in the development stage)





Condensed
      Consolidated Statements of Cash Flows


(Unaudited)





**Three Months Ended**
            
            **From Inception****March 31,**
            
            **(May 19, 2003) to****2008**
            
            **2007**
            
            **March 31, 2008****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)****Operating
                Activities**Net
                loss
            
            $
            (859,043
            )
            $
            (1,761,814
            )
            $
            (13,364,721
            )Adjustments
                to reconcile net loss to net cash used in operations:Depreciation
            
            
            65,715
            
            
            57,213
            
            
            492,558Compensation
                to directors and employees of stock options and restricted
                stock
            
            
            138,005
            
            
            136,089
            
            
            1,512,424Compensation
                to consultants of stock options
            
            
            10,282
            
            
            2,462
            
            
            197,092Warrants
                issued in vendor dispute
            
            
            -
            
            
            -
            
            
            577,500Loss
                on sale of assets
            
            
            -
            
            
            -
            
            
            6,734Change
                in assets and liabilities:Accounts
                receivable
            
            
            22,102
            
            
            (85,175
            )
            
            (112,135
            )Inventories
            
            
            77,274
            
            
            (362,217
            )
            
            (1,557,020
            )Prepaid
                expenses
            
            
            11,115
            
            
            (97,240
            )
            
            (100,243
            )Accounts
                payable
            
            
            9,622
            
            
            138,135
            
            
            240,063Accrued
                expenses
            
            
            14,636
            
            
            677,953
            
            
            268,202Accrued
                interest
            
            
            11,255
            
            
            -
            
            
            141,220Unearned
                grants
            
            
            (6,793
            )
            
            (8,484
            )
            
            24,184Net
                cash used in operating activities
            
            
            (505,830
            )
            
            (1,303,078
            )
            
            (11,674,142
            )**Investing
                Activities**Withdrawal/(Deposit)
                of restricted cash
            
            
            (1,297
            )
            
            (3,848
            )
            
            (116,454
            )Proceeds
                from sale of assets
            
            
            -
            
            
            -
            
            
            36,500(Purchases)/Impairment
                of property, plant, and equipment
            
            
            -
            
            
            (39,277
            )
            
            (3,012,679
            )Net
                cash used in investing activities
            
            
            (1,297
            )
            
            (43,125
            )
            
            (3,092,633
            )**Financing
                Activities**Proceeds
                from note payable, bank
            
            
            -
            
            
            250,000
            
            
            1,839,420Payments
                on note payable, bank
            
            
            (14,630
            )
            
            (2,283
            )
            
            (927,774
            )Proceeds
                from long-term debt
            
            
            -
            
            
            -
            
            
            1,172,052Payments
                on long-term debt
            
            
            (25,428
            )
            
            (11,473
            )
            
            (169,323
            )Proceeds
                from exercise of stock option
            
            
            -
            
            
            -
            
            
            8,000Issuance
                of preferred stock (Series A) in private placement, net of
                expenses
            
            
            -
            
            
            -
            
            
            2,779,813Issuance
                of preferred stock (Series B) in private placement, net of
                expenses
            
            
            -
            
            
            279,000
            
            
            3,595,095Issuance
                of common stock in private placements, net of expenses
            
            
            -
            
            
            -
            
            
            6,639,008Net
                cash provided by (used in) financing activities
            
            
            (40,058
            )
            
            515,244
            
            
            14,936,291**Effect
                of Exchange Rates on Cash and Cash Equivalents**
            
            
            (4,526
            )
            
            (1,184
            )
            
            (7,938
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            (551,711
            )
            
            (832,143
            )
            
            161,578**Cash
                and Cash Equivalents - Beginning of Period**
            
            
            713,289
            
            
            1,149,207
            
            
            -**Cash
                and Cash Equivalents - End of Period**
            
            $
            161,578
            
            $
            317,064
            
            $
            161,578


-
        continued -
  See
      accompanying notes


6


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


(a
      corporation in the development stage)





Condensend
      Consolidated Statements of Cash Flows


(Unaudited)





-Continued-





**Three months ended**
            
            **From Inception****March 31,**
            
            **(May 19, 2003) to****2008**
            
            **2007**
            
            **March 31, 2008****(Unaudited)**
            
            **(Unaudited)**
            
            **(Unaudited)****Supplemental
                Cash Flow Information**Interest
                paid
            
            $
            29,111
            
            $
            13,913
            
            $
            240,401**Supplemental
                Disclosures of Noncash Investing and Financing
                Activities**Additional
                paid-in capital contribution for expenses paid by founder
            
            $
            -
            
            $
            -
            
            $
            103,636Issuance
                of common stock for equipment
            
            $
            -
            
            $
            -
            
            $
            47,851Issuance
                of common stock for conversion of debt
            
            $
            -
            
            $
            -
            
            $
            557,051Acquistion
                of property, plant, and equipment through financing
            
            $
            -
            
            $
            111,450
            
            $
            692,081Payables
                for construction in progress
            
            $
            -
            
            $
            -
            
            $
            232,208Receivable
                for state loan
            
            $
            -
            
            $
            -
            
            $
            100,000Series
                A Preferred stock beneficial conversion feature accreted as a
                dividend
            
            $
            -
            
            $
            1,889,063
            
            $
            1,889,063




See
      accompanying notes


7


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


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


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**March
      31, 2008**




**1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Overview
      of Companies*





Hydrogen
      Engine Center, Inc. is a Nevada corporation with operations at, Hydrogen Engine
      Center, Inc., an Iowa corporation (“HEC Iowa”), and Hydrogen Engine Center (HEC)
      Canada Inc. (“HEC Canada”).





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





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





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





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





Through
      March 31, 2008, we remain in the development stage. Development stage is
      characterized by minimal revenues, with efforts focused on fund raising and
      prioritization of expenditures for the design and development of our products,
      manufacturing processes, intellectual property and strategic sales and
      marketing.





*Interim
      Financial Statements*





The
      unaudited interim financial information included in this report reflects normal
      recurring adjustments that management believes are necessary for a fair
      statement of the results of operations, financial position, and cash flows
      for
      the periods presented. This interim information should be read in conjunction
      with the financial statements and accompanying notes contained in the company’s
      Form 10-KSB filed April 15, 2008.





The
      results of operations for the quarterly period ended March 31, 2008 are not
      necessarily indicative of the results to be expected for other interim periods
      or the full year.





*Principles
      of Consolidation*





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





*Liquidity
      and Going Concern*





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


8


Since
      inception, we have invested in the resources and technology we believe necessary
      to deliver carbon free energy technology. As such, we have incurred substantial
      operating losses. We expect to incur operating losses in 2008. We have financed
      all development, sales and operations since inception through equity and debt
      financings. We continue to take steps to lower our monthly cash expenditures.
      On
      April 11, 2008, we entered into an agreement to sell up to a maximum of
      $4,000,000 in equity securities over twenty-four months to a hedge fund. The
      agreement requires that we register stock prior to receiving any funds. The
      registration process with the Securities and Exchange Commission could take
      60
      to 90 days or longer. With our existing capital, projected sales revenue, and
      secured financing, we anticipate that we can fund our operations through July,
      2008, without additional capital. As of May 13, 2008, we have approximately
      $192,303 in cash, $79,195 in trade receivables and $139,833 in trade payables.
      We have sales orders of approximately $253,757 (approximately $140,000 of which
      are scheduled to be delivered in May 2008) and an expected tax refund of
      approximately $30,000. In addition, we have available funds from a line of
      credit from a bank in the amount of $165,000. As our funding efforts continue,
      we plan to stage our growth by expanding our sales and marketing programs,
      and
      by proceeding with technology development, patent filings and essential engine
      certification. While interest in the alternative energy sector is strong, we
      are
      prepared to further curtail spending if needed. These timeframes may vary if
      events occur which negatively or positively affect our operations.





Our
      continuing operations are dependent upon obtaining financing. There can be
      no
      assurance that we will successfully complete the required stock registration
      or
      be able to draw funds in a timely manner. These conditions raise substantial
      doubt about the ability to continue as a going concern.





*Fair
      Value of Financial Instruments*





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





*Inventories*





Inventories
      consist mainly of parts, work-in-process and finished goods that are stated
      at
      the lower of cost (determined by the first-in, first out method) or market
      value
      (Note 3). We follow the provisions of SFAS 151, “Inventory Costs” that amends
      the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory
      Pricing” (ARB No. 43). Under this guidance, we allocate fixed production
      overhead to inventory based on the normal capacity of the production facilities,
      any expense incurred as a result of idle facility expense, freight and handling
      costs are expensed as period costs. For the three months ended March 31, 2008
      we
      allocated approximately $4,000 of overhead to inventory and approximately
      $49,500 of overhead to inventory from inception (May 19, 2003) to March 31,
      2008. For the three months ended March 31, 2007 we allocated approximately
      $5,000 of overhead to inventory. The balance of fixed production overhead is
      recorded in general and administrative costs.





*Revenue
      Recognition*





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





*Business
      Agreements*





Income
      is
      also derived through business agreements for the development and/or
      commercialization of products based upon our proprietary technology. Some of
      the
      business agreements have stipulated performance milestones and deliverables
      where others require “best efforts” with no performance criteria. The business
      agreements require that payments be made to us as certain milestones are reached
      prior to delivery of the product to the customer. Accordingly, income related
      to
      business agreements are recorded as a reduction in research and development
      expense, when title and risk of ownership transfers to the customer. Expenses
      we
      incur are recorded as research and development costs. During the three months
      ended March 31, 2008, we did not record a reduction in research and development
      expense resulting from business agreements. From inception (May 19, 2003) to
      March 31, 2008, we recorded $273,913, as a reduction in research and development
      expense.


9


*General
      and Administrative Costs*





General
      and administrative costs include payroll, employee benefits, stock-based
      compensation, and other costs associated with general and administrative costs
      including administrative personnel, professional fees, consulting fees and
      office expense. We allocate overhead and direct production expense to products
      manufactured. However, because we have not reached our production capacity,
      excess manufacturing costs are expensed as incurred as general and
      administrative costs. Expenses related to pre-production include salaries for
      production personnel, purchasing costs and the costs associated with production
      ramp up. Total pre-production costs included in general and administrative
      expenses for the three months ending March 31, 2008 totaled $121,484. For the
      period from inception (May 19, 2003) to March 31, 2008 pre-production expense
      was $1,464,918.





*Research
      and Development Costs*





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





*Stock-Based
      Compensation*





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





In
      March
      2005, SAB 107 provided supplemental implementation guidance for SFAS 123R.
      We
      applied the provisions of SAB 107 in our adoption of SFAS 123R. As a result
      of
      adopting the fair value method for stock compensation, all stock options and
      restricted stock awards are expensed over the award vesting period. These awards
      are expensed under the same approach using the fair value measurements which
      were used in calculating pro forma stock-based compensation expense under SFAS
      123.





SFAS
      123R
      requires the use of a valuation model (Note 8), to calculate the fair value
      of
      stock-based awards. We have elected to utilize the Black-Scholes option pricing
      model to estimate the fair value of options.





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





We
      account for options issued to non-employees (other than directors) under SFAS
      123R and EITF No. 96-18, “Accounting for Equity Instruments that are Issued to
      Other Than Employees for Acquiring, or in Conjunction with Selling, Goods,
      or
      Services.” Therefore, the fair value of options issued to non-employees, as
      calculated, using the Black Scholes Option pricing formula (Note 8), is recorded
      as an expense over the vesting terms. Options issued to non-employees and
      employees are issued using the same methodology and
      assumptions.


10


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





**Period from Inception****(May 19, 2003) to****March 31, 2008**Net
                loss attributable to common shareholders, as reported
            
            $
            (15,253,784
            )Add:
                  options and restricted stock-based employee compensationexpense
                  included in reported net loss attributable to common
                  shareholders
            
            
            1,512,424Deduct:
                  options and restricted stock-based employee compensationexpense
                  determined under fair value based method
            
            
            (1,698,226
            )Pro
                forma net loss attributable to common shareholders
            
            $
            (15,439,586
            )





Total
      employee non-cash stock compensation expense, net of forfeitures, for the three
      months ended March 31, 2008 was $138,005.





For
      purposes of pro forma disclosures, the estimated fair value of the options
      granted is amortized to expense over the option vesting periods as services
      are
      performed (Note 8).





*Use
      of Estimates*





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





*Recent
      Accounting Pronouncements*





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




*Reclassifications*





Certain
      amounts in the Condensed Consolidated Statement of Operations for the three
      months ended March 31, 2007 have been reclassified to conform to the current
      year presentation. These reclassifications had no effect on net loss as
      previously reported.





**2.
      FAIR VALUE INSTRUMENTS**




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


11


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




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




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




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




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




The
      following table provides information on those assets and liabilities measured
      at
      fair value on a recurring basis.





**Carrying Amount****In Consolidated****Balance Sheet**
            
            **Fair Value**
            
            **Fair Value Measurement Using****March 31, 2008**
            
            **March 31, 2008**
            
            **Level 1**
            
            **Level
                2**
            
            **Level
                3**Money
                Market Funds
            
            $
            61,656
            
            $
            61,656
            
            $
            61,656
            
            $
            -
            
            $
            -





Effective
      January 1, 2008, we also adopted SFAS 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities –
including an Amendment of FASB Statement No. 115* ,
      which
      allows an entity to choose to measure certain financial instruments and
      liabilities at fair value on a contract-by-contract basis. Subsequent fair
      value
      measurement for the financial instruments and liabilities an entity chooses
      to
      measure will be recognized in earnings. As of March 31, 2008, we did not
      elect such option for our financial instruments and liabilities.





**3.
      INVENTORIES**





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





**March 31, 2008**
            
            **December 31, 2007****(unaudited)**Component
                parts
            
            $
            1,216,738
            
            $
            1,266,612Work
                in process
            
            
            36,444
            
            
            10,407Finished
                goods
            
            
            324,903
            
            
            378,340Totals
            
            $
            1,578,085
            
            $
            1,655,359





**4.
      NOTES PAYABLE, BANK**





At
      March
      31, 2008, we had a letter of credit with a bank in the amount of $108,000.
      The
      letter of credit bears interest equal to the bank’s prime rate and had a balance
      of $0 at March 31, 2007. The letter of credit is secured by a certificate of
      deposit in the amount of $116,454. On April 15, 2008, the line of credit was
      dissolved and the restriction on the certificate of deposit was lifted.





On
      March
      24, 2008, we obtained a line of credit from a bank for $250,000. The line of
      credit expires August 1, 2008 and is secured by real estate and a business
      security agreement. The line of credit carries a variable interest rate equal
      to
      1.5% above the Wall Street Journal U.S. Prime Rate. At March 31, 2008 the
      balance on the line of credit was $0 and carried an interest rate of 6.75%.
      As
      of May 13, 2008 we had drawn $85,000 from this line of credit for operating
      expenses.


12


**5.
      LONG-TERM DEBT**





Long-term
      debt consists of the following:





**March 31,**
              **2008**
            
            **December 31,**
              **2007****(unaudited)**Note
                payable to City of Algona. See (a)
            
            $
            155,000
            
            $
            160,000Note
                payable to Algona Area Economic Development Corporation. See (b)
            
            
            146,124
            
            
            146,124Note
                payable to Algona Area Economic Development Corporation. See
                (c)
            
            
            60,881
            
            
            64,827Notes
                payable to Iowa Department of Economic Development. See (d)
            
            
            400,000
            
            
            400,000Note
                payable to finance company. See (e)
            
            
            -
            
            
            6,388Note
                payable to bank. See (f)
            
            
            591,956
            
            
            594,2461,353,962
            
            
            1,368,585Less
                amounts due within one year
            
            
            43,337
            
            
            30,350Totals
            
            $
            1,310,625
            
            $
            1,338,235





Future
      maturities of long-term debt at March 31, 2008 are as follows:





2009
            
            $
            591,0112010
            
            
            169,5622011
            
            
            200,3302012
            
            
            148,800Thereafter
            
            
            200,922Total
                long-term debt
            
            $
            1,310,625





(a)
      In
      September 2005, we obtained $200,000 from the City of Algona. The note requires
      quarterly payments of $5,000 starting January 1, 2006, with the final payment
      due October 1, 2015. There is no interest on this loan provided we create and
      retain 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. At this
      time
      the requirements have not been met. Therefore, as of March 31, 2008, we have
      accrued interest on the note in the amount of $45,974. The loan is
      collateralized by real estate.





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





·
            $67,650
                of principal and interest will be forgiven if we certify that we
                have
                created 50 new full-time equivalent jobs by June 1, 2010, and continuously
                retained those jobs in Algona, Iowa until June 1,
                2015.


·
            $67,650
                of principal and interest will be forgiven if we certify that we
                have
                created and continuously retained 50 additional new full-time equivalent
                jobs by June 1, 2015.


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


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


13


At
      this
      time the requirements have not been met. Therefore, as of March 31, 2008, we
      have accrued interest in the amount of $32,283. The loan is secured by the
      real
      estate.





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





(d)
      On
      June 28, 2005, the Iowa Department of Economic Development (“IDED”) awarded us a
      Physical Infrastructure Assistance Program (“PIAP”) grant in the amount of
      $150,000. This is a five-year forgivable loan and proceeds are to be used for
      the construction and equipping of the 30,000 square foot manufacturing facility.
      We received payment of this award in December 2005. Other terms of the loan
      include a minimum contribution of $1,543,316 for building construction,
      machinery and equipment, and working capital. In addition, we must create 49
      full-time equivalent positions, with 38 positions at a starting wage exceeding
      $11.76 per hour, and an average wage for all positions of $24.94 per hour.
      In
      order to qualify for the job count, employees must be Iowa residents. We are
      required to maintain the minimum employment level through the thirteenth week
      after the project completion date. If requirements are not met, the balance
      of
      the forgivable loan determined by IDED as due and payable will be amortized
      over
      three years from the agreement expiration date of July 31, 2010, at 6% interest
      per annum with equal quarterly payments. IDED requires end-of-year status
      reports to ensure compliance. At this time the requirements have not been met.
      Therefore, as of March 31, 2008, the total amount of interest accrued was
      $20,984. The note is secured by a security agreement on our assets.





Also
      on
      June 28, 2005, IDED awarded us a Community Economic Betterment Account (“CEBA”)
      forgivable loan in the amount of $250,000. This is a three-year forgivable
      loan
      and proceeds are to be used for the construction of the plant. We received
      $150,000 of this award in December 2005. The balance of the award, $100,000,
      was
      received in January 2006. The terms of this award are the same as the PIAP
      award
      explained in the previous paragraph. At the project completion date, if we
      have
      fulfilled at least 50% of our job creation/retention and wage obligation, $6,579
      will be forgiven for each new full-time equivalent job created and retained
      and
      maintained for at least ninety days past the project completion date. The
      project completion date of this award is July 30, 2010. Any balance (shortfall)
      will be amortized over a two-year period, beginning at the project completion
      date at 6% per annum from the date of the first CEBA disbursement on the
      shortfall amount, with that amount accrued as of the project completion date,
      being due and payable immediately. If we have a loan balance, the shortfall
      balance and existing balance will be combined to reflect a single monthly
      payment. We are accruing interest on this note until the terms of the note
      have
      been met. The total amount of interest accrued at March 31, 2008 was $34,973.
      The note is secured by a security agreement on our assets.





At
                March 31, 2008 we have created 17 jobs to meet the above job creation
                requirement.





(e)
      On
      March 20, 2006, we acquired manufacturing equipment through an equipment
      financing agreement with Wells Fargo Financial Leasing, Inc. The note requires
      payments of $2,129 per month for 24 months. The equipment serves as collateral
      for the note. At March 31, 2008, the entire remaining balance is due within
      one
      year and considered current.




(f)
                On March 27, 2008, we renewed a note with a bank for $591,956. The
                balance
                of this note on December 31, 2007 was $594,246. This note matures
                on April
                1, 2009, and carries a variable interest rate equal to the Wall Street
                Journal U.S. Prime Rate. At March 31, 2008, the interest rate on
                the note
                was 5.25% and requires monthly interest and principal payments of
                $4,340.
                The loan is secured by real
                estate.


14


**6.
      CAPITALIZED LEASES**





We
      have
      entered into three capital lease agreements, to purchase equipment with a net
      book value of $126,382 at March 31, 2008. Amortization of assets held under
      capital lease is included with depreciation expense.





The
      following is a schedule, by years of future minimum payments, required under
      the
      lease together with their present value as of March 31, 2008:





2008
            
            $
            43,0862009
            
            
            57,4482010
            
            
            19,8892011
            
            
            11,5862012
            
            
            635Total
                minimum lease payments
            
            
            132,644Less
                amount representing interest
            
            
            17,246Present
                value of minimum lease payments
            
            
            115,398Less
                amounts due within one year
            
            
            46,637Totals
            
            $
            68,761





**7.
      GRANTS AND INCENTIVE PROGRAMS**





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





At
      March
      31, 2008, we had not met all of our obligations for the EZ agreement and we
      have
      determined that we will not meet all of the requirements of this agreement
      before June 28, 2008. We have recorded the benefits we have received from this
      program as liabilities estimated to be $103,000. We have notified IDED of our
      inability to meet our job creation obligations and we are in the process of
      providing them with essential information so that our liability for this program
      can be determined.





**8.**  **STOCK-BASED
      COMPENSATION**





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





We
      may
      also issue restricted stock under the Incentive Plan. Restricted stock awards
      made under this program vest over periods designated by the Board of Directors,
      generally two to four years. The aggregate number of shares authorized for
      employee stock options, non-employee stock options and restricted stock awards
      is 2,000,000. At March 31, 2008, there were 696,084 shares available for grant
      and 1,303,916 shares granted. Of the shares granted, 361,000 were granted as
      restricted stock, 231,666 were granted as non-employee stock options, and
      711,250 were granted as employee and director stock options.





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


15





**For the three months ending**
            
            **Period from Inception****March 31,**
            
            **(May 19, 2003) to****2008**
            
            **2007**
            
            **March 31, 2008**Risk-free
                interest rate
            
            
            3.6
            %
            
            4.7
            %
            
            4.2
            %Expected
                volatility
            
            
            81.0
            %
            
            100.8
            %
            
            146.5
            %Expected
                life (in years)
            
            
            4.0
            
            
            5.5
            
            
            7.4Dividend
                yield
            
            
            -
            
            
            -
            
            
            -Weighted-average
                estimated fair value of options granted during the period
            
            $
            0.27
            
            $
            2.38
            
            $
            0.97





The
      following table summarizes the activity for outstanding employee and
      non-employee stock options for the three months ended March 31,
      2008:





**Options Outstanding****Number of**
              **Shares**
            
            **Weighted-**
              **Average**
              **Exercise Price**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
              **(in years)**
            
            **Aggregate**
              **Intrinsic Value**
              **(1)**Balance
                at December 31, 2007
            
            
            884,916
            
            $
            1.16Granted
            
            
            50,000
            
            $
            .46Balance
                at March 31, 2008
            
            
            934,916
            
            $
            1.12
            
            
            5.02
            
            $
            0Vested
                and exercisable as
              of
                March 31, 2008
            
            
            629,916
            
            $
            1.05
            
            
            3.38
            
            $
            0Vested
                and expected to vest as
              of
                March 31, 2008
            
            
            906,869
            
            $
            1.15
            
            
            5.02
            
            $
            0





(1)
            The
                aggregate intrinsic value is calculated as approximately the difference
                between the weighted-average exercise price of the underlying awards
                and
                our closing stock price of $0.40 on March 31, 2008, the last day
                of
                trading in March.





There
      were no stock options exercised during the three months ending March 31, 2008.





As
      of
      March 31, 2008, there was approximately $772,475 of unrecognized compensation
      cost related to outstanding stock options, net of forecasted forfeitures. This
      amount is expected to be recognized over a weighted-average period of 5.86
      years. To the extent the forfeiture rate is different than we have anticipated,
      stock-based compensation related to these awards will be different from
      expectations.





The
      following table summarizes the activity for the unvested restricted stock for
      the three months ended March 31, 2008:




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





As
      of
      March 31, 2008, there was approximately $63,212 of unrecognized compensation
      cost related to unvested restricted stock. This amount is expected to be
      recognized over a weighted-average period of 2.42 years. To the extent actual
      forfeiture rate is different than we have anticipated, the numbers of restricted
      stock expected to vest would be different from expectations.




16




The
      following table summarizes additional information about stock options
      outstanding and exercisable as of March 31, 2008:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise**
              **Price**
            
            **Options**
              **Outstanding**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
              **Exercisable**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**$
            0.40
            
            
            20,000
            
            
            10.00
            
            $
            .40
            
            
            10,000
            
            $
            .40$
            0.50
            
            
            30,000
            
            
            2.88
            
            $
            .50
            
            
            30,000
            
            $
            .50$
            1.00
            
            
            481,666
            
            
            2.72
            
            $
            1.00
            
            
            429,666
            
            $
            1.00$
            1.34
            
            
            393,250
            
            
            7.62
            
            $
            1.34
            
            
            160,250
            
            $
            1.34$
            1.40
            
            
            10,000
            
            
            9.41
            
            $
            1.40
            
            
            -
            
            $
            -934,916
            
            
            5.01
            
            $
            1.05
            
            
            629,916
            
            $
            1.05





**9.**  **SUBSEQUENT
      EVENT**





*Standby
      Equity Distribution Agreement (SEDA)*





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





Under
      the
      terms of the SEDA, we have paid a structuring fee of $10,000 and a due diligence
      fee of $5,000. We are obligated to issue $160,000 worth of stock at the earlier
      of the date of effectiveness of the Registration Statement or 60 days from
      the
      Closing Date as a Commitment Fee under the SEDA. We are also obligated to pay
      a
      monthly monitoring fee of $3,333 during the term of the agreement. We may
      terminate the SEDA upon 15 trading days notice, provided there are no Advances
      outstanding and that we have paid all amounts then due to the Investor.


17


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





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





**General**





Hydrogen
      Engine Center, Inc. (“HEC”, “we”, “us”, “our” or the “company”) was organized
      for the purpose of developing and commercializing clean solutions for today’s
      energy needs. Today, we offer technologies that enable spark-ignited internal
      combustion engines and power generation systems to produce clean energy with
      near-zero carbon emissions, using our proprietary engine controller and software
      to efficiently distribute ignition spark and fuel to injectors. Our business
      plan is centered on a growing portfolio of intellectual property that we expect
      to play an increasing role in addressing the world’s energy needs as well as its
      environmental concerns. Our long-term plans include revenue-generating
      opportunities from licensing fees and from the production and marketing, often
      in collaboration with others, of our technologies and products to a wider
      variety of end-users and manufacturers. As the price of gasoline increases,
      and
      the price of hydrogen declines, we believe our market position is
      improving.





We
      expect
      future revenue generation from the sale of hydrogen or ammonia-fueled engines
      and electrical power generation systems (“ gensets ”)
      for
      dedicated uses, such as airport ground support and irrigation pumping. We are,
      for example, currently working, in collaboration with Air Liquide and a number
      of other participants, to finalize an opportunity to sell some of our
      hydrogen-fueled engines for use in ground support vehicles at designated
      airports. Many airports are seeking clean-energy solutions for operation of
      ground support vehicles. We believe we are uniquely situated to meet the needs
      of this market. We have constructed the facility and developed the discipline
      necessary to enable us to build and sell approximately 700 high-quality engines
      over a period of 2.5 years. We have developed our own proprietary controller
      that enables our engines to run efficiently on hydrogen. Of the 14
      hydrogen-fueled engines we have sold with this controller, none have experienced
      controller failure in the field.





The
      accompanying condensed consolidated balance sheets as of March 31, 2008 and
      December 31, 2007 and the condensed consolidated statements of operations,
      and
      the condensed consolidated statements of cash flows for the quarters ended
      March
      31, 2008 and 2007 and for the period from inception (May 19, 2003) to March
      31,
      2008 respectively, consolidate the historical financial statements of the
      company with HEC Iowa after giving effect to the Merger where HEC Iowa is the
      accounting acquirer and after giving effect to the Private Offerings.




**Overview**





As
      a
      result of the Merger, we own all of the issued and outstanding shares of HEC
      Iowa and all of the issued and outstanding shares of Hydrogen Engine Center
      (HEC) Canada, Inc. HEC Iowa is a development stage company being built upon
      the
      vision of carbon-free, energy independence. On a step-by-step basis we are
      working to build engines and gensets that provide the ability to generate and
      use clean power on demand, where needed.





We
      have
      funded our operations from inception through March 31, 2008, through a series
      of
      financing transactions, including convertible loans and Private Offerings.
      In
      April 2008, we entered into a SEDA which provides us the opportunity to access
      additional capital in the maximum amount of Four Million Dollars ($4,000,000),
      subject to our obtaining an effective registration statement for shares of
      our
      Common Stock sold under the SEDA. We expect to access the SEDA in July 2008.
      We
      view the SEDA as a financial safety net and we do not intend to access the
      full
      amount that may become available to us unless alternative financing on terms
      deemed acceptable to the company is not available. See “Liquidity and Capital
      Resources - Terms of the SEDA” below.


18


**Results
      of Operations**





A
      summary
      statement of our operations, for the quarters ended March 31, 2008 and 2007
      and
      for the period from inception through March 31, 2008 follows:





**2008**
            
            **2007**
            
            **From Inception**
              **(May 19, 2003) to**
              **March 31, 2008**Revenues
            
            $
            161,685
            
            $
            238,290
            
            $
            1,224,388Cost
                of Sales
            
            
            150,367
            
            
            202,664
            
            
            1,072,151Gross
                Profit
            
            
            11,318
            
            
            35,626
            
            
            152,237Operating
                Expenses
            
            
            834,331
            
            
            1,767,304
            
            
            13,296,801Loss
                from Operations
            
            
            (823,013
            )
            
            (1,731,678
            )
            
            (13,144,564
            )Other
                Expense
            
            
            (36,030
            )
            
            (30,136
            )
            
            (220,157
            )Net
                Loss
            
            $
            (859,043
            )
            $
            (1,761,814
            )
            $
            (13,364,721
            )Series
                A Preferred Stock Beneficial Conversion Feature Accreted as a
                Dividend
            
            
            -
            
            $
            (1,889,063
            )
            $
            (1,889,063
            )Net
                Loss Available to Common Stockholders
            
            $
            (859,043
            )
            $
            (3,650,877
            )
            $
            (15,253,784
            )





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





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





**Revenues**





Revenues
      in the period ended March 31, 2008 totaled $161,685, a decrease of 32.15%
      compared to revenues of $238,290 in 2007. However we believe sales for the
      second quarter 2008 will show an increase compared to the second quarter of
      2007. For the period ended March 31, 2008 we realized $112, 013 from the sale
      of
      87 of our 4.9L remanufactured engines, $29,821 from the sale of three new 4.9L
      Oxx Power® engines and five new Oxx Power® power units and $19,851 from the sale
      of parts. For the period ended March 31, 2007 we realized $ 238,290 from the
      sale of eight Oxx Power® engines, thirty-three open power units and eighteen
      remanufactured engines. From inception to date we have realized revenues of
      $1,224,388.





We
      also
      derive income through business agreements for the development and/or
      commercialization of our hydrogen and ammonia products, which are not reflected
      in our revenue. We record income related to business agreements as a reduction
      in research and development expense. The expenses we incur are recorded as
      research and development costs. During the period ended March 31, 2008, we
      did
      not record a reduction in research and development expense resulting from
      business agreements. During the period ended March 31, 2007 we realized project
      reimbursements in the amount of $30,000 from delivery of one 50kW hydrogen
      genset.





**Cost
      of Sales and Gross Profit**





We
      realized gross profit on our revenues of approximately 7.0% in 2008 and
      approximately 15.0% in 2007. The decrease in gross profit is due primarily
      to a
      higher number of open power units sold in 2007 compared to 2008 and to a
      reduction in the price of our remanufactured engines. Our decision to reduce
      the
      price on our remanufactured engines was made in response to market conditions.
      We expect to continue to realize gross profit margins in this range as long
      as
      our primary sales are composed of traditional fueled engines. We expect our
      gross profit margins to increase as we increase our alternative fuel
      sales.


19


**Operating
      Expenses**





Our
      sales
      and marketing expenses for the periods ended March 31, 2008 and 2007 were
      $84,065 and $88,514, respectively and the total expense from inception to date
      (May 19, 2003) is $1,285,101. We continue our search for technically qualified
      sales personnel, who we feel are key to the success of our company. We expect
      to
      be more involved in the distributed generation market because of the tightening
      of governmentally imposed emission standards and the growing clean-energy
      solutions offered by our intellectual property. We also plan to aggressively
      market our carbon-reduced and carbon-freed products in 2008 and expect that
      our
      sales and marketing expense may increase as we pursue national and international
      sales opportunities for these products.





General
      and administrative expenses decreased from $823,422 for the three months ended
      March 31, 2007 to $ 570,904
      for the three months ended March 31, 2008. General and administrative expenses
      from inception (May 19, 2003) through March 31, 2008 were $7,042,312. Our
      general and administrative costs include payroll, employee benefits, stock-based
      compensation, and other costs associated with general and administrative costs
      such as investor relations, accounting and legal fees.





Our
      general and administrative expenses also include overhead and direct production
      expense related to pre-production costs, which costs, if we had reached
      production capacity, would be allocated to products manufactured. Expenses
      related to pre-production include salaries for production, personnel, purchasing
      costs and costs associated with production ramp up. Total pre-production
      expenses included in general and administrative expense for the periods ended
      March 31, 2008 and 2007 respectively, were $121,484 and $203,134. Pre-production
      expense from inception (May 19, 2003) through March 31, 2008 totaled $1,464,918.





We
      view
      our stock based compensation as a key tool that allows us to attract talented,
      experienced employees and directors without having to increase cash
      compensation. Although we have been able to preserve cash with this tool, we
      have recognized $138,005 in stock option and restricted stock expense for
      employees and directors in the three months ended March 31, 2008 and $136,089
      in
      stock option and restricted stock expense for the three months ended March
      31,
      2007. Total stock option compensation for employees and directors from inception
      (May 19, 2003) through March 31, 2008 was $1,512,424. Stock option expense
      is
      allocated among sales and marketing expense, general and administrative expense
      and research and development expense.





Since
      inception (May 19, 2003), we have accrued approximately $38,500 in accrued
      property taxes and approximately $40,678 in accrued program costs related to
      forgivable loans and grants from state and local government sponsored programs.
      These expenses have also been recorded as general and administrative expenses.
      Expenses related to forgivable loans and grants will continue to accrue until
      we
      meet certain criteria for job creation. If we can comply with the job creation
      criteria, these expenses would be recorded, at the time of forgiveness, as
      other
      income.




Costs
      related to research and development were $191,266 and $407,357 for the periods
      ended March 31, 2008 and 2007, respectively. Total expense for research and
      development expense from inception (May 19, 2003) to March 31, 2008 is
      $3,441,769. Management believes that, assuming receipt of additional capital,
      research and development expenses will increase during 2008. Research and
      development costs for 2008 are expected to include the cost of engine
      certification along with the cost of additional engine and generator
      development.





We
      recovered $11,904 during the period ended March 31, 2008 from previously
      recorded inventory write downs. During the period ended March 31, 2007 we
      recorded an expense of $448,011 to settle a dispute with a vendor. The
      settlement payment was made by issuing 375,000 warrants with a three year term
      and an exercise price of $2.00. The fair value of the warrants was calculated
      using the Black Scholes Option pricing formula.


20


**Loss
      from Operations**




We
      recorded a net loss of $859,043 for the three months ended March 31, 2008
      compared to a net loss of
      $1,761,814 for the
      three months ended March 31, 2007. We
      recorded net losses totaling $13,364,721 from inception (May 19, 2003) through
      March 31, 2008. We expect to continue to operate at a net loss during
      2008.




During
      the three months ended March 31, 2008 we did not recognize any stock dividends
      attributable to stockholders. During the three months ended March 31, 2007,
      we
      accreted a beneficial conversion dividend to the holders of Series A Preferred
      Stock of $1,889,063. The stock dividend, resulted in a net loss to common
      stockholders of $3,650,877 for the three months ended March 31, 2007 and did
      not
      have an affect on the net loss to common stockholders at March 31, 2008. We
      recorded net losses attributable to common stockholders totaling $15,253,784
      from inception (May 19, 2003) through March 31, 2008.





**Other
      Income (Expense)**




We
      had
      total interest income for the three months ended March 31, 2008 of $4,429 as
      compared to interest income received for the three months ended March 31, 2007
      of $11,501. We realized interest income from inception (May 19, 2003) to March
      31, 2008 of $168,481.





Interest
      expense for the three months ended March 31, 2008 was $40,459 and $41,637 for
      the three months ended March 31, 2007. Our interest expense from inception
      (May
      19, 2003) to March 31, 2008 totaled $381,904. We accrue interest expense related
      to forgivable loans and grants from state and local government sponsored
      programs. From inception (May 19, 2003) through March 31, 2008 we have accrued
      approximately $136,000 in accrued interest expense related to our forgivable
      loans and grants and will continue to accrue these expenses until we meet
      certain criteria for job creation. If we can comply with the job creation
      criteria, these amounts would be recorded, at the time of forgiveness, as other
      income.





**Critical
      Accounting Policies**




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





*Inventories*





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





*Warranty
      Reserve*





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





*Revenue
      Recognition*





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


Stock-based
      Compensation





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


21


*Stock-based
      Compensation*





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





**Liquidity
      and Capital Resources**





Operating
      Budget and Financing of Operations





With
      current cash and cash flow generated from operations we believe that we will
      have sufficient cash to cover operations through July, 2008. On March 24, 2008
      we secured a line of credit from a local bank in the amount of $250,000. On
      April 11, 2008, we entered into a Standby Equity Distribution Agreement with
      YA
      Global, which provides us the opportunity to access additional capital in the
      maximum amount of Four Million Dollars ($4,000,000) in increments not to exceed
      $350,000 each. We will have access to these funds over a two-year period
      beginning on the date on which the SEC first declares effective the registration
      statement to which this Prospectus is made a part, registering the resale of
      our
      shares by the YA Global. We plan to access the SEDA funds in August and will
      only access the SEDA funds thereafter to the extent necessary.





In
      addition to the above, we expect to secure an agreement to provide
      hydrogen-fueled engines for ground support vehicles at designated airports
      during the first half of 2008 and we continue to engage in discussions to secure
      a strategic banking relationship. We believe that the combination of these
      opportunities and potentials can provide needed cash flow to the company
      throughout 2008.





Going
      Concern





Our
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates our continuation of operations, realization
      of
      assets, and liquidation of liabilities in the ordinary course of business.
      Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses over the next several months. As of March 31, 2008,
      we had an accumulated deficit of approximately $15.3 million. Our accompanying
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.





We
      have
      financed our operations since inception primarily through equity and debt
      financings and loans from our officers, directors, and stockholders. Continuing
      our operations is dependent upon obtaining further financing. Although we expect
      to access necessary funds through the SEDA, there can be no assurance that
      we
      will successfully complete the registration required under the agreement, or
      that amounts accessed would be sufficient to satisfy our capital requirements.
      These conditions raise substantial doubt about our ability to continue as a
      going concern.





Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses in the foreseeable future. We have financed
      operations since inception primarily through equity and debt financings. We
      anticipate our expenses will increase as we continue to expand our operations.
      We had approximately $192,303 in cash, $79,195 in trade receivables and $139,833
      in trade payables at May 13, 2008. As of May 13, 2008, we had sales orders
      of
      approximately $250,000 (approximately $140,000 of which are scheduled to be
      delivered in May 2008) and an expected tax refund of approximately $30,000.
      We
      have a balance of $165,000 remaining on our bank line of credit. If we are
      unable to raise additional funds through the SEDA, we anticipate that our
      existing capital will fund operations through July 2008. These timeframes will
      vary either positively or negatively based on subsequent events.





Terms
      of the SEDA





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


22


We
      have
      paid $15,000 to YA Global as a structuring and due diligence fee and are
      obligated to issue $160,000 worth of stock at the earlier of the date of
      effectiveness of the registration statement to which this Prospectus is made
      a
      part or sixty (60) days from April 11, 2008 as a commitment fee under the SEDA.
      We are obligated to pay a monthly monitoring fee of $3,333 during the term
      of
      the SEDA. We may terminate the SEDA upon fifteen (15) trading days of prior
      notice to YA Global, as long as there are no Advances outstanding and we have
      paid to YA Global all amount then due. A copy of the SEDA is attached as Exhibit
      10.3 to the company’s Annual Report on Form 10-K as filed with the SEC on April
      15, 2008.





We
      have
      engaged Growth Energy Capital Advisors (GenCap) of Dallas, TX, an unaffiliated
      registered broker-dealer, to act as placement agent in connection with the
      SEDA.
      GenCap is entitled to receive a fee equal to seven percent (7%) of the gross
      proceeds of the SEDA and warrants to purchase a number of shares of Common
      Stock
      equal to five percent (5%) of the total number of shares issued under the SEDA
      (neither the warrants or shares of Common Stock issuable upon exercise of the
      warrants are being registered hereunder). If the company drew down on the entire
      Four Million Dollars ($4,000,000) available under the SEDA, GenCap would receive
      an aggregate placement fee equal to $280,000 plus warrants to purchase common
      stock.





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





**Cash
      Flow From Operations**





The
      following table depicts cash flow information for the periods ended March 31,
      2008 and 2007 and from inception (May 19, 2003) to March 31, 2008:





**From Inception****Three months ended March 31,**
            
            **(May 19, 2003) to****2008**
            
            **2007**
            
            **March 31, 2008**Net
                cash used in operating activities
            
            $
            (505,830
            )
            $
            (1,303,078
            )
            $
            (11,674,142
            )Net
                cash used in investing activities
            
            
            (1,297
            )
            
            (43,125
            )
            
            (3,092,633
            )Net
                cash provided by (used in) financing activities
            
            
            (40,058
            )
            
            515,244
            
            
            14,936,291





Net
      cash
      used in operating activities were $505,830 during the three months ended March
      31, 2008 compared to $1,303,078 during the same period in 2007, which
      constitutes a decrease of $797,248. The decrease is primarily the result of
      a
      decrease in inventory purchasing activity and efforts to reduce our operating
      expenses. From inception (May 19, 2003) through March 31, 2008 we have used
      $11,674,142 to fund our operating activities.





At
      March
      31, 2008 we had cash on hand of $161,578 compared to cash on hand of $317,064
      at
      March 31, 2007, compared to $713,289 at December 31, 2007.





Cash
      Flow Used in Investing Activities




Net
      cash
      used in investing activities for the three months ended March 31, 2008 was
      approximately $1,297 compared to $43,125 for the three months ended March 31,
      2007. The decrease is a result of a decrease in purchases of property and
      equipment. We have used $3,092,633 for the purchase of property and equipment
      from inception (May 19, 2003) through March 31, 2008.


23


Cash
      Flow From Financing Activities





Net
      cash
      used to pay short term and long term debt during the three months ended March
      31, 2008 and 2007, respectively was $40,058 and $13,756. We did not receive
      any
      proceeds from borrowings or private placements during the three months ended
      March 31, 2008. During the period ended March 31, 2007, we borrowed $250,000
      and
      raised $279,000 from private placements.





During
      the three months ended March 31, 2008, we renewed our note with Farmers State
      Bank in the principal amount of $591,956. In addition, on March 24, 2008, we
      obtained a line of credit with Iowa State Bank in the amount of $250,000. As
      of
      May 13, 2008, we have drawn $85,000 from this line of credit.





At
      March
      31, 2008 we had total assets of $5,258,857 and stockholders equity of $2,665,876
      compared to total assets of $5,985,477 and stockholders’ equity of $3,381,158 at
      December 31, 2007.





**Plan
      of Operation**





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





We
      expect
      to continue our efforts to raise additional capital resources during 2008.
      We
      anticipate that increased sales of our products could commence for calendar
      year
      2008, subject to timely receipt of quality parts from suppliers and receipt
      of
      anticipated purchase orders, which may add to cash reserves. We are currently
      exploring a variety of opportunities to obtain additional capital. There is
      no
      assurance that we will be able to raise the necessary capital or that the
      capital, if available, will be available on terms that will be acceptable to
      us.





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





In
      the
      event that we are unable to obtain debt or equity financing or we are unable
      to
      obtain financing on terms and conditions that are acceptable to us, we may
      have
      to cease or severely curtail our operations. These factors raise substantial
      doubt about our ability to continue as a going concern. So far, we have been
      able to raise the capital necessary to reach this stage of product development
      and have been able to obtain funding for operating requirements, but there
      can
      be no assurance that we will be able to continue to do so.





We
      believe that the manufacture and sale of our current Oxx Power® engines, open
      power units and gensets are merely the first steps toward our vision of a
      carbon-free, energy independent future. We have not received the amount of
      capital we anticipated receiving from investors to date. We have also
      experienced delays in the receipt of quality parts for our engines and we have
      experienced delays in initiating the certification process of our engines.
      Our
      long-term vision has been focused around three market segments: fuel delivery
      and controls, by-product gas, and renewables. Capital constraints have delayed
      our efforts to commercialize our intellectual property. However, we anticipate
      that revenue from these sources will continue to help support our continuing
      operations and assist with funding for our research and development
      efforts.





Our
      basic
      business plan is based upon the development of our intellectual property and
      the
      commercialization of our technologies. We currently have nine patents pending
      and expect to file several more during the next several months. In May 2008
      we
      were notified that our application for a patent on a *Precision
      Hi-speed Generator Alignment Fixture* has been
      allowed.





In
      the
      event that we are unable to obtain debt or equity financing or we are unable
      to
      obtain financing on terms and conditions that are acceptable to us, we will
      not
      be able to attain our goals and we may have to cease or severely curtail our
      operations. These factors raise substantial doubt about our ability to continue
      as a going concern. So far, we have been able to raise the capital necessary
      to
      reach this stage of product development and have been able to obtain funding
      for
      operating requirements and for construction of our manufacturing facilities,
      but
      there can be no assurance that we will be able to continue to do
      so.





We
      do not
      anticipate expanding our manufacturing facilities in 2008. We anticipate our
      capital expenditures for 2008 will be approximately $500,000, subject to
      sufficient capital from anticipated financing.


24


We
      believe we will have expenditures of up to $500,000 in 2008 to certify the
      4.9L
      engine. This testing procedure will be an expense of research and development.
      We anticipate that our research and development costs could be approximately
      $1
      million (including this certification process) in 2008, subject to sufficient
      capital from anticipated financing.





**Grants
      and Government Programs**





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





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





The
      CEBA
      and PIAP programs provide that the loan amounts will be forgiven if we meet
      certain requirements, including the creation of 49 jobs in Iowa by July 2010.
      As
      of March 31, 2008, we had 17 employees in Iowa. We are accruing interest on
      these loans until we meet the terms.





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





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




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




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




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




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




In
      order
      to receive these benefits, we must meet a number of requirements, including
      the
      creation of 59 new full-time equivalent jobs at the company’s headquarters by
      June 28, 2008. We will not meet this requirement and are in discussions with
      the
      department about possible alternatives. We estimate that the amount due to
      the
      department if we are unable to negotiate more favorable terms would be
      approximately $103,000.





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





**Employees**





We
      currently have 20 employees, 17 of whom are in Algona, Iowa and 3 of whom are
      in
      Canada. We plan to maintain lean staffing and will only add key skill sets
      as
      required – mainly in the technical and sales disciplines.


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**Inflation**





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





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements.


26


**ITEM
      4T. CONTROLS AND PROCEDURES**





EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES.





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





CHANGES
      IN INTERNAL CONTROLS OVER FINANCIAL REPORTING





As
      of the
      date of this report, management has initiated efforts to define, publish and
      implement policies and procedures in key areas related to its internal controls
      and financial reporting.  Management has enhanced its review and approval
      procedures in the first quarter of 2008 to include accounting reviews as it
      pertains to stock conversions. Management will provide education in this area
      and will have future conversions reviewed by an external subject matter
      expert.





Except
      as
      described above, there has been no change in our internal control over financial
      reporting (as defined in Rule 13a-15(f) under the exchange act) that occurred
      in
      the first quarter ended March 31, 2008 that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.


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**PART
      II OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





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





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





During
      the quarter ended March 31, 2008, we granted options to purchase 20,000 shares
      to a director and options to purchase 30,000 shares to a consultant under the
      company’s 2005 Incentive Compensation Plan, with exercise prices of $0.40 -
      $0.50 per share. Further information about awards under the 2005 Incentive
      Compensation Plan is included in our Annual Report on Form 10-KSB filed with
      the
      Commission on April 15, 2008, which report is incorporated herein by reference.


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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-K, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002, by Donald C. Vanderbrook,
                the company's Chief Executive Officer.31.2
            
            Certification
                pursuant to Item 601(b) (31) of Regulation S-K, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002, by Sandra Batt, the
                company's Chief Financial Officer.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 Donald C. Vanderbrook, the company's
                Chief Executive Officer.32.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002, by Sandra Batt, the company's Chief
                Financial Officer.










**NOTES
      ABOUT FORWARD-LOOKING STATEMENTS**





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


29


**SIGNATURES**





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





**HYDROGEN ENGINE CENTER, INC.**Date:
                May 20, 2008
            By
            /s/Donald
                C. VanderbrookDonald C. VanderbrookPresident and Chief Executive OfficerDate:
                May 20, 2008
            By
            /s/Sandra
                BattSandra BattChief Financial Officer




30