**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 June 30, 2008**





o
            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
              of
                incorporation)
            (IRS
                Employer
              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 July 15, 2008**Common
            
            29,909,577













**FORM
      10-Q**




**TABLE
      OF CONTENTS**





Page**PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Condensed
                Consolidated Financial Statements
            
            1Condensed
                Consolidated Balance Sheets as of June 30, 2008 (unaudited)
              and
                December 31, 2007
            
            1Condensed
                Consolidated Statements of Operations for the Six Months and
              Three
                Months Ended June 30, 2008 and 2007 and the period from inception
              (May
                19, 2003) through June 30, 2008 (unaudited)
            
            3Condensed
                Consolidated Statements of Cash Flows for the Six Months and
              Three
                Months Ended June 30, 2008 and 2007 and the period from inception
              (May
                19, 2003) through June 30, 2008 (unaudited)
            
            4Notes
                to Consolidated Financial Statements (unaudited)
            
            6Item
                2.
            Management's
                Discussion and Analysis of Financial Condition
              and
                Results of Operations
            
            17Item
                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
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            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
 
 **June
                  30,**
              
              **December
                  31,****ASSETS**
              
              **2008**
              
              **2007****(Unaudited)****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              132,340
              
              $
              713,289Restricted
                  cash
              
              
              -
              
              
              115,157Accounts
                  receivable
              
              
              201,867
              
              
              134,237Inventories
              
              
              1,385,006
              
              
              1,655,359Prepaid
                  expenses
              
              
              263,003
              
              
              89,901Total
                  current assets
              
              
              1,982,216
              
              
              2,707,943**Property,
                  Plant and Equipment**Building
              
              
              2,271,209
              
              
              2,271,209Equipment
              
              
              899,620
              
              
              908,999Land
                  and improvements
              
              
              472,504
              
              
              472,5043,643,333
              
              
              3,652,712Less
                  accumulated depreciation
              
              
              494,591
              
              
              375,178Net
                  property and equipment
              
              
              3,148,742
              
              
              3,277,534**Total
                  Assets**
              
              $
              5,130,958
              
              $
              5,985,477
  See
        accompanying notes
 1
 
 **HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**
 (a
        corporation in the development stage)
 
 Condensed
        Consolidated Balance Sheets
 
 **June
                  30,**
              
              **December
                  31,****LIABILITIES
                  AND EQUITY**
              
              **2008**
              
              **2007****(Unaudited)****Current
                  Liabilities**Notes
                  payable, banks
              
              $
              1,347,436
              
              $
              594,677Current
                  portion long-term debt
              
              
              24,171
              
              
              30,350Current
                  installments of obligation under capital lease
              
              
              48,071
              
              
              45,247Accounts
                  payable
              
              
              256,360
              
              
              146,585Accrued
                  expenses
              
              
              279,642
              
              
              207,328Accrued
                  interest
              
              
              155,073
              
              
              129,965Unearned
                  grants
              
              
              18,773
              
              
              30,977Total
                  current liabilities
              
              
              2,129,526
              
              
              1,185,129**Long-term
                  debt, net of current maturities**
              
              
              731,848
              
              
              1,338,235**Obligation
                  under capital lease, excluding current
                  installments**
              
              
              56,192
              
              
              80,955788,040
              
              
              1,419,190Total
                  liabilities
              
              
              2,917,566
              
              
              2,604,319**Commitments
                  and Contingencies****Stockholders'
                  Equity**Preferred
                  stock - Series B, $0.001 par value; 5,000,000 shares
                  authorized,-0-
                  shares issued and outstanding
              
              
              -
              
              
              1,933Common
                  stock, $0.001 par value; 100,000,000 shares authorized,29,909,577
                  shares issued and outstanding
              
              
              29,910
              
              
              27,590Additional
                  paid-in capital
              
              
              16,241,091
              
              
              15,860,725Accumulated
                  other comprehensive loss - foreign currency
              
              
              (6,486
              )
              
              (3,412
              )Deficit
                  accumulated during the development stage
              
              
              (14,051,123
              )
              
              (12,505,678
              )Total
                  stockholders' equity
              
              
              2,213,392
              
              
              3,381,158**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              5,130,958
              
              $
              5,985,477
  See
        accompanying notes
 2
 
 **HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**
 (a
        corporation in the development stage)
 
 Condensed
        Consolidated Statements of Operations
  **Three
                  months ended**
              
              **Six
                  months ended**
              
              **From
                  Inception****June
                  30,**
              
              **June
                  30,**
              
              **(May
                  19, 2003) to****2008**
              
              **2007**
              
              **2008**
              
              **2007**
              
              **June
                  30, 2008****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)****Sales**
              
              $
              359,772
              
              $
              203,383
              
              $
              521,457
              
              $
              441,673
              
              $
              1,584,160**Cost
                  of Goods Sold**Material,
                  labor, and overhead
              
              
              331,860
              
              
              170,180
              
              
              482,227
              
              
              372,844
              
              
              1,404,011Inventory
                  markdown (recovery)
              
              
              (78,669
              )
              
              -
              
              
              (90,573
              )
              
              -
              
              
              871,450253,191
              
              
              170,180
              
              
              391,654
              
              
              372,844
              
              
              2,275,461**Gross
                  Profit (Loss)**
              
              
              106,581
              
              
              33,203
              
              
              129,803
              
              
              68,829
              
              
              (691,301
              )**Operating
                  Expenses**Sales
                  and marketing
              
              
              50,491
              
              
              78,234
              
              
              134,556
              
              
              166,748
              
              
              1,335,592General
                  and administrative
              
              
              497,132
              
              
              717,739
              
              
              1,068,036
              
              
              1,541,160
              
              
              7,539,444Research
                  and development
              
              
              215,408
              
              
              338,097
              
              
              406,674
              
              
              745,454
              
              
              3,657,177Vendor
                  settlement
              
              
              -
              
              
              -
              
              
              -
              
              
              448,011
              
              
              577,500763,031
              
              
              1,134,070
              
              
              1,609,266
              
              
              2,901,373
              
              
              13,109,713**Operating
                  Loss**
              
              
              (656,450
              )
              
              (1,100,867
              )
              
              (1,479,463
              )
              
              (2,832,544
              )
              
              (13,801,014
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              2,214
              
              
              24,245
              
              
              6,643
              
              
              35,746
              
              
              170,695Interest
                  expense
              
              
              (32,166
              )
              
              (44,601
              )
              
              (72,625
              )
              
              (86,239
              )
              
              (414,070
              )Loss
                  on disposals of assets
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,734
              )(29,952
              )
              
              (20,356
              )
              
              (65,982
              )
              
              (50,493
              )
              
              (250,109
              )**Net
                  Loss**
              
              $
              (686,402
              )
              $
              (1,121,223
              )
              $
              (1,545,445
              )
              $
              (2,883,037
              )
              $
              (14,051,123
              )Series
                  A Preferred stock beneficial conversionfeature
                  accreted as a dividend
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (1,889,063
              )
              $
              (1,889,063
              )**Net
                  Loss Attributable To****Common
                  Stockholders**
              
              $
              (686,402
              )
              $
              (1,121,223
              )
              $
              (1,545,445
              )
              $
              (4,772,100
              )
              $
              (15,940,186
              )**Weighted
                  -average shares outstanding**
              
              
              28,320,350
              
              
              25,737,648
              
              
              27,953,240
              
              
              25,737,648**Basic
                  and diuluted net loss per share**
              
              
              (0.02
              )
              
              (0.04
              )
              
              (0.06
              )
              
              (0.19
              )
  See
        accompanying notes
 3
 
 **HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**
 (a
        corporation in the development stage)
 
 Condensed
        Consolidated Statements of Cash Flows
 
 **Three
                  Months Ended**
              
              **Six
                  Months Ended**
              
              **From
                  Inception****June
                  30,**
              
              **June
                  30,**
              
              **(May
                  19, 2003) to****2008**
              
              **2007**
              
              **2008**
              
              **2007**
              
              **June
                  30, 2008****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)****Operating
                  Activities**Net
                  loss
              
              $
              (686,402
              )
              $
              (1,121,223
              )
              $
              (1,545,445
              )
              $
              (2,883,037
              )
              $
              (14,051,123
              )Adjustments
                  to reconcile net loss to net cash used in operations:Depreciation
              
              
              63,306
              
              
              61,294
              
              
              129,021
              
              
              118,507
              
              
              555,864Compensation
                  to directors and employees of stock options and restricted
                  stock
              
              
              70,041
              
              
              188,947
              
              
              208,046
              
              
              325,036
              
              
              1,582,465Compensation
                  to consultants of stock options
              
              
              2,425
              
              
              2,463
              
              
              12,707
              
              
              4,925
              
              
              199,517Warrants
                  issued in vendor dispute
              
              
              -
              
              
              577,500
              
              
              -
              
              
              577,500
              
              
              577,500Loss
                  on sale of assets
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,734Change
                  in assets and liabilities:Accounts
                  receivable
              
              
              (89,732
              )
              
              153,632
              
              
              (67,630
              )
              
              68,457
              
              
              (201,867
              )Inventories
              
              
              193,079
              
              
              28,875
              
              
              270,353
              
              
              (333,342
              )
              
              (1,363,941
              )Prepaid
                  expenses
              
              
              (24,217
              )
              
              90,030
              
              
              (13,102
              )
              
              (7,210
              )
              
              (124,460
              )Accounts
                  payable
              
              
              100,153
              
              
              (466,413
              )
              
              109,775
              
              
              (328,278
              )
              
              340,216Accrued
                  expenses
              
              
              57,678
              
              
              (586,194
              )
              
              72,314
              
              
              91,759
              
              
              325,880Accrued
                  interest
              
              
              13,853
              
              
              -
              
              
              25,108
              
              
              -
              
              
              155,073Unearned
                  grants
              
              
              (5,411
              )
              
              (9,308
              )
              
              (12,204
              )
              
              (17,792
              )
              
              18,773Net
                  cash used in operating activities
              
              
              (305,227
              )
              
              (1,080,397
              )
              
              (811,057
              )
              
              (2,383,475
              )
              
              (11,979,369
              )**Investing
                  Activities**Withdrawal/(Deposit)
                  of restricted cash
              
              
              116,454
              
              
              (3,977
              )
              
              115,157
              
              
              (7,825
              )
              
              -Proceeds
                  from sale of assets
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              36,500Purchases
                  of property, plant, and equipment
              
              
              (229
              )
              
              (62,762
              )
              
              (229
              )
              
              (102,039
              )
              
              (3,012,908
              )Net
                  cash provided by (used in) investing activities
              
              
              116,225
              
              
              (66,739
              )
              
              114,928
              
              
              (109,864
              )
              
              (2,976,408
              )**Financing
                  Activities**Proceeds
                  from note payable, bank
              
              
              196,000
              
              
              -
              
              
              196,000
              
              
              250,000
              
              
              2,035,420Payments
                  on note payable, bank
              
              
              (17,455
              )
              
              (2,975
              )
              
              (32,086
              )
              
              (5,258
              )
              
              (945,229
              )Proceeds
                  from long-term debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,172,052Payments
                  on long-term debt
              
              
              (20,233
              )
              
              (22,165
              )
              
              (45,660
              )
              
              (33,638
              )
              
              (189,556
              )Proceeds
                  from exercise of stock option
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,000Issuance
                  of preferred stock (Series A) in private placement, net of
                  expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,779,813Issuance
                  of preferred stock (Series B) in private placement, net of
                  expenses
              
              
              -
              
              
              3,316,095
              
              
              -
              
              
              3,595,095
              
              
              3,595,095Issuance
                  of common stock in private placements, net of expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,639,008Net
                  cash provided by financing activities
              
              
              158,312
              
              
              3,290,955
              
              
              118,254
              
              
              3,806,199
              
              
              15,094,603**Effect
                  of Exchange Rates on Cash and Cash Equivalents**
              
              
              1,452
              
              
              (5,961
              )
              
              (3,074
              )
              
              (7,145
              )
              
              (6,486
              )**Net
                  Increase (Decrease) in Cash and Cash Equivalents**
              
              
              (29,238
              )
              
              2,137,858
              
              
              (580,949
              )
              
              1,305,715
              
              
              132,340**Cash
                  and Cash Equivalents - Beginning of Period**
              
              
              161,578
              
              
              317,064
              
              
              713,289
              
              
              1,149,207
              
              
              -**Cash
                  and Cash Equivalents - End of Period**
              
              $
              132,340
              
              $
              2,454,922
              
              $
              132,340
              
              $
              2,454,922
              
              $
              132,340
 
 -Continued-
  See
      accompanying notes  4
 
 **HYDROGEN
        ENGINE CENTER, INC. AND SUBSIDIARIES**
 (a
        corporation in the development stage)
 
 Condensed
        Consolidated Statements of Cash Flows
 
 
 -Continued-
 **Three
                  months ended**
              
              **Six
                  months ended**
              
              **From
                  Inception****June
                  30,**
              
              **June
                  30,**
              
              **(May
                  19, 2003) to****2008**
              
              **2007**
              
              **2008**
              
              **2007**
              
              **June
                  30, 2008****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)****Supplemental
                  Cash Flow Information**Interest
                  paid
              
              $
              18,313
              
              $
              66,457
              
              $
              47,517
              
              $
              80,370
              
              $
              258,807**Supplemental
                  Disclosures of Noncash****Investing
                  and Financing Activities**Additional
                  paid-in capital contributionfor
                  expenses paid by founder
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              103,636Issuance
                  of common stock for equipment
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              47,851Issuance
                  of common stock forconversion
                  of debt
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              557,051Acquistion
                  of property, plant, and equipmentthrough
                  financing
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              111,450
              
              $
              692,081Payables
                  for construction in progress
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              232,208Receivable
                  for state loan
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              100,000Conversion
                  of Preferred Stock for Series A
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              1,511Series
                    A Preferred stock beneficial conversion featureaccreted as a
                    dividend
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              1,889,063
              
              $
              1,889,063Conversion
                  of Preferred Stock for Series B
              
              $
              1,933
              
              $
              -
              
              $
              1,933
              
              $
              -
              
              $
              1,933Issuance
                  of common stock for financing commitment fee
              
              $
              160,000
              
              $
              -
              
              $
              160,000
              
              $
              -
              
              $
              160,000
  See
        accompanying notes


5


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


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


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      30, 2008**





**1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Overview
      of Companies*





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





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





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





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





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





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





*Interim
      Financial Statements*





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





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





*Principles
      of Consolidation*





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




6





*Liquidity
      and Going Concern*





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





Since
      inception, we have invested in the resources and technology we believe necessary
      to deliver carbon free energy technology. As such, we have incurred substantial
      operating losses. We expect to incur operating losses in 2008. We have financed
      all development, sales and operations since inception through equity and debt
      financings. Our engine sales are beginning to increase steadily and we have
      reduced our monthly cash expenditures. On April 11, 2008, we entered into a
      Standby Equity Distribution Agreement (“SEDA”) to sell up to a maximum of
      $4,000,000 in equity securities over twenty-four months to an investor. The
      agreement requires that we register stock prior to receiving any funds and
      subject to certain limitations, allows us to issue shares under the SEDA
      periodically in amounts not to exceed $350,000 at one time. The per share price
      for shares issued under the SEDA will be dependent upon the market value of
      our
      stock at the time of funding. Our registration statement covering 4,054,541
      of
      such equity securities, filed on May 20, 2008, was declared effective by the
      Securities and Exchange Commission on August 5, 2008. We plan to begin accessing
      the SEDA funds in August and will only access the SEDA funds to the extent
      necessary. In addition, we expect to secure an agreement to provide
      hydrogen-fueled engines for ground support vehicles at designated airports
      in
      the third or fourth quarter of 2008 and we continue to engage in discussions
      to
      secure a strategic banking relationship. We also expect to secure agreements
      to
      provide hydrogen generators that will provide one megawatt of power. We are
      pursuing research and development grants and strategic development partners.
      We
      believe that the combination of these opportunities and potentials can provide
      needed cash flow to our operations for at least the next twelve months; however
      there are no assurances that anticipated sales will occur in the timeframe
      we
      anticipate, which would have a negative adverse effect on our operations and
      would accelerate the need for additional funding. However, we are currently
      dependent on the capital we draw from the SEDA and continued renewal of existing
      debt arrangements to fund our involvement in new research and development
      projects and sustain our operations.





*Fair
      Value of Financial Instruments*





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





*Inventories*





Inventories
      consist mainly of parts, work-in-process and finished goods that are stated
      at
      the lower of cost (determined by the first-in, first out method) or market
      value
      (Note 3). We follow the provisions of Statements of Financial Accounting
      Standards (“SFAS”) 151, “Inventory Costs” that amends the guidance in Accounting
      Research Bulletin No. 43, Chapter 4, “Inventory Pricing” (ARB No. 43). Under
      this guidance, we allocate fixed production overhead to inventory based on
      the
      normal capacity of the production facilities, any expense incurred as a result
      of idle facility expense, freight and handling costs are expensed as period
      costs. For the three months and six months ended June 30, 2008 we allocated
      approximately $7,000 and $11,000, respectively, of overhead to inventory and
      approximately $56,400 of overhead to inventory from inception (May 19, 2003)
      to
      June 30, 2008. For the three months and six months ended June 30, 2007 we
      allocated approximately $4,500 and $9,500, respectively, 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.





7





*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 six months
      ended June 30, 2008, we did not receive income from business agreements and
      therefore did not record a reduction in research and development expense
      resulting from such agreements. From inception (May 19, 2003) to June 30, 2008,
      we recorded $273,913, as a reduction in research and development expense.





*General
      and Administrative Costs*





General
      and administrative costs include payroll, employee benefits, stock-based
      compensation, and other costs associated with general and administrative costs
      including administrative personnel, professional fees, consulting fees and
      office expense. We allocate overhead and direct production expense to products
      manufactured. However, because we have not reached our production capacity,
      excess manufacturing costs are expensed as incurred as general and
      administrative costs. Expenses related to pre-production include salaries for
      production personnel, purchasing costs and the costs associated with production
      ramp up. Total pre-production costs included in general and administrative
      expenses for the three months and six months ending June 30, 2008 totaled
      $101,538 and $223,022, respectively. For the period from inception (May 19,
      2003) to June 30, 2008 pre-production expense was $1,687,940.





*Research
      and Development Costs*





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





*Stock-Based
      Compensation*





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





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





SFAS
      123R
      requires the use of a valuation model (Note 9), 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 123. As permitted by SFAS 123, we chose to follow APB
      No. 25 and related interpretations for our employee stock-based compensation.
      Under APB No. 25, no compensation expense was recognized at the time of option
      grant if the exercise price of the employee stock option is fixed and equals
      or
      exceeds the fair value of the underlying common stock on the date of grant
      and
      the number of shares to be issued pursuant to the exercise of such option are
      known and fixed at the date of grant. We use the fair value of common stock
      at
      the close of business on the date the option is approved by our Board of
      Directors.




8





We
      account for options issued to non-employees (other than directors) under SFAS
      123R and Emerging Issues Task Force (‘EITF’) No. 96-18, “Accounting for Equity
      Instruments that are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling, Goods, or Services.” Therefore, the fair value of
      options issued to non-employees, as calculated, using the Black Scholes Option
      pricing formula (Note 9), is recorded as an expense over the vesting terms.
      Options issued to non-employees and employees are issued using the same
      methodology and assumptions.





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





**Period
                from Inception**
              **(May
                19, 2003) to**
              **June
                30, 2008**Net
                loss attributable to common shareholders, as reported
            
            $
            (15,940,186
            )Add:
                options and restricted stock-based employee compensationexpense
                included in reported net loss attributable to common
                shareholders
            
            
            1,582,465Deduct:
                options and restricted stock-based employee compensationexpense
                determined under fair value based method
            
            
            (1,768,267
            )Pro
                forma net loss attributable to common shareholders
            
            $
            (16,125,988
            )





Total
      employee non-cash stock compensation expense, net of forfeitures, for the three
      months and six months ended June 30, 2008 was $70,041 and $208,046.





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 9).





*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.




9




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




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





**2.
      FAIR VALUE INSTRUMENTS**




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




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




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




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




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




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




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****June
                30, 2008**
            
            **June
                30, 2008**
            
            **Level
                1**
            
            **Level
                2**
            
            **Level
                3**Money
                Market Funds
            
            $
            67,537
            
            $
            67,537
            
            $
            67,537
            
            $
            -
            
            $
            -





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 June 30, 2008, we did not elect
      such option for our financial instruments and liabilities.




10





**3.
      INVENTORIES**





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





**June
                30,**
              **2008**
            
            **December
                31,**
              **2007****(unaudited)**Component
                parts
            
            $
            1,119,959
            
            $
            1,266,612Work
                in process
            
            
            13,608
            
            
            10,407Finished
                goods
            
            
            251,439
            
            
            378,340Totals
            
            $
            1,385,006
            
            $
            1,655,359





**4.
      NOTES PAYABLE, BANK**





On
      December 10, 2007 we renewed a note with a bank for $561,304. This note matures
      on December 15, 2008, and carries a variable interest rate equal to prime.
      At
      June 30, 2008, the balance on the note is $551,466 and the note bears an
      interest rate of 5.0% with monthly interest and principal payments of $4,484
      until maturity. The loan is secured by real estate.





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





On
      March
      24, 2008, we obtained a line of credit from a bank for $250,000. The line of
      credit is secured by real estate and a business security agreement and was
      originally contracted to expire August 1, 2008. On July 21, 2008, the expiration
      date on this note was extended to December 1, 2008. The line of credit carries
      a
      variable interest rate equal to 1.5% above prime. At June 30, 2008 the balance
      on the line of credit was $196,000 and carried an interest rate of 6.50%.





On
      March
      27, 2008, we renewed a note with a bank for $591,956. The balance of this note
      on June 30, 2008 was $588,845. This note matures on April 1, 2009, and carries
      a
      variable interest rate equal to prime. At June 30, 2008, the interest rate
      on
      the note was 5.0% and requires monthly interest and principal payments of
      $4,340. The loan is secured by real estate.





**5.
      LONG-TERM DEBT**





Long-term
      debt consists of the following:




**June
                30,**
              **2008**
            
            **December
                31,**
              **2007****(unaudited)**Note
                payable to City of Algona. See (a)
            
            $
            150,000
            
            $
            160,000Note
                payable to Algona Area Economic Development Corporation. See (b)
            
            
            146,124
            
            
            146,124Note
                payable to Algona Area Economic Development Corporation. See
                (c)
            
            
            59,895
            
            
            61,827Notes
                payable to Iowa Department of Economic Development. See (d)
            
            
            400,000
            
            
            400,000Note
                payable to finance company. See (e)
            
            
            -
            
            
            6,388Note
                payable to bank. See (f)
            
            
            -
            
            
            594,246756,019
            
            
            1,368,585Less
                amounts due within one year
            
            
            24,171
            
            
            30,350Totals
            
            $
            731,848
            
            $
            1,338,235





11




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





2009
            
            $
            12,2342010
            
            
            169,5622011
            
            
            200,3302012
            
            
            148,800Thereafter
            
            
            200,922Total
                long-term debt
            
            $
            731,848





(a)
      In
      September 2005, we obtained $200,000 from the City of Algona. The note requires
      quarterly payments of $5,000 starting January 1, 2006, with the final payment
      due October 1, 2015. There is no interest on this loan provided we create 42
      new
      full-time positions within two years of the agreement. On June 16, 2008, we
      signed an amended agreement to extend the time requirement for job creation
      until July 31, 2010. If job creation requirements are not met, interest on
      the
      loan will be payable at 10% per annum. At this time the requirements have not
      been met. Therefore, as of June 30, 2008, we have accrued interest on the note
      in the amount of $49,734. 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.





At
      this
      time the requirements have not been met. Therefore, as of June 30, 2008, we
      have
      accrued interest in the amount of $35,198. 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 June 30, 2008, the total amount of interest accrued was
      $23,227. 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 June 30, 2008 was $38,712.
      The
      note is secured by a security agreement on our assets.




12





At
                June 30, 2008 we have created 14 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 June 30, 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 June 30, 2008 was $588,845 and at June 30, 2008 was included in notes
      payable, bank (Note 5). This note matures on April 1, 2009, and carries a
      variable interest rate equal to the Wall Street Journal U.S. Prime Rate. At
      June
      30, 2008, the interest rate on the note was 5% and requires monthly interest
      and
      principal payments of $4,340. The loan is secured by real estate. The entire
      remaining balance at June 30, 2008 is due within one year and considered
      current.




**6.
      CAPITALIZED LEASES**





We
      have
      entered into three capital lease agreements, to purchase equipment with a net
      book value of $120,065 at June 30, 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 June 30, 2008:





2008
            
            $
            28,7252009
            
            
            57,4482010
            
            
            19,8892011
            
            
            11,5862012
            
            
            635Total
                minimum lease payments
            
            
            118,283Less
                amount representing interest
            
            
            14,020Present
                value of minimum lease payments
            
            
            104,263Less
                amounts due within one year
            
            
            48,071Totals
            
            $
            56,192





**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.




13





At
      June
      30, 2008, we had not met all of our obligations for the EZ agreement and we
      have
      determined that we will probably not meet all of the requirements of this
      agreement. We have recorded most of the benefits we have received from this
      program as liabilities estimated to be $116,000. We have notified IDED of our
      inability to meet our job creation obligations and we are in the process of
      providing them with essential information so that the amount due and timing
      of
      the repayments can be determined.





**8.**  **COMMON
      STOCK**





On
      May
      31, 2008, 1,932,846 shares of Series B Preferred Stock were converted into
      1,932,846 shares of common stock per the terms of the private placement offering
      dated March 13, 2007. All shares of Series A Preferred Stock were converted
      to
      common stock during 2007.





On
      June
      17, 2008, we issued 386,567 shares of common stock at a price of $.4139 to
      satisfy our obligation for a Commitment Fee under the Standby Equity
      Distribution Agreement (SEDA) entered into with an investor. The stock price
      was
      determined by using the lowest daily Volume Weighted Average Price (“VWAP”), as
      reported by Bloomberg, of the common stock on June 10, 2008. As of June 30,
      2008, we had 29,909,577 shares of Common Stock issued and
      outstanding.





**9.**  **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 June 30, 2008, there were 783,084 shares available for grant
      and 1,216,916 shares granted. Of the shares granted, 361,000 were granted as
      restricted stock, 231,666 were granted as non-employee stock options, and
      624,250 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 since
      September 2005.





**Period
                from Inception****For
                the three months ending**
              **June
                30,**
            
            **For
                the six months ending**
              **June
                30,**
            
            **(May
                19, 2003)**
              **to****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **June
                30, 2008**Risk-free
                interest rate
            
            
            -
            %
            
            4.9
            %
            
            3.6
            %
            
            4.7
            %
            
            4.2
            %Expected
                volatility
            
            
            -
            %
            
            99.5
            %
            
            81.0
            %
            
            100.4
            %
            
            155.5
            %Expected
                life (in years)
            
            
            -
            
            
            5.5
            
            
            4.0
            
            
            5.5
            
            
            7.9Dividend
                yield
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Weighted-average
                estimated fair value of options granted during the period
            
            $
            -
            
            $
            1.34
            
            $
            .27
            
            $
            2.08
            
            $
            1.73





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




14




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





**Options
                Outstanding****Number
                of Shares**
            
            **Weighted-Average
                Exercise Price**
            
            **Weighted-Average
                Remaining Contractual Term**
              **(in
                years)**
            
            **Aggregate
                Intrinsic Value**
              **(1)**Balance
                at December 31, 2007
            
            
            884,916
            
            $
            1.16Granted
            
            
            50,000
            
            $
            .46Forfeited
            
            
            (87,000
            )
            $
            1.34Balance
                at June 30, 2008
            
            
            847,916
            
            $
            1.10
            
            
            3.86
            
            $
            0Vested
                and exercisable as
              of
                June 30, 2008
            
            
            649,916
            
            $
            1.06
            
            
            2.66
            
            $
            0Vested
                and expected to vest as
              of
                June 30, 2008
            
            
            812,779
            
            $
            1.09
            
            
            3.75
            
            $
            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 $0.47 on June 30, 2008, the last day of
                trading
                in June.





There
      were no stock options exercised during the six months ending June 30, 2008.





As
      of
      June 30, 2008, there was approximately $507,697 of unrecognized compensation
      cost related to outstanding stock options, net of forecasted forfeitures. This
      amount is expected to be recognized over a weighted-average period of 2.16
      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 six months ended June 30, 2008:




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





As
      of
      June 30, 2008, there was approximately $52,057 of unrecognized compensation
      cost
      related to unvested restricted stock. This amount is expected to be recognized
      over a weighted-average period of 1.17 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.





15




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





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Price**
            
            **Options
                Outstanding**
            
            **Weighted-Average
                Remaining Contractual Life**
            
            **Weighted-Average
                Exercise Price**
            
            **Shares
                Exercisable**
            
            **Weighted-Average
                Exercise Price**$
            0.40
            
            
            20,000
            
            
            9.75
            
            $
            .40
            
            
            10,000
            
            $
            .40$
            0.50
            
            
            30,000
            
            
            2.63
            
            $
            .50
            
            
            30,000
            
            $
            .50$
            1.00
            
            
            481,666
            
            
            2.47
            
            $
            1.00
            
            
            429,666
            
            $
            1.00$
            1.34
            
            
            306,250
            
            
            5.62
            
            $
            1.34
            
            
            180,250
            
            $
            1.34$
            1.40
            
            
            10,000
            
            
            9.16
            
            $
            1.40
            
            
            -
            
            $
            -847,916
            
            
            3.86
            
            $
            1.10
            
            
            649,916
            
            $
            1.06





**11.**  **SUBSEQUENT
      EVENT**





*Standby
      Equity Distribution Agreement (SEDA)*





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





We
      entered into a Standby Equity Distribution Agreement (the “SEDA”) with an
      investor on April 11, 2008. For a two-year period beginning on August
      5,
      2008, we will have the right ,
      at our
      discretion, to sell registered shares of our common stock to the Investor for
      up
      to $4,000,000. For each share of common stock purchased under the SEDA, the
      Investor will pay ninety-three (93%) of the lowest daily volume weighted average
      price (“VWAP”) during the five consecutive trading days after the Advance Notice
      Date (as such term is defined in the SEDA). Each such sale (“Advance”) may be
      for an amount not to exceed $350,000 and each
      Advance Notice Date must be no less than five trading days after the prior
      Advance Notice Date .
      The
      Advance request will be reduced to the extent the price of our common stock
      during the five
      consecutive trading days after the Advance Notice Date is less
      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, a due diligence
      fee of $5,000 and issued 386,567 shares of common stock (Note 8). 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.




16


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





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





**General**





Hydrogen
      Engine Center, Inc. (“HEC”, “we”, “us”, “our” or the “company”) was organized
      for the purpose of developing and commercializing clean solutions for today’s
      energy needs. We offer technologies that enable spark-ignited internal
      combustion engines and power generation systems to produce clean energy with
      near-zero carbon emissions, using our pr o prietary
      engine controller and software to efficiently distribute ignition spark and
      fuel
      to injectors. Our business plan is centered on a growing portfolio of
      intellectual property that has been designed to play an increasing role in
      addressing 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.





According
      to the United States Department of Energy, the U.S. average regular-grade
      gasoline price was approximately $4.10 per gallon on June 30, 2008 and is
      projected to remain over $4 per gallon until the fourth quarter of 2009.
      Regular-grade gasoline was expected to average $3.84 per gallon for all of
      2008,
      more than $1 per gallon above the 2007 average price. ( *see:* *http://www.eia.doe.gov/steo* )
      We
      believe these trends support and enhance our market position.





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 high-quality engines. We have developed
      our own proprietary controller that enables our engines to run efficiently
      on
      hydrogen.





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




**Overview**




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




17





We
      have
      funded our operations from inception through June 30, 2008, through a series
      of
      financing transactions, including convertible loans and Private Offerings.
      In
      April 2008, we entered into a SEDA which provides us the opportunity to access
      additional capital in the maximum amount of Four Million Dollars ($4,000,000),
      subject to our obtaining an effective registration statement for shares of
      our
      Common Stock sold under the SEDA. Our registration statement was declared
      effective on August 5, 2008. We expect to access the SEDA in August 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.





**Results
      of Operations**





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





**Three
                months ended**
              **June
                30,**
            
            **Six
                months ended**
              **June
                30,**
            
            **From
                Inception**
              **(May
                19, 2003)**
              **to**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**Revenues
            
            $
            359,772
            
            $
            203,383
            
            $
            521,457
            
            $
            441,673
            
            $
            1,584,160Cost
                of Goods Sold
            
            
            253,191
            
            
            170,180
            
            
            391,654
            
            
            372,844
            
            
            2,275,461Gross
                Profit (Loss)
            
            
            106,581
            
            
            33,203
            
            
            129,803
            
            
            68,829
            
            
            (691,301
            )Operating
                Expenses
            
            
            763,031
            
            
            1,134,070
            
            
            1,609,266
            
            
            2,901,373
            
            
            13,109,713Loss
                from Operations
            
            
            (656,450
            )
            
            (1,100,867
            )
            
            (1,479,463
            )
            
            (2,832,544
            )
            
            (13,801,014
            )Other
                Expense
            
            
            (29,952
            )
            
            (20,356
            )
            
            (65,982
            )
            
            (50,493
            )
            
            (250,109
            )Net
                Loss
            
            $
            (686,402
            )
            $
            (1,121,223
            )
            $
            (1,545,445
            )
            $
            (2,883,037
            )
            $
            (14,051,123
            )Series
                A Preferred Stock Beneficial Conversion Feature Accreted as a
                Dividend
            
            
            -
            
            
            -
            
            
            -
            
            $
            (1,889,063
            )
            $
            (1,889,063
            )Net
                Loss Available to Common Stockholders
            
            $
            (686,402
            )
            $
            (1,121,223
            )
            $
            (1,545,445
            )
            $
            (4,772,100
            )
            $
            (15,940,186
            )





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





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





**Revenues**





Revenues
      in the three-month period ended June 30, 2008 totaled $359,772, an increase
      of
      76.89% compared to revenues of $203,383 in 2007. We expect sales for the third
      quarter 2008 will also show an increase compared to the third quarter of 2007.
      For the six-month period ended June 30, 2008 we realized $521,457 compared
      to
      $441,673 for the six-month period ended June 30, 2007. From inception to date
      we
      have realized revenues of $1,584,160.





We
      also
      derive income through business agreements for the development and/or
      commercialization of our hydrogen and ammonia products, which are not reflected
      in our revenue. We record income related to business agreements as a reduction
      in research and development expense. The expenses we incur are recorded as
      research and development costs. During the three- and six-month periods ended
      June 30, 2008, we did not record a reduction in research and development expense
      resulting from business agreements. On June 3, 2008 an
      order
      for two hydrogen-fueled, V-8 Oxx Power ® engines
      from the International
      Centre for Hydrogen Energy Technology/UNIDO was cancelled because we were unable
      to ship the product in a timely fashion.




18




**Cost
      of Sales and Gross Profit**





We
      realized gross profit on our revenues of approximately 29.6% in the second
      quarter 2008 and approximately 16.3% in 2007. This increase in profit margin
      is
      due primarily to the recovery of inventory write-downs of approximately $79,000
      during the three-month period ended June 30, 2008. We expect our gross profit
      margins to be approximately 15% (exclusive of any such recoveries) during the
      remainder of 2008 and thereafter to increase only as we are able to increase
      our
      alternative fuel sales.





We
      recovered $78,669 during the three-month period ended June 30, 2008, and $90,573
      during the six-month period ended June 30, 2008, from previously recorded
      inventory write downs. There were no similar recoveries during the same periods
      in 2007.





**Operating
      Expenses**





Our
      sales
      and marketing expenses for the three-month periods ended June 30, 2008 and
      2007
      were $50,491 and $78,234, respectively. Our sales and marketing expenses for
      the
      six-month periods ended June 30, 2008 and 2007 were $134,556 and $166,748,
      respectively and the total expense from inception to date (May 19, 2003) is
      $1,335,592. We plan to be more involved in the distributed generation market
      as
      governmentally imposed emission standards tighten and the clean-energy solutions
      offered by our intellectual property develop and become accepted in the market
      place. We also plan to aggressively market our carbon-reduced and carbon-free
      products during the remainder of 2008.





General
      and administrative expenses decreased from $717,739 for the three months ended
      June 30, 2007 to $497,132 for the three months ended June 30, 2008. General
      and
      administrative expenses decreased from $1,541,160 for the six months ended
      June
      30, 2007 to $ 1,068,036
      for the six months ended June 30, 2008. General and administrative expenses
      from
      inception (May 19, 2003) through June 30, 2008 were $7,539,444. 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 three-month
      periods ended June 30, 2008 and 2007 respectively, were $101,538 and $175,581.
      Total pre-production expenses included in general and administrative expense
      for
      the six month-periods ended June 30, 2008 and 2007 respectively, were $223,022
      and $378,715. Pre-production expense from inception (May 19, 2003) through
      June
      30, 2008 totaled $1,566,456.




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 $70,041 in stock option and in restricted stock expense for
      employees and directors in the three months ended June 30, 2008 and $188,947
      in
      stock option and restricted stock expense for the three months ended June 30,
      2007. We have recognized $208,046 in stock option and restricted stock expense
      for employees and directors in the six months ended June 30, 2008 and $325,036
      in stock option and restricted stock expense for the six months ended June
      30,
      2007. Total stock option compensation for employees and directors from inception
      (May 19, 2003) through June 30, 2008 was $1,582,465. 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 $51,317 in accrued property taxes
      and
      $46,225 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.




19


Costs
      related to research and development were $215,408 and $338,097 for the
      three-month periods ended June 30, 2008 and 2007, respectively. Costs related
      to
      research and development were $406,674 and $745,454 for the six-month periods
      ended June 30, 2008 and 2007, respectively. Total expense for research and
      development expense from inception (May 19, 2003) to June 30, 2008 is
      $3,657,177. Management believes that, assuming receipt of additional capital,
      research and development expenses will increase during 2008.




**Loss
      from Operations**




We
      recorded an operating loss of $656,450 for the three months ended June 30,
      2008
      compared to an operating loss of $1,100,867 for the three months ended June
      30,
      2007. We recorded an operating loss of $1,479,463 for the six months ended
      June
      30, 2008 compared to an operating loss of
      $2,832,544 for the
      six months ended June 30, 2007. We
      recorded operating losses totaling $13,801,014 from inception (May 19, 2003)
      through June 30, 2008. We expect to continue to operate at a loss during
      2008.





During
      the three month and six month periods ended June 30, 2008 we did not recognize
      any stock dividends attributable to stockholders. During the six months ended
      June 30, 2007, we accreted a beneficial conversion dividend to the holders
      of
      Series A Preferred Stock of $1,889,063. The stock dividend constituted
      approximately 39.6% of a net loss to common stockholders of $4,772,100 for
      the
      six months ended June 30, 2007 and did not have an affect on the net loss to
      common stockholders at June 30, 2008. We recorded net losses attributable to
      common stockholders totaling $15,940,186 from inception (May 19, 2003) through
      June 30, 2008.





**Other
      Income (Expense)**




We
      had
      total interest income for the three months ended June 30, 2008 of $2,214 as
      compared to interest income of $24,245 for the three months ended June 30,
      2007.
      We had total interest income for the six months ended June 30, 2008 of $6,643
      as
      compared to interest income of $35,746 for the six months ended June 30, 2007.
      We realized interest income from inception (May 19, 2003) to June 30, 2008
      of
      $170,695.





Interest
      expense for the three months ended June 30, 2008 was $32,166 and $44,601 for
      the
      three months ended June 30, 2007. Interest expense for the six months ended
      June
      30, 2008 was $72,625 and $86,239 for the six months ended June 30, 2007. Our
      interest expense from inception (May 19, 2003) to June 30, 2008 totaled
      $414,070. We accrue interest expense related to forgivable loans and grants
      from
      state and local government sponsored programs. From inception (May 19, 2003)
      through June 30, 2008 we have accrued $149,891 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.




20





*Revenue
      Recognition*





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





*Stock-based
      Compensation*





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




**Liquidity
      and Capital Resources**





Operating
      Budget and Financing of Operations





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





On
      April
      11, 2008, we entered into a Standby Equity Distribution Agreement with YA Global
      Investments, L.P. (“YA Global”), which provides us the opportunity to access
      additional capital in the maximum amount of Four Million Dollars ($4,000,000)
      in
      increments not to exceed $350,000 each. We will have access to these funds
      over
      a two-year period beginning on August 5, 2008, the date on which the SEC first
      declared effective our registration statement registering the resale of our
      shares by YA Global. We plan to begin accessing the SEDA funds in August and
      will only access the SEDA funds to the extent necessary. The per share price
      for
      shares issued under the SEDA will be dependent upon the market value of our
      stock at the time of funding. Our registration statement covering 4,054,541
      shares, filed May 20, 2008, was declared effective by the Securities and
      Exchange Commission on August 5, 2008.





In
      addition to the above, we expect to secure an agreement to provide
      hydrogen-fueled engines for ground support vehicles at designated airports
      in
      the third or fourth quarter of 2008 and we continue to engage in discussions
      to
      secure a strategic banking relationship. We also expect to secure agreements
      to
      provide hydrogen generators that will provide a megawatt of power.  We are
      presently applying for research and development grants and pursuing strategic
      development partners.





We
      believe that the combination of these opportunities and potentials can provide
      needed cash flow to our operations for at least the next twelve months; however
      there are no assurances that anticipated sales will occur in the timeframe
      we
      anticipate, which would have a negative adverse effect on our operations and
      would accelerate the need for additional funding. We are dependent on the
      capital we draw from the SEDA to fund our involvement in new research and
      development projects and sustain our operations.





Going
      Concern





Our
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates our continuation of operations, realization
      of
      assets, and liquidation of liabilities in the ordinary course of business.
      Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses over the next several months. As of June 30, 2008,
      we had an accumulated deficit of approximately $14.1 million. Our accompanying
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.




21




Terms
      of the SEDA





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





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





We
      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 three- and six-month
      periods ended June 30, 2008 and 2007 and from inception (May 19, 2003) to June
      30, 2008:





**Three
                months ended**
              **June
                30,**
            
            **Six
                months ended**
              **June
                30,**
            
            **From
                Inception**
              **(May
                19, 2003)**
              **to**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**Net
                cash used in
              operating
                activities
            
            $
            (305,227
            )
            $
            (1,080,397
            )
            $
            (811,057
            )
            $
            (2,383,475
            )
            $
            (11,979,369
            )Net
                cash provided by
              (used
                in) investing activities
            
            
            116,225
            
            
            (66,739
            )
            
            114,928
            
            
            (109,864
            )
            
            (2,976,408
            )Net
                cash provided by
              (used
                in) financing
              activities
            
            
            158,312
            
            
            3,290,955
            
            
            118,254
            
            
            3,806,199
            
            
            15,094,603





Net
      cash
      used in operating activities was $305,227 during the three months ended June
      30,
      2008 compared to $1,080,397 during the same period in 2007, which constitutes
      a
      decrease of approximately 71.7%. Net cash used in operating activities was
      $811,057 during the six months ended June 30, 2008 compared to $2,383,475 during
      the same period in 2007, resulting in a decrease of approximately 66.0%. The
      decrease for these periods is primarily the result of a decrease in inventory
      purchasing activity and enhanced efforts to reduce our operating expenses.
      From
      inception (May 19, 2003) through June 30, 2008 we have used $11,973,369 to
      fund
      our operating activities.




22




At
      June
      30, 2008 we had cash on hand of $132,340 compared to cash on hand of $2,454,922
      at June 30, 2007, and $713,289 at December 31, 2007.





Cash
      Flow From (Used in) Investing Activities




Net
      cash
      from investing activities for the three months ended June 30, 2008 was $116,225
      compared to $66,739 used in investing activities for the three months ended
      June
      30, 2007. Net cash from investing activities for the six months ended June
      30,
      2008 was $114,928 compared to $109,864 used in investing activities for the
      six
      months ended June 30, 2007. The decrease in cash used in investing activities
      is
      primarily the result of a decrease in purchases of property and equipment.
      We
      have used $3,012,908 for the purchase of property and equipment from inception
      (May 19, 2003) through June 30, 2008. Net cash from investing activities for
      the
      period from inception (May 19, 2003) through June 30, 2008 was
      $2,976,408.





Cash
      Flow From Financing Activities





Net
      cash
      used to pay short term and long term debt during the three months ended June
      30,
      2008 and 2007, respectively was $37,688 and $25,140. Net cash used to pay short
      term and long term debt during the six months ended June 30, 2008 and 2007,
      respectively was $77,746 and $38,896. We received proceeds of $196,000 from
      borrowings and none from private placements during the three and six months
      ended June 30, 2008. We received $3,316,095 from private placements and no
      proceeds from borrowings during the three months ended June 30, 2007. During
      the
      six months ended June 30, 2007, we received $3,595,095 from private placements
      and proceeds of $250,000 from borrowings.





During
      the six months ended June 30, 2008, we renewed our note with Farmers State
      Bank
      in the principal amount of $591,956. In addition, on March 24, 2008, we obtained
      a line of credit with Iowa State Bank in the amount of $250,000. As of August
      1,
      2008, we have drawn $196,000 from this line of credit. This line of credit
      has
      an expiration date of December 1, 2008 and carries an interest rate of 1.5%
      above the Wall Street journal U.S. Prime Rate. The interest rate at June 30,
      3008 was 6.5%.





At
      June
      30, 2008 we had total assets of $5,130,958 and stockholders equity of $2,213,392
      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 restrict 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.





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 four markets: hydrogen airport ground
      support vehicle engines, stranded hydrogen electrical power generators,
      hydrogen-fueled cell phone tower power systems, and ammonia-fueled irrigation
      systems. 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.




23





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





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





Our
      hydrogen-powered products are generally sold to customers through business
      agreements, which are most often for power products that meet certain
      specifications. Income related to business agreements is recorded as a reduction
      in research and development expense. All
      of
      our hydrogen products utilize our Oxx BoxxTM **** engine
      controller. We expect that our future revenue will come from the licensing
      and
      sale of our technologies as well as from the sale of hydrogen or ammonia-fueled
      engines and gensets for dedicated uses, such as airport ground support and
      irrigation pumping.





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





On
      August
      5, 2008, as part of our strategic alliance with Startech Environmental
      Corporation, we shipped a single genset to integrate with Startech’s system to
      produce hydrogen from its waste mitigation process. Assuming we have successful
      trials, we intend to work together to package and market a complete system.
      We
      believe testing for the project will begin this fall. Startech designs and
      manufactures plasma conversion waste processing equipment. Startech believes
      that it can produce hydrogen from its waste mitigation process that can be
      used
      to create power from both traditional and non-traditional power generation
      systems.




As
      of
      August 12, 2008, our first ammonia-fueled power unit has logged over 1000 hours.
      The power unit, which was shipped in September 2007 to TGP West in California,
      is equipped with an Oxx Power ® 4.9L
      engine outfitted with our proprietary controls and fuel delivery system. The
      engine is currently being tested to run primarily on anhydrous ammonia, with
      liquefied petroleum gas (LPG) as a catalyst fuel for this test. The clean power
      supplied by this unit is used to irrigate a walnut grove and provide water
      for a
      cattle ranch in the San Luis Obispo area. We have experienced minimal problems
      with the unit and are exploring new research which could eliminate the use
      of a
      catalyst fuel. We believe ammonia could be the enabler to the hydrogen economy.





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 $120,000, subject to
      sufficient capital from anticipated financing.





We
      anticipate that our research and development costs in 2008 could be
      approximately $1 million, subject to sufficient capital from anticipated
      financing.




24





**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 August 4, 2008, we have a total of fourteen (14) employees in Iowa, all
      of
      whom are now working full-time, as well as two (2) part-time and one (1)
      full-time employee in Canada.





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





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




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




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




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




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




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





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





**Employees**





We
      currently have 16 employees, 13 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.





25




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





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




27


**PART
      II OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





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





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





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





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





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





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





At
      our
      Annual Meeting of
      Stockholders held on June 4, 2008, two matters were voted upon. A description
      of
      each matter and tabulation of the votes for each of the matters is as
      follows:




1.
      To
      elect directors nominees to hold office until the next Annual
      Meeting of
      Shareholders or until their successors are elected:




VotesNominee
            
            For
            
            WithheldTheodore
                G. Hollinger
            
            
            21,333,000
            
            
            130,563Thomas
                O. Trimble
            
            
            21,432,978
            
            
            30,325Philip
                G. Ruggieri
            
            
            21,405,728
            
            
            66,475Stephen
                T. Parker
            
            
            21,390,583
            
            
            77,370





2.
      To
      ratify of the appointment of LWBJ, LLP, as the independent registered public
      accounting firm of the company for the fiscal year ended December 31,
      2008:




VotesFor
            
            Against
            
            Abstain21,499,387
            
            
            56,354
            
            
            34,230




28




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





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




**NOTES
      ABOUT FORWARD-LOOKING STATEMENTS**





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





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:
              August 14, 2008
            By
            /s/
              THEODORE
              G.HOLLINGERTheodore
                G. Hollinger
              Acting
                President and Chief Executive Officer
              (Principal
                Executive Officer)


Date:
              August 14, 2008
            By
            /s/
              SANDRABATTSandra
                Batt
              Chief
                Financial Officer
              (Principal
                Financial Officer)


30