**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**FORM
      10-QSB/A***


**Amendment
      No. 1**





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





**For
      the quarterly period ended September 30, 2007**







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
              (IRS
                  Employerof
                  incorporation)
              Identification
                  No.)





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


(Address
      of principal executive offices)





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





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




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





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filer x




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




**Class**
            
            **Outstanding
                at October 19, 2007**Series
                B Preferred
            
            1,932,846Common
            
            27,590,164





***
      See explanatory note regarding amendment on next page**









**EXPLANATORY
      NOTE REGARDING AMENDMENT**





We
      are
      amending this Form 10-QSB for the nine months ending September 30, 2007 and
      the
      period from inception (May 19, 2003) to September 30, 2007 as a result of our
      evaluation of the anti-dilution rights associated with the shares of Series
      A
      Convertible Preferred Stock issued in 2006. As a result of these anti-dilution
      rights and the sale of the Series B Preferred Stock on March 27, 2007, the
      conversion price of the Series A Preferred Stock was reduced from $3.25 per
      share to $2.00 per share. We have concluded that this reduced conversion price
      resulted in a noncash, quasi dividend totaling $1,889,063 for the nine months
      ending September 30, 2007 and the period from inception (May 19, 2003) to
      September 30, 2007. Our previously filed financial statements for these periods
      did not reflect this quasi dividend.





The
      condensed consolidated statements of operations, condensed consolidated balance
      sheet and accompanying notes have been restated to reflect this quasi dividend
      and to adjust the net loss attributable to common shareholders. We are also
      revising Item 2. Management’s Discussion and Analysis of Financial Condition and
      Results of Operations, and the discussion under Item 3. Controls and Procedures,
      in light of the restatement. Except as described above, no other changes were
      made to the Form 10-QSB as previously filed.









**FORM
      10-QSB**




**TABLE
      OF CONTENTS**





Page**PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Condensed
                Consolidated Financial Statements (Unaudited)Condensed
                Consolidated Balance Sheet as of September 30, 2007
            4Condensed
                Consolidated Statements of Operations for the Nine Months and
              Three
                Months Ended September 30, 2007 and 2006 and the period from inception
                (May 19, 2003) through September 30, 2007
            6Condensed
                Consolidated Statements of Cash Flows for the Nine Months and
              Three
                Months Ended September 30, 2007 and 2006 and the period from inception
                (May 19, 2003) through September 30, 2007
            7Notes
                to Consolidated Financial Statements
            9Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            20Item
                3.
            Controls
                and Procedures
            28**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            29Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            29Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            30Item
                6.
            Exhibits
                and Reports on Form 8-K
            30Notes
                About Forward-looking Statements
            30**SIGNATURES**
            
            31





3




**ITEM
      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





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


(a
      corporation in the development stage)





Condensed
      Consolidated Balance Sheet





**September 30,****ASSETS**
            
            **2007**(Unaudited)**Current
                Assets**Cash
                and cash equivalents
            
            $
            1,563,728Restricted
                cash
            
            
            364,430Accounts
                receivable
            
            
            101,175Inventories
            
            
            2,130,524Prepaid
                expenses
            
            
            69,736Total
                current assets
            
            
            4,229,593**Property,
                Plant and Equipment**Leasehold
                improvements
            
            
            17,156Building
            
            
            2,156,940Equipment
            
            
            888,911Land
                and improvements
            
            
            472,504Construction
                in progress
            
            
            164,4203,699,931Less
                accumulated depreciation
            
            
            351,154Net
                property and equipment
            
            
            3,348,777**Total
                Assets**
            
            $
            7,578,370




See
      accompanying notes




4




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


(a
      corporation in the development stage)





Condensed
      Consolidated Balance Sheet





**September 30,****LIABILITIES
                AND EQUITY**
            
            **2007**(Unaudited)**Current
                Liabilities**Notes
                payable, bank
            
            $
            1,409,875Current
                portion long-term debt
            
            
            36,636Current
                installments of obligation under capital lease
            
            
            43,899Accounts
                payable
            
            
            222,697Accrued
                expenses
            
            
            200,917Accrued
                interest
            
            
            116,454Unearned
                project reimbursements
            
            
            102,972Unearned
                grants
            
            
            40,335Total
                current liabilities
            
            
            2,173,785Long-term
                debt, net of current maturities
            
            
            750,008Obligation
                under capital lease, excluding current installments
            
            
            92,785842,793Total
                liabilities
            
            
            3,016,578**Commitments
                and Contingencies****Stockholders'
                Equity**Preferred
                stock - Series A, $0.001 par value; 1,000,000 shares authorized,
                465,000
                shares issued and outstanding
            
            
            465Preferred
                stock - Series B, $0.001 par value; 5,000,000 shares authorized,
                1,932,846
                shares issued and outstanding
            
            
            1,933Common
                stock, $0.001 par value; 100,000,000 shares authorized, 26,834,539
                shares
                issued and outstanding
            
            
            26,834Additional
                paid-in capital
            
            
            17,727,020Accumulated
                other comprehensive loss - foreign currency
            
            
            (2,988
            )Deficit
                accumulated during the development stage
            
            
            (13,191,472
            )Total
                stockholders' equity
            
            
            4,561,792**Total
                Liabilities and Stockholders’ Equity**
            
            $
            7,578,370




See
      accompanying notes




5




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


(a
      corporation in the development stage)





Condensed
      Consolidated Statements of Operations


(Unaudited)





**Three
                months ended**
            
            **Nine months ended**
            
            **From Inception****September 30,**
            
            **September 30,**
            
            **(May 19, 2003) to****2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **September 30, 2007****Sales**
            
            $
            86,047
            
            $
            126,331
            
            $
            527,720
            
            $
            202,040
            
            $
            849,624**Cost
                of Sales**
            
            
            74,299
            
            
            113,109
            
            
            447,143
            
            
            168,365
            
            
            724,410**Gross
                Profit**
            
            
            11,748
            
            
            13,222
            
            
            80,577
            
            
            33,675
            
            
            125,214**Operating
                Expenses**Sales
                and marketing
            
            
            64,488
            
            
            263,442
            
            
            231,236
            
            
            675,930
            
            
            1,212,397General
                and administrative
            
            
            610,243
            
            
            852,886
            
            
            2,167,029
            
            
            2,426,617
            
            
            5,832,557Research
                and development
            
            
            361,089
            
            
            438,290
            
            
            1,109,662
            
            
            943,042
            
            
            2,986,895Settlement
                of vendor dispute
            
            
            -
            
            
            -
            
            
            448,011
            
            
            -
            
            
            577,500Decline
                in market value of inventory, net of recoveries
            
            
            239,598
            
            
            75,980
            
            
            220,853
            
            
            523,717
            
            
            667,7451,275,418
            
            
            1,630,598
            
            
            4,176,791
            
            
            4,569,306
            
            
            11,277,094**Operating
                Loss**
            
            
            (1,263,670
            )
            
            (1,617,376
            )
            
            (4,096,214
            )
            
            (4,535,631
            )
            
            (11,151,880
            )**Other
                Income (Expense)**Interest
                income
            
            
            24,935
            
            
            12,939
            
            
            60,681
            
            
            38,852
            
            
            151,676Interest
                expense
            
            
            (46,653
            )
            
            (32,156
            )
            
            (132,892
            )
            
            (82,938
            )
            
            (301,178
            )Loss
                on sale of asset
            
            
            (1,027
            )
            
            -
            
            
            (1,027
            )
            
            -
            
            
            (1,027
            )(22,745
            )
            
            (19,217
            )
            
            (73,238
            )
            
            (44,086
            )
            
            (150,529
            )**Net
                Loss**
            
            $
            (1,286,415
            )
            $
            (1,636,593
            )
            $
            (4,169,452
            )
            $
            (4,579,717
            )
            $
            (11,302,409
            )Series
                A Preferred stock beneficial conversion feature accreted as a
                dividend
            
            
            -
            
            
            -
            
            
            (1,889,063
            )
            
            -
            
            
            (1,889,063
            )**Net
                Loss Attributable to Common Stockholders**
            
            $
            (1,286,415
            )
            $
            (1,636,593
            )
            $
            (6,058,515
            )
            $
            (4,579,717
            )
            $
            (13,191,472
            )**Weighted-average
                shares outstanding**
            
            
            25,773,966
            
            
            25,180,764
            
            
            25,749,887
            
            
            24,967,619**Basic
                and diluted net loss per share**
            
            $
            (0.05
            )
            $
            (0.06
            )
            $
            (0.24
            )
            $
            (0.18
            )




See
      accompanying notes




6




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


(a
      corporation in the development stage)





Condensed
      Consolidated Statements of Cash Flows


(Unaudited)





**Three months ended**
            
            **Nine months ended**
            
            **From Inception****September 30,**
            
            **September 30,**
            
            **(May 19, 2003) to****2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **September 30, 2007****Cash
                Flows from Operating Activities**Net
                loss
            
            $
            (1,286,415
            )
            $
            (1,636,593
            )
            $
            (4,169,452
            )
            $
            (4,579,717
            )
            $
            (11,302,409
            )Adjustments
                to reconcile net loss to net cash used in operations:Depreciation
            
            
            50,207
            
            
            46,914
            
            
            168,714
            
            
            90,915
            
            
            351,154Compensation
                to directors and employees of stock options and restricted
                stock
            
            
            153,759
            
            
            174,594
            
            
            478,795
            
            
            610,740
            
            
            1,353,672Compensation
                to consultants of stock options
            
            
            2,463
            
            
            4,649
            
            
            7,388
            
            
            41,315
            
            
            184,498Warrants
                issued in vendor dispute
            
            
            -
            
            
            -
            
            
            577,500
            
            
            -
            
            
            577,500Change
                in assets and liabilities:Accounts
                receivable
            
            
            33,743
            
            
            (91,555
            )
            
            102,200
            
            
            (114,101
            )
            
            (101,175
            )Inventories
            
            
            (16,316
            )
            
            (959,299
            )
            
            (349,658
            )
            
            (1,714,601
            )
            
            (2,350,662
            )Prepaid
                expenses
            
            
            7,356
            
            
            34,988
            
            
            (26,312
            )
            
            (62,764
            )
            
            (96,194
            )Accounts
                payable
            
            
            274,082
            
            
            280,587
            
            
            (54,196
            )
            
            779,004
            
            
            547,756Accrued
                expenses
            
            
            (67,734
            )
            
            44,533
            
            
            44,762
            
            
            442,725
            
            
            247,155Accrued
                interest
            
            
            12,688
            
            
            -
            
            
            18,409
            
            
            -
            
            
            116,454Unearned
                project reimbursements
            
            
            -
            
            
            -
            
            
            -
            
            
            126,772
            
            
            102,972Unearned
                grants
            
            
            (8,536
            )
            
            -
            
            
            (26,328
            )
            
            -
            
            
            40,335Net
                cash used in operating activities
            
            
            (844,703
            )
            
            (2,101,182
            )
            
            (3,228,178
            )
            
            (4,379,712
            )
            
            (10,328,944
            )**Cash
                Flows from Investing Activities**Increase
                in restricted cash
            
            
            (4,021
            )
            
            -
            
            
            (11,846
            )
            
            -
            
            
            (364,430
            )Proceeds
                from sale of assets
            
            
            36,000
            
            
            -
            
            
            36,000
            
            
            -
            
            
            36,000Purchases
                of property, plant, and equipment
            
            
            (65,815
            )
            
            (153,370
            )
            
            (167,854
            )
            
            (1,385,157
            )
            
            (2,995,999
            )Net
                cash used in investing activities
            
            
            (33,836
            )
            
            (153,370
            )
            
            (143,700
            )
            
            (1,385,157
            )
            
            (3,324,429
            )**Cash
                Flows from Financing Activities**Proceeds
                from note payable, bank
            
            
            -
            
            
            -
            
            
            250,000
            
            
            832,690
            
            
            1,806,046Payments
                on note payable, bank
            
            
            (3,560
            )
            
            -
            
            
            (8,818
            )
            
            -
            
            
            (658,818
            )Proceeds
                from long-term debt
            
            
            -
            
            
            -
            
            
            -
            
            
            100,000
            
            
            1,172,052Payments
                on long-term debt
            
            
            (22,471
            )
            
            (12,057
            )
            
            (56,109
            )
            
            (37,678
            )
            
            (121,107
            )Proceeds
                from exercise of stock option
            
            
            -
            
            
            -
            
            
            -
            
            
            8,000
            
            
            8,000Issuance
                of preferred stock (Series A) in private placement, net of
                expenses
            
            
            -
            
            
            1,389,712
            
            
            -
            
            
            1,389,712
            
            
            2,779,813Issuance
                of preferred stock (Series B) in private placement, net of
                expenses
            
            
            -
            
            
            -
            
            
            3,595,095
            
            
            -
            
            
            3,595,095Issuance
                of common stock in private placements, net of expenses
            
            
            -
            
            
            215,943
            
            
            -
            
            
            3,013,244
            
            
            6,639,008Net
                cash provided by (used in) financing activities
            
            
            (26,031
            )
            
            1,593,598
            
            
            3,780,168
            
            
            5,305,968
            
            
            15,220,089**Effect
                of Exchange Rates on Cash and Cash Equivalents**
            
            
            13,376
            
            
            (7,779
            )
            
            6,231
            
            
            (4,850
            )
            
            (2,988
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            (891,194
            )
            
            (668,733
            )
            
            414,521
            
            
            (463,751
            )
            
            1,563,728**Cash
                and Cash Equivalents – Beginning of Period**
            
            
            2,454,922
            
            
            2,551,230
            
            
            1,149,207
            
            
            2,346,248
            
            
            -**Cash
                and Cash Equivalents – End of Period**
            
            $
            1,563,728
            
            $
            1,882,497
            
            $
            1,563,728
            
            $
            1,882,497
            
            $
            1,563,728




-Continued-




See
      accompanying notes




7




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


(a
      corporation in the development stage)





Condensend
      Consolidated Statements of Cash Flows


(Unaudited)





-Continued-





**Three months ended**
            
            **Nine months ended**
            
            **From Inception****September 30,**
            
            **September 30,**
            
            **(May 19, 2003) to****2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **September 30, 2007****Supplemental
                Cash Flow Information**Interest
                paid
            
            $
            33,961
            
            $
            9,482
            
            $
            114,331
            
            $
            22,237
            
            $
            184,540**Supplemental
                Disclosures of Noncash Investing and Financing
                Activities**Additional
                paid-in capital contribution for expenses paid by founder
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            103,636Issuance
                of common stock for equipment
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            47,851Issuance
                of common stock for conversion of debt
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            557,051Acquistion
                of property, plant, and equipment through financing
            
            $
            -
            
            $
            61,746
            
            $
            111,450
            
            $
            112,847
            
            $
            692,081Payables
                for construction in progress
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            32,594
            
            $
            232,208Receivable
                for state loan
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            100,000Issuance
                of warrants for inventory
            
            $
            21,065
            
            $
            -
            
            $
            21,065
            
            $
            -
            
            $
            21,065Series
                A Preferred stock beneficial conversion feature accreted as a
                dividend
            
            $
            -
            
            $
            -
            
            $
            1,889,063
            
            $
            -
            
            $
            1,889,063




See
      accompanying notes




8




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


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


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2007**




**1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Overview
      of Companies*





Hydrogen
      Engine Center, Inc., formerly known as Green Mountain Labs, Inc. (“Green Mt.
      Labs”), is a Nevada corporation. Green Mt. Labs was a public-reporting shell
      company and, in connection with our merger, changed its name to Hydrogen Engine
      Center, Inc. (the “Company”). Also, as a result of our merger, the Company’s
      operations are those of its wholly owned subsidiaries, Hydrogen Engine Center,
      Inc., an Iowa corporation (“HEC Iowa”), and Hydrogen Engine Center (HEC) Canada
      Inc. (“HEC Canada”).





HEC
      Iowa
      was incorporated on May 19, 2003 (“inception date”) for the purpose of
      commercializing environmentally friendly internal combustion 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 a
      Trois-Rivieres.





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





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





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 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 gasoline, propane, natural gas, ethanol and hydrogen. We are
      developing engines that are fueled by ammonia. Our engines and engine products
      are sold under the brand name Oxx Power TM .





Through
      September 30, 2007, we remain in the development stage. We have filed patents
      to
      help ensure full intellectual property protection. 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.





*Private
      Placement*





On
      March
      13, 2007, we commenced the private placement of our Series B Preferred Stock.
      The Board of Directors authorized 5,000,000 shares of Series B Preferred Stock
      at $2.00. We sold 1,932,846 shares for $3,865,692 and incurred expenses of
      $270,597 as a result of this offering. We also issued 57,985 warrants in
      connection with the sale of the Series B Preferred Stock. The warrants were
      issued at an exercise price of $2.00 and expire May 15, 2012. Shares of the
      Series B Preferred Stock are no longer being offered by the Company. However,
      we
      plan to raise additional funds through another private placement of either
      debt
      or equity securities.





*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.





9




*Liquidity
      and Going Concern*





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





Since
      inception, we have invested in the resources and technology we believe necessary
      to deliver carbon free energy technology. As such, the company has incurred
      substantial operating losses. The company is expected to incur operating losses
      in 2007. We have financed all development, sales and operations since inception
      through equity and debt financings. We intend to manage our expenses in balance
      with the operating environment. Efforts are ongoing to raise new capital. We
      intend to expand development, sales and operations. As of November 9, 2007
      we
      had cash of $1,059,588 accounts receivable of $196,283 and accounts payable
      of
      $90,323. As our funding efforts continue, we plan to stage investment growth
      to
      expand our sales and marketing programs, and proceed with technology
      development, patent filings and essential engine certification. While interest
      in the alternative energy sector is strong, we are prepared to further curtail
      spending, if we are unable to raise additional funds. With our existing capital,
      and projected sales revenue, we anticipate that we can fund our operations
      through February 2008, without additional capital. These timeframes will vary
      if
      events occur which negatively or positively affect our operations.





Continuing
      operations is dependent upon obtaining significant further financing. We have
      engaged an investment banking firm that is experienced in our sector, to assist
      in obtaining funding needed to implement our business plan. There can be no
      assurance that we will successfully complete this offering or that these
      proceeds, if completed, will be sufficient to satisfy capital requirements.
      Also, there are no assurances that additional funding will be available at
      terms
      that will be acceptable to us. These conditions raise substantial doubt about
      the ability to continue as a going concern.





*Fair
      Value of Financial Instruments*





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





*Foreign
      Currency Translation*





Our
      results of operations and cash flows of foreign subsidiaries are translated
      to
      U.S. dollars at average period currency exchange rates. Assets and liabilities
      are translated at end-of-period exchange rates. Foreign currency translation
      adjustments related to foreign subsidiaries using the local currency as their
      functional currency are included in *Accumulated*  *other
      comprehensive loss – foreign currency.*





*Cash
      and Cash Equivalents*





We
      consider highly-liquid investments with an original maturity of ninety days
      or
      less to be cash equivalents. We maintain cash balances in four institutions.
      At
      times, our cash and cash equivalent balances may exceed amounts insured by
      the
      Federal Deposit Insurance Corporation. We believe we are not exposed to any
      significant credit risk on cash and cash equivalents.





*Restricted
      Cash*





We
      have a
      letter of credit with a financial institution which is secured by a certificate
      of deposit. As long as the certificate of deposit is retained as security for
      the letter of credit, it will be recorded as restricted cash.





10




*Accounts
      Receivable*





Accounts
      receivable are recorded at their estimated net realizable value. We follow
      a
      policy of providing an allowance for doubtful accounts. However, based on the
      evaluation of receivables at September 30, 2007, we believe that such accounts
      will be collectible and thus, an allowance is not necessary. Accounts are
      considered past due if payment is not made on a timely basis in accordance
      with
      our credit policy. Accounts considered uncollectible are written off. Credit
      terms are extended to customers in the normal course of business. We perform
      ongoing credit evaluations of our customers’ financial condition and, generally,
      require no collateral.





*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 2).





*Property,
      Plant and Equipment*





Property,
      plant and equipment are recorded at cost. Once assets are placed in service,
      depreciation is provided over estimated useful lives by using the straight-line
      method. Leasehold improvements are depreciated over the life of the lease.
      Maintenance and repairs are expensed as incurred; major improvements and
      betterments are capitalized.





We
      review
      our property, plant and equipment for indicators of impairment when events
      or
      changes in circumstances indicate that the carrying value may not be
      recoverable. If the evaluation indicates that the carrying amount of the asset
      may not be recoverable and an impairment loss exists, the amount of the loss
      will be recorded in the consolidated statements of operations.





*Warranty
      Reserve*





We
      record
      a warranty reserve at the time products are sold and the revenue is recognized.
      We estimate the liability for product warranty costs based upon industry
      standards and best estimate of future warranty claims. We recorded a warranty
      reserve during the three months and nine months ended September 30, 2007 of
      $3,959 and $16,702, respectively and have recorded $35,099 in accrued expenses
      from inception (May 19, 2003) to September 30, 2007.





*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.





*Shipping
      and Handling Costs*





Amounts
      charged to customers and costs we incur for shipping and handling are currently
      treated as expense reimbursements and are not included in revenue and cost
      of
      goods sold, respectively, in accordance with Emerging Issues Task Force (“EITF”)
      Issue No. 00-10, “Accounting for Shipping and Handling Fees and
      Costs.”





*Stock
      Conversion*





As
      per
      EITF 00-27, we evaluated the embedded beneficial conversion feature of the
      Series A Convertible Preferred Stock transaction. This beneficial conversion
      feature was accreted to the Series A Convertible Preferred Stock as a dividend.
      The accretion is included on the income statement as a quasi dividend to
      determine net loss attributable to common shareholders.





*Business
      Agreements*





Income
      is
      also derived through business agreements for the development and/or
      commercialization of products based upon our proprietary technology. Some of
      the
      business agreements have stipulated performance milestones and deliverables
      where others require “best efforts” with no performance criteria. The business
      agreements require that payments be made to us as certain milestones are reached
      prior to delivery of the product to the customer. Accordingly, income related
      to
      business agreements are recorded as a reduction in research and development
      expense, when title and risk of ownership transfers to the customer. Expenses
      we
      incur are recorded as research and development costs. During the three months
      and nine months ended September 30, 2007, we have recorded $0 and $30,000,
      respectively as a reduction in research and development expense. From inception
      (May 19, 2003) to September 30, 2007, we have recorded $81,200, as a reduction
      in research and development expense. We have recorded $102,972 as “Unearned
      project reimbursements” for projects which are in process at September 30,
      2007.





11




*Grants
      and Incentive Programs*




We
      recognize grant income as reimbursement of expenses incurred, when it is
      reasonably probable that the conditions of the grant will be met.  For
      reimbursements of capital expenditures, the grants are recognized as a reduction
      of the basis of the asset upon complying with the conditions of the grant.
      We
      record the receipt of funds when compliance is uncertain as “Unearned grants”.





*Sales
      and Marketing Costs*





Sales
      and
      marketing expenses include payroll, employee benefits, stock-based compensation,
      and other costs associated with sales and marketing personnel and advertising,
      promotions, tradeshows, seminars and other marketing-related programs. We
      expense advertising costs as incurred. Advertising costs for the three months
      and nine months ended September 30, 2007 were $4,625 and $24,722, respectively.
      For the period from inception (May 19, 2003) to September 30, 2007 advertising
      costs were $231,751.





*General
      and Administrative Costs*





General
      and administrative costs include payroll, employee benefits, stock-based
      compensation, and other costs associated with general and administrative costs
      including administrative personnel, professional fees, consulting fees and
      office expense. We allocate overhead and direct production expense to products
      manufactured. However, because we have not reached our production capacity,
      excess manufacturing costs are expensed as incurred as general and
      administrative costs. Expenses related to pre-production include salaries for
      production personnel, purchasing costs and the costs associated with production
      ramp up. Total pre-production costs included in general and administrative
      expenses for the three months and nine months ending September 30, 2007, were
      $106,019 and $484,734, respectively. For the period from inception (May 19,
      2003) to September 30, 2007 pre-production expense was $1,206,450.





*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 on our balance sheet, regardless of their value.





*Income
      Taxes*





As
      of
      January 1, 2007, we adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting
      for Uncertainty in Income Taxes”, which supplements Statement of Financial
      Accounting Standard 109, “Accounting for Income Taxes”, by defining the
      confidence level that a tax position must meet in order to be recognized in
      the
      financial statements. FIN 48 requires that the tax effect of a position be
      recognized only if it is “more-likely-than-not” to be sustained based solely on
      its technical merits as of the reporting date. If a tax position is not
      considered more-likely-than-not to be sustained based solely on its technical
      merits, no benefits of the position are recognized. This is a different standard
      for recognition than was previously required. The more-likely-than-not threshold
      must continue to be met in each reporting period to support continued
      recognition of a benefit. We have reviewed our tax positions and have not
      identified any positions that fail the more-likely-than-not threshold. Due
      to
      our full valuation allowance on the deferred tax asset, the adoption of FIN
      48
      had no material impact on our financial statements (Note 6).





12




*Net
      Loss Per Share*





Under
      the
      provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per
      Share” (“SFAS 128”) and Securities and Exchange Commission Staff Accounting
      Bulletin No. 98 (“SAB 98”), basic loss per share is computed by dividing our net
      loss attributable to common shareholders for the period by the weighted-average
      number of shares of common stock outstanding during the period.





*Interim
      Financial Statements*





The
      unaudited interim financial information included in this report reflects normal
      recurring adjustments that management believes are necessary for a fair
      statement of the results of operations, financial position, and cash flows
      for
      the periods presented. This interim information should be read in conjunction
      with the financial statements and accompanying notes contained in the Company’s
      Form 10-KSB filed April 17, 2007.





The
      results of operations for the three months and nine months ended September
      30,
      2007 are not necessarily indicative of the results to be expected for other
      interim periods or the full year.





*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.





*Stock-Based
      Compensation*





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





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





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





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





We
      account for options issued to non-employees (other than directors) under SFAS
      123R and EITF No. 96-18, “Accounting for Equity Instruments that are Issued to
      Other Than Employees for Acquiring, or in Conjunction with Selling, Goods,
      or
      Services.” Therefore, the fair value of options issued to non-employees, as
      calculated, using the Black Scholes Option pricing formula (Note 10), is
      recorded as an expense over the vesting terms. Options issued to non-employees
      and employees are issued using the same methodology and
      assumptions.




13




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




**Period from Inception****(May 19, 2003) to****September 30, 2007**Net
                loss attributable to common shareholders, as reported
            
            $
            (13,191,472
            )Add:
                options and restricted stock-based employee compensation expense
                included
                in reported net loss
            
            
            1,353,672Deduct:
                options and restricted stock-based employee compensation expense
                determined under fair value based method
            
            
            (1,539,474
            )Pro
                forma net loss attributable to common shareholders
            
            $
            (13,377,274
            )





Total
      employee non-cash stock compensation expense, net of forfeitures, for the three
      months and nine months ended September 30, 2007 was $153,759 and $478,795,
      respectively.





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





*Warrants*





We
      have
      granted warrants to certain finders in our private placements. Based on EITF
      00-19, “Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settle in, a Company's Own Stock,” the sale of the warrants was
      reported in permanent equity and accordingly, there is no impact on our
      financial position and results of operation. Subsequent changes in fair value
      will not be recognized as long as the warrants continue to be classified as
      an
      equity instrument (Note 7).





*Recent
      Accounting Pronouncements*





FASB
      Statement No. 157


In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 provides a single definition of fair value, together with a
      framework for measuring it, and requires additional disclosure about the use
      of
      fair value to measure assets and liabilities. SFAS 157 also emphasizes that
      fair
      value is a market-based measurement, not an entity-specific measurement, and
      established a fair value hierarchy with the highest priority being the quoted
      price in active markets. This statement is effective for years beginning on
      or
      after November 15, 2007. We are currently evaluating the impact on our
      Consolidated Financial Statements, but do not believe that it will have a
      material impact. We plan to adopt SFAS 157 in the first quarter of
      2008.





FASB
      Statement No. 159


In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities,” (“SFAS”) which permits entities to
      choose to measure, on an item-by-item basis, specified financial instruments
      and
      certain other items at fair value. Unrealized gains and losses on items for
      which the fair value option has been elected are required to be reported in
      earnings at each reporting date. SFAS 159 is effective for fiscal years
      beginning after November 15, 2007. The provisions of this statement are required
      to be applied prospectively. We are currently evaluating whether to adopt SFAS
      159 and if adopted, the impact of adoption.





*Reclassifications*





Certain
      amounts in the Condensed Consolidated Statements of Operations for the three
      months and nine months ended September 30, 2006 and the Condensed Consolidated
      Statements of Cash Flow, for the nine months ended September 30, 2006 have
      been
      reclassified to conform to the current year presentation. These
      reclassifications had no effect on net loss as previously reported.





14


**2.
      INVENTORY**





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





Component
                parts
            
            $
            1,612,763Work
                in process
            
            
            26,267Finished
                goods
            
            
            491,494Total
            
            $
            2,130,524





We
      follow
      the provisions of SFAS 151, “Inventory Costs” that amends the guidance in
      Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing” (ARB No.
      43). Under this guidance, we allocate fixed production overhead to inventory
      based on the normal capacity of the production facilities, any expense incurred
      as a result of idle facility expense, freight and handling costs are expensed
      as
      period costs. For the three months and nine months ended September 30, 2007,
      we
      allocated approximately $4,700 and $14,200, respectively, of overhead to
      inventory. We allocated approximately $36,200 of overhead to inventory from
      inception (May 19, 2003) to September 30, 2007. The balance of fixed production
      overhead is recorded in general and administrative costs.





At
      September 30, 2007 we recorded inventory of $2,130,524 which includes
      approximately $350,000 for engine blocks purchased from our supplier in China.
      We have rejected most of the engine blocks received from this supplier. Based
      upon the Warranty and Replacement Terms agreement with the supplier, dated
      March
      22, 2007, and a visit to the factory in China during the month of October,
      we
      expect that the supplier will replace the rejected products at no additional
      cost to us. We anticipate that the blocks will be shipped to us in lots of
      35,
      so that 100% inspection can be completed before the blocks are accepted. We
      also
      anticipate having an HEC-employed quality inspector, at the factory in China,
      during the production of our blocks.





As
      a
      result of recent changes in our efforts to market our excess 4.9L remanufactured
      engine inventory, we recorded an inventory write-down, net of recoveries of
      $239,598 for the quarter ended September 30, 2007 and $667,745 from inception
      (May 9, 2003) through September 30, 2007. The inventory write-down consists
      of
      component parts and finished goods inventory.





**3.
      CONSTRUCTION IN PROGRESS**





At
      September 30, 2007 we recorded $164,420 for construction in progress.
      Construction in progress includes $111,894 for improvements to our dynamometer
      room and $52,527 for the purchase of a dynamometer. We anticipate that we will
      have approximately $15,000 in additional costs to complete the improvements
      to
      the dyno room and to complete the installation of the dynamometer.





**4.
      NOTES PAYABLE, BANK**





On
      February 21, 2007, we amended our loan agreement for our letter of credit.
      The
      amendment reduced the letter of credit with the bank from $330,000 to $80,000.
      This amendment allowed us to obtain a revolving line of credit for $250,000.
      The
      interest rate was equal to the bank’s prime rate, which was 8.25%, and required
      that interest be paid monthly. The line of credit was to expire on October
      16,
      2007 and was secured by a certificate of deposit. On October 3, 2007, we paid
      off the $250,000 line of credit, with proceeds from the certificate of deposit.
      In addition, we amended our loan agreement dated February 21, 2007, and
      increased our letter of credit with the bank from $80,000 to $108,000. This
      letter of credit is secured by a certificate of deposit in the amount of
      $114,000.





**5.
      CAPITALIZED LEASES**





We
      entered into a capital lease agreement on February 14, 2007, to purchase
      equipment totaling approximately $111,000 that is being depreciated over five
      years. The equipment lease calls for 36 monthly installments of $3,756 and
      a
      downpayment of $15,351. This lease agreement contains a bargain purchase option
      at the end of the lease term. We have other leases with bargain purchase options
      that are being depreciated over five year periods. The purchase price for this
      equipment was $49,940 and has monthly lease payments of $1,032.


15


The
      net
      book value of capital lease assets was $145,299 at September 30, 2007.
      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 September 30, 2007:





2007
            
            $
            14,3622008
            
            
            57,4482009
            
            
            57,4482010
            
            
            19,8892011
            
            
            11,586Thereafter
            
            
            635Total
                minimum lease payments
            
            
            161,368Less
                amount representing interest
            
            
            24,684Present
                value of minimum lease payments
            
            
            136,684Less
                amounts due within one year
            
            
            43,899Totals
            
            $
            92,785





**6.
      INCOME TAXES**





Our
      tax
      returns filed and to be filed for years ended December 31, 2004, 2005, and
      2006
      are open to review by the Internal Revenue Service. As of November 8, 2007
      we
      have not been notified that we have any tax returns under review. We have
      sustained net operating losses in each of these years, in the United States
      and
      for 2005 and 2006 in Canada. We h ave
      reviewed our calculations of unrecognized tax benefits that may result from
      tax
      uncertainties, and we believe that our estimate for unrecognized tax benefits
      is
      appropriate. We recognize interest and penalties related to uncertain tax
      positions in our provision for income taxes. As a
      result of the adoption of FIN 48, there has been no change in unrecognized
      tax
      benefits.





**7.
      WARRANTS**





On
      August
      21, 2007, we issued 25,000 warrants for inventory purchased. The warrants carry
      a three-year term and an exercise price of $2.00. Our assumptions included
      an
      expected life of three years, a risk-free interest rate of 4.6%, and a
      volatility rate of 96.56%. The calculation, under SFAS 123R and EITF No. 96-18,
      yielded a per warrant price of $.84 and total expense of $21,065. This amount
      was included as part of the total inventory cost.





**8.
      PREFERRED STOCK**





On
      March
      13, 2007, we commenced the private placement of our Series B Preferred Stock.
      The Board of Directors authorized 5,000,000 shares of Series B Preferred Stock
      at $2.00. On March 27, 2007, we sold 150,000 shares of Series B Preferred Stock
      which triggered certain antidilution rights of the Series A Preferred Stock
      sold
      in 2006.





The
      shares of Series B Preferred Stock are convertible into a number of shares
      of
      Common Stock at a conversion price determined by dividing the offering price
      by
      any lower price at which the Company may sell shares of Common Stock prior
      to
      the expiration of twelve months from the date of issuance.





As
      a
      result of the issuance of the Series B Preferred Stock, the conversion price
      of
      the Series A Preferred Stock was reduced from $3.25 per share to $2.00 per
      share. This modification resulted in a beneficial conversion totaling
      $1,889,063. This beneficial conversion feature was accreted to the Series A
      Convertible Preferred Stock as a dividend because the preferred stock was
      convertible upon issuance. The accretion is included on the income statement
      as
      a quasi dividend to determine net loss attributable to common
      shareholders.





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





On
      September 29, 2007, 465,000 shares of our Series A Preferred Stock automatically
      converted to 755,625 shares of common stock per the terms of the Certificate
      of
      Designation for the Series A Preferred Stock dated September 29, 2006. In
      addition, on October 4, 2007 the balance of the Series A Preferred Stock of
      465,000 shares converted to 755,625 shares of Common Stock.


16





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





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





We
      may
      also issue restricted stock under the Incentive Plan. Restricted stock awards
      made under this program vest over periods designated by the Board of Directors,
      generally two to four years. The aggregate number of shares authorized for
      employee stock options, non-employee stock options and restricted stock awards
      is 2,000,000. At September 30, 2007, there were 624,834 shares available for
      grant and 1,375,166 shares granted. Of the shares granted, 361,000 were granted
      as restricted stock, 201,666 were granted as non-employee stock options, and
      812,500 were granted as employee and director stock options.




On
      August
      13, 2007, the Board of Directors approved the repricing of all of the options
      granted after September 1, 2005. The Board of Directors determined such a
      repricing to be appropriate in order to sustain the incentivization of the
      employees. Employees’ existing option grants were repriced to an exercise price
      of $1.34 per share (the closing price of the common stock as of the reprice
      date). Original exercise prices had ranged from $3.50 to $1.70 per share.
      Additionally, any unvested portion of the original option will vest per the
      original grant.





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 $29 million and $1.4 billion, in addition to our actual history over
      a
      twenty-five month period.





**Period from Inception****For the three months ending**
              **September 30,**
            
            **For the nine months ending**
              **September 30,**
            
            **(May 19, 2003)**
              **to****2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **September 30,**
              **2007**Risk-free
                interest rate
            
            
            4.7
            %
            
            4.6
            %
            
            4.7
            %
            
            4.6
            %
            
            4.2
            %Expected
                volatility
            
            
            96.4
            %
            
            116
            %
            
            96.4
            %
            
            116
            %
            
            148.9
            %Expected
                life (in years)
            
            
            5.5
            
            
            5.5
            
            
            5.5
            
            
            5.5
            
            
            7.5Dividend
                yield
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Weighted-average
                estimated fair value of options granted during the period
            
            $
            .99
            
            $
            2.80
            
            $
            .99
            
            $
            2.80
            
            $
            .99




17


The
      following table summarizes the activity for outstanding employee and
      non-employee stock options for the nine months ended September 30,
      2007:





**Options Outstanding****Number of**
              **Shares**
            
            **Weighted-**
              **Average**
              **Exercise Price**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
              **(in years)**
            
            **Aggregate**
              **Intrinsic Value**
              **(1)**Balance
                at December 31, 2006
            
            
            838,666
            
            $
            1.85Granted
            
            
            195,000
            
            $
            1.34Forfeited
            
            
            (27,500
            )
            $
            1.00Balance
                at September 30, 2007
            
            
            1,006,166
            
            $
            1.16
            
            
            8.4
            
            $
            593,638Vested
                and exercisable asof
                September 30, 2007
            
            
            545,916
            
            $
            1.08
            
            
            8.1
            
            $
            365,764Vested
                and expected to vest asof
                September 30, 2007
            
            
            991,074
            
            $
            1.16
            
            
            8.4
            
            $
            584,734





(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 $1.75 on September 28, 2007, the last
                day of
                trading in September.





There
      were no stock options exercised during the three months and nine months ending
      September 30, 2007.





As
      of
      September 30, 2007, there was approximately $1,339,746 of unrecognized
      compensation cost related to outstanding stock options, net of forecasted
      forfeitures. This amount is expected to be recognized over a period of four
      years. To the extent the forfeiture rate is different than we have anticipated,
      stock-based compensation related to these awards will be different from
      expectations.





The
      following table summarizes the activity for the unvested restricted stock for
      the nine months ended September 30, 2007:




**Unvested
                Restricted Stock****Number
                of**
              **Shares**
            
            **Weighted-Average**
              **Grant
                Date**
              **Fair
                Value**Unvested
                at December 31, 2006
            
            
            218,000
            
            $
            1.00Vested
            
            
            (61,000
            )
            $
            1.00Forfeited
            
            
            (65,000
            )
            $
            1.00Unvested
                at September 30, 2007
            
            
            92,000
            
            $
            1.00





As
      of
      September 30, 2007, there was approximately $86,844 of unrecognized compensation
      cost related to unvested restricted stock. This amount is expected to be
      recognized over a weighted-average period of 2 years. To the extent actual
      forfeiture rate is different than we have anticipated, the numbers of restricted
      stock expected to vest would be different from expectations.




18


The
      following table summarizes additional information about stock options
      outstanding and exercisable as of September 30, 2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise**
              **Price**
            
            **Options**
              **Outstanding**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Shares
                Exercisable**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**$1.00
            
            
            533,666
            
            
            7.9
            
            $
            1.00
            
            
            409,666
            
            $
            1.00$1.34
            
            
            462,500
            
            
            8.9
            
            $
            1.34
            
            
            136,250
            
            $
            1.34$1.40
            
            
            10,000
            
            
            9.9
            
            $
            1.40
            
            
            0
            
            $
            1.401,006,166
            
            
            8.4
            
            $
            1.16
            
            
            545,916
            
            $
            1.08




**11.**  **COMMITMENTS
      AND CONTINGENCIES**





*Component
      Parts Procurement*





At
      November 5, 2007, we had issued approximately $87,901 in purchase orders to
      several vendors for inventory, engine certification, and equipment to support
      our business plan. These purchase orders have been issued with delivery dates
      through June 2008.




19


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





Hydrogen
      Engine Center, Inc. (“HEC” or the “company”) is in the business of offering
      tangible technologies that produce clean energy solutions designed to lessen
      America’s dependence on foreign fuels. We currently offer technologies that
      enable power generation systems (“gensets”) and engines to run on hydrogen and
      are testing technologies to allow an engine to run on ammonia, another
      carbonless fuel. We are dedicated to the further development of our current
      technologies, as well as to the development of new clean energy solutions for
      tomorrow’s energy needs.




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-QSBA. THIS DISCUSSION CONTAINS FORWARD LOOKING
      STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS WILL DEPEND
      UPON A NUMBER OF FACTORS BEYOND OUR CONTROL AND COULD DIFFER MATERIALLY FROM
      THOSE ANTICIPATED IN THE FORWARD LOOKING STATEMENTS. READERS SHOULD CAREFULLY
      READ OUR FINANCIAL STATEMENTS AND THE NOTES THERETO, AS WELL AS THE "RISK
      FACTORS" DESCRIBED
      IN THE DOCUMENTS WE FILE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
      COMMISSION, INCLUDING OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
      DECEMBER 31, 2006.





*Plan
      of Operation*





Because
      we have not to date received the level of financing we anticipated, we have
      initiated action to streamline our operations while continuing our mission
      and
      commitment to developing and delivering carbon-free energy solutions. Our
      short-term tactics involve a cash management plan designed to preserve cash
      and
      maximize our other resources. Our longer-term strategies are designed to allow
      us to continue to pursue development and marketing of the technologies we
      believe to be the core of our future. We believe the economics of traditional
      energy sources such as oil and gas, combined with severe supply concerns, bring
      very favorable factors to our technology. Our technology enables internal
      combustion engines to run on carbon-free fuels that are available in the
      domestic US market. We believe this gives HEC a competitive
      advantage.





*Our
      Cash-Management Plan*





We
      have
      actions in place to reduce our use of cash. To do so we have commenced the
      following actions:





·
            We
                are prioritizing our cash spending on revenue generating opportunities.
                We
                expect to continue to expend funds to support: (i) tactical sales,
                (ii)
                all manufacturing operations needed to support tactical sales revenue
                and
                (ii) further development of our technologies, patents and intellectual
                property.





·
            We
                are minimizing the amount of cash we spend on overhead during this
                period.
                This may involve layoffs of some employees and will involve the deferral
                or elimination of spending in other categories. Under this plan,
                salaries
                for all officers have been reduced during this period by 15%.





*Our
      Strategies to Realize Opportunities*





The
      escalation in traditional energy prices has accelerated to unprecedented levels.
      Supply concerns are growing. These factors are not expected to improve. We
      believe this set of dynamics places increased value and focus on the technology
      that HEC is developing. Market demand for our technology is expected to
      accelerate. The prices we can charge for our solutions are expected to escalate.
      We believe all of these factors have combined to create an accelerated
      opportunity for HEC. Accordingly --- we are focusing our efforts to take
      advantage of these market dynamics. We are implementing business actions now,
      built upon our core strengths, in the following areas:





·
            Marketing
                of “clean energy controllers” for use across multiple engine platforms. We
                believe this effectively brings a licensing opportunity to HEC. We
                plan to
                leverage our to-date patent filings, and our OxxWorks products, selling
                our solutions to other engine designers and manufacturers. Our value
                proposition is carbon-free energy on the traditional internal combustion
                engine base for use in our engines or engines built by other
                manufacturers. We believe this program will build on our technology
                know
                how, but allow faster deployment with less
                capital.


20


·
            Marketing
                our technology services to modify engines built by other manufacturers,
                thus allowing them to use hydrogen and other clean fuels with the
                use of
                our control system. This is being built upon our track record of
                achievement in building carbon-free engines for power generation,
                agriculture, urban bus transport and industrial
                applications.





·
            Obtaining
                Tier I certification for our 4.9L OxxPowerTMengine. This will allow us to sell our OxxPowerTMtechnology and engines into the replacement market.





We
      are
      also assessing the possibility of obtaining EPA certification for our
      dynomometer facility in Algona which could create another potential strategic
      stream of revenue and profits as well as a stream of strategic partners. Our
      dynomometer is fully operational, testing alternative fuel efficiencies. We
      view
      our dynomometer facility as a strategic asset that can be leveraged across
      a
      large industry base.





We
      believe that our control and fuel delivery systems will also allow us to offer
      distributed power generation solutions to a wide variety of markets, as
      demonstrated in our current products. For example, we have delivered a 50kW
      Oxx
      PowerTM genset to Grasim Industries in India. This genset runs on hydrogen that
      is a byproduct of the chlor-alkali manufacturing process. It therefore offers
      the potential of low cost, clean energy to run the manufacturing facility.
      We
      believe this can deliver the power of clean, low cost energy, independent of
      foreign oil sources, and independent of the strained power grid. This proof
      point is in place and we believe based on our recent meetings with Grasim,
      that
      this solution is highly scalable. We anticipate that we will receive an
      additional order from Grasim Industries. Another example of the viability of
      our
      generator systems occurred on October 4, 2007, when HEC completed the final
      acceptance test phase on our 4 + 1TM 250kW hydrogen generator for Natural
      Resources Canada (NRCAN). NRCAN is is planning to use our genset technology
      to
      prove that continuous power generation from wind energy is achievable. This
      proof point applies to other renewable energy sources such as solar and hydro.
      This technology is also highly scalable. We anticipate being engaged to perform
      additional services to complete grid integration for the 4 + 1TM 250kW
      genset.





The
      technologies embedded in our controllers, fuel delivery systems and engine
      modification abilities are the foundation we have built over the past two years.
      We believe market dynamics point to an imperative that we must expand our
      technology development, built upon our core assets and the proof points
      mentioned above. The heightened focus on technology development is underway,
      and
      we are finalizing a plan to accelerate our delivery of advanced technologies.
      Again, we believe the value proposition we deliver to customers is getting
      even
      more favorable. Our technologies are being designed to reduce global dependency
      on oil supplies. Our technology powers business and the economy with little
      to
      no greenhouse gas emissions. These deliverables have value now, and their value
      is expected to increase. HEC is gearing to participate in this highly scalable
      and valuable market. We intend to pursue broad protection of our intellectual
      property, which we view as a material portion of the long-term value of our
      company. We expect to file patents and receive patent pending status covering
      the alternative energy solutions described below. Our efforts to raise expansion
      capital are built upon the increasingly favorable market factors, and the
      success of our proof points, as outlined above.





**Corporate
      History**





The
      company (previously known as Green Mt. Labs, Inc.) is a Nevada corporation
      originally organized in Idaho on July 12, 1983. On
      August
      30, 2005, the company completed the acquisition of Hydrogen Engine Center,
      Inc.,
      an Iowa corporation (“HEC Iowa”). To accomplish the acquisition, we merged our
      newly created, wholly-owned subsidiary with and into HEC Iowa, with HEC Iowa
      being the surviving entity (the “Merger”). In connection with the Merger, we
      changed our name from Green Mt. Labs, Inc. to Hydrogen Engine Center,
      Inc.





Under
      the
      terms of the Merger, we issued 16,297,200 shares of our post-split common stock
      (representing 81% of our total outstanding shares immediately following the
      transaction) to Theodore G. Hollinger, who was the sole stockholder of HEC
      Iowa,
      in exchange for 100% of HEC Iowa’s outstanding capital stock. HEC Iowa is our
      wholly-owned subsidiary, along with our Canadian subsidiary, Hydrogen Engine
      Centre (HEC) Canada, Inc. (“HEC Canada”). References to “we,” “us,” or the
“company” refer to the company and its subsidiaries, HEC Iowa and HEC Canada.


21


The
      accompanying condensed consolidated balance sheet as of September 30, 2007,
      and
      the condensed consolidated statements of operations and consolidated statements
      of cash flows for the nine months and three months ended September 30, 2007
      and
      2006, and from inception (May 19, 2003) to September 30, 2007, consolidate
      the
      historical financial statements of the company with HEC Iowa after giving effect
      to the Merger where HEC Iowa is the accounting acquirer.





**Overview**





We
      are a
      development stage company being built
      upon the vision of carbon-free, energy independence. We offer cost effective
      clean energy technologies designed to generate and use clean power on demand,
      where needed. Technologies are available today that enable
      engines and generator systems to run efficiently on hydrogen, gasoline, propane,
      natural gas, ethanol and other fuels. The engines can run on various grades
      of
      hydrogen, or on mixed gases such as natural gas and hydrogen. We
      have
      generated revenue through
      the sale of engines, open power units and generator systems using our
      high-quality, reliable remanufactured engines and our new Oxx PowerTM engines. We
      believe that revenue from these sources, along with revenue from our power
      generation technologies, will help support our continuing operations and assist
      with funding for our research and development efforts relating to our clean
      energy solutions .





**Results
      of Operations**





A
      summary
      statement of our operations, for the three and nine month periods ended
      September 30, 2007 and 2006 and for the period from inception through September
      30, 2007 follows:





Summary
      Statement of Operations


(unaudited)





**Three Months Ended**
              **September 30**
            
            **Nine Months Ended**
              **September 30**
            
            **From Inception**
              **(May 19, 2003) to****2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **September 30, 2007**Sales
            
            $
            86,047
            
            $
            126,331
            
            $
            527,720
            
            $
            202,040
            
            $
            849,624Cost
                of Sales
            
            
            74,299
            
            
            113,109
            
            
            447,143
            
            
            168,365
            
            
            724,410Gross
                Profit
            
            
            11,748
            
            
            13,222
            
            
            80,577
            
            
            33,675
            
            
            125,214Operating
                Expenses
            
            
            1,275,418
            
            
            1,630,598
            
            
            4,176,791
            
            
            4,569,306
            
            
            11,277,094Operating
                Loss
            
            
            (1,263,670
            )
            
            (1,617,376
            )
            
            (4,096,214
            )
            
            (4,535,631
            )
            
            (11,151,880
            )Other
                Income (Expense)
            
            
            (22,745
            )
            
            (19,217
            )
            
            (73,238
            )
            
            (44,086
            )
            
            (150,529
            )Net
                Loss
            
            $
            (1,286,415
            )
            $
            (1,636,593
            )
            $
            (4,169,452
            )
            $
            (4,579,717
            )
            $
            (11,302,409
            )Series
                A Preferred stock beneficial conversion feature accreted as a
                dividend
            
            
            -
            
            
            -
            
            
            (1,889,063
            )
            
            -
            
            
            (1,889,063
            )Net
                Loss Attributable to Common Stockholders
            
            $
            (1,286,415
            )
            $
            (1,636,593
            )
            $
            (6,058,515
            )
            $
            (4,579,717
            )
            $
            (13,191,472
            )





Sales
      increased by $325,680 for the nine months ended September 30, 2007, which we
      attribute to the sales efforts of our power products distributors. Our sales
      for
      the three months ended September 30, 2007 decreased by $40,284, compared to
      sales in the same quarter last year. Some factors such as an extremely wet
      summer in sections of the mid west and south hampered sales of our engines
      and
      power units that are used in irrigation applications, and were beyond our
      control.


22


During
      the three months ended September 30, 2007 and 2006 we realized gross profit
      margins of 13.7% and 10.5%, respectively, while our gross profit margins for
      all
      other periods reported above were approximately 15%-16%. As long as our primary
      sales are composed of traditional fueled engines, we anticipate that our gross
      margins will remain at a level that will allow for positive cash flow. In an
      effort to liquidate our excess inventory of remanufactured engines, we have
      recorded a decline in market value of inventory to reflect a lower future sales
      price. We are hopeful, with this new pricing that we can become more price
      competitive with our remanufactured engine products.





We
      anticipate realizing higher gross margins for production hydrogen fueled
      products. Although we did not have any hydrogen product sales in the third
      quarter, we do expect to win some hydrogen projects in the fourth quarter.
      We
      anticipate that our gross margins will increase only to the extent we are
      successful in marketing our hydrogen and other clean-energy products. This
      is
      consistent with our mission of offering tangible technologies that produce
      clean
      energy solutions.





·
            We
                received a purchase order from the United Nations Industrial Development
                Organization to deliver two hydrogen powered, 275 hp marine engines
                to be
                used in water taxis in Istanbul, Turkey. The total value of the purchase
                order is $51,200.





·
            On
                October 4, 2007, we completed the final acceptance testing phase
                on our 4
                + 1TM 250kW hydrogen generator, procured by Natural Resources Canada
                (NRCAN). We will receive a third milestone payment for this project
                of
                approximately $91,125 (CAD). In addition, we anticipate receiving
                a
                purchase order for additional engineering services for grid integration
                of
                the 4 + 1TM.





·
            We
                have provided quotes to potential customers with Renewable Wind Energy
                Projects. These projects are similar to the projects we undertook
                with
                Xcel Energy and Natural Resources Canada. We anticipate that these
                projects will provide additional sales opportunities for us. Xcel
                Energy
                recently began testing our 50kW hydrogen powered genset in Colorado
                and
                the 4 + 1TM unit for Natural Resources Canada is scheduled to be installed
                sometime during the spring of 2008. We are confident that the testing
                will
                be favorable thus creating demand for similar projects.





·
            We
                have recently traveled to India to observe our 50kW hydrogen powered
                generator set (genset) located at Grasim Industries. The genset is
                used to
                provide power to supplement the energy needs of the plant. Grasim
                Industries continues to be interested in our technology and we anticipate
                receiving an additional order for a 250kW genset with our newly designed
                heat recovery system. We have provided numerous quotes for our hydrogen
                powered generator sets to customers and potential customers whose
                production processes generate hydrogen as a by-product of production,
                similar to the opportunity we encountered at Grasim.





·
            We
                are currently testing ammonia as a fuel alternative, using our proprietary
                controls to allow an HEC open power unit to operate an irrigation
                pump in
                California. To date, this engine has run successfully on ammonia
                (using
                propane as a catalyst), for over 200 hours. We will soon begin the
                testing
                of another ammonia powered engine in order to obtain related data
                for
                emissions and fuel consumption. We anticipate that by using ammonia
                as a
                fuel we could reduce emissions and reduce our dependence on foreign
                oil
                while bridging the lack of a developed hydrogen infrastructure. Recently,
                the State of Washington added ammonia to its list of official alternative
                vehicle fuels. We are hopeful that other states will follow. A significant
                effort by a number of groups is underway to affect this goal. Ammonia
                (NH3) also known as anhydrous ammonia contains no carbon, stores
                like
                propane and is the second most prevalent chemical in the world. An
                infrastructure for ammonia is already in place, ammonia pipelines
                can be
                found in many areas of the United States and distribution of the
                fuel is
                already established.





·
            We
                have begun work with our new partner in India, Belliss Co, Ltd, and
                have
                several projects in process that we hope will result in significant
                orders. A sales visit in India is ongoing at the time of filing of
                this
                report.


23


Income
      related to certain of our hydrogen projects is recorded as a reduction in
      research and development expense at the time title and risk of ownership
      transfers to the customer. These amounts, therefore, are not reflected in our
      sales revenue. Expenses we incur for these projects are recorded as research
      and
      development costs. During the three months and nine months ended September
      30,
      2007, we recorded $0 and $30,000, respectively as a reduction in research and
      development expense resulting from proceeds from hydrogen projects. From
      inception (May 19, 2003) to September 30, 2007, we recorded $81,200, as a
      reduction in research and development expense. We have recorded $102,972 as
      “Unearned project reimbursements” for projects which are in process at September
      30, 2007.




Sales
      and
      marketing expense for the three months ending and nine months ending September
      30, 2007 was $64,488 and $231,236, respectively. We expect to be more involved
      in the distributed generation market because of the tightening of governmentally
      imposed emission standards. We also plan to be more involved in technology
      licensing. For that reason, we plan to continue our search for highly qualified
      sales people with engineering and controls experience.





Our
      general and administrative expenses decreased $242,643 and $259,588 for the
      three months and nine months ended September 30, 2007, as compared to respective
      periods in 2006. General and administrative expenses for the three months and
      nine months ended September 30, 2007 were $610,243 and $2,167,029, respectively.
      Reductions in general and administrative expenditures are due primarily to
      our
      efforts to control operational expenses. Our general and administrative expenses
      include salaries, employee benefits, stock-based compensation, and the cost
      of
      compliance. Compliance costs include legal and accounting fees and the costs
      incurred for investor relations.





Our
      general and administrative expense also includes overhead and direct production
      expenses related to preproduction 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 the costs associated with production ramp up. Total pre-production
      costs included in general and administrative expenses for the three months
      and
      nine months ended September 30, 2007, were $106,019 and $484,734, respectively.
      For the period from inception (May 19, 2003) to September 30, 2007,
      pre-production expense was $1,206,450.





On
      August
      14, 2007, our Board of Directors voted to reprice employee stock options awarded
      after September 1, 2005. The repricing will add an additional $77,050 in
      operating expense over the term of the options. We recognized additional
      expense, due to the repricing, of $26,686 for the quarter ending September
      30,
      2007. Our operating expenses include $156,222 and $486,183 for the three months
      and nine months ending September 30, 2007, in employee stock options,
      nonemployee stock options and restricted stock compensation for directors and
      employees. We view our stock option 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, since inception (May 19, 2003), an aggregate amount of
      $1,538,170 in stock-based compensation expense. This expense has been allocated
      among sales and marketing, general and administrative, and research and
      development expenses.





Since
      inception (May 19, 2003) we have accrued approximately $150,000 in expenses
      related to forgivable loans and grants from state and local government sponsored
      programs. These expenses will continue to accrue until we meet certain criteria
      for job creation. If we can comply with the job creation criteria, these
      expenses would be recorded, at the time of forgiveness, as other income.





Costs
      recorded for research and development for the three months and nine months
      ended
      September 30, 2007 were $361,089 and $1,109,662 respectively. For the first
      three quarters of 2007 our Chief Executive Officer who also serves as our Chief
      Technical Officer has been concentrating his efforts on compiling technological
      data as support for the four patent applications filed thus far in 2007.





Our
      research and development costs also include payroll, employee benefits,
      stock-based compensation, engine certification expense, and other costs
      associated with product development. Because these costs are expensed as they
      are incurred, our investments in technology and patent applications are recorded
      at zero in our financial statements, regardless of their value. We currently
      have seven patents filed and pending and three in process addressing various
      aspects of our technologies. Our application for a patent relating to a material
      neutral process was filed with the US Patent office on October 9, 2007 and
      filed
      under the Patent Cooperation Treaty (foreign filing) on
      10-10-07.


24


On
      August
      21, 2007, we issued 25,000 warrants to a vendor for payment of inventory. We
      added $21,065 to component parts inventory as a result of this transaction.
      We
      also realized an expense in the amount of $448,011 to recognize the value of
      warrants issued to a former supplier to settle a dispute. The warrants were
      issued on May 9, 2007 and the settlement has been completed.





At
      September 30, 2007 we recorded inventory of $2,130,524, which amount includes
      approximately $350,000 for engine blocks purchased from our supplier in China.
      After inspection we rejected most of the blocks received from that supplier.
      Based upon the Warranty and Replacement Terms dated March 22, 2007, as well
      as
      personal conversations with this supplier, we expect that the supplier will
      replace the rejected products at no additional cost to us. One of our officers
      visited the supplier in October 2007 and confirms that the supplier is
      relocating its operations to a modern facility that appears to be capable of
      meeting our specifications for design and operating performance. We anticipate
      that the blocks will be shipped to us in lots of 35, so that 100% inspection
      can
      be completed before the blocks are accepted. We also anticipate having an
      HEC-employed quality inspector, at the factory in China, during the production
      of our blocks. It is possible that we will be required to obtain engine blocks
      from other, more expensive sources, if the blocks from this new facility do
      not
      meet our expectations.





For
      the
      three months ended September 30, 2007 we recorded a net loss of $1,286,415 compared
      to a net loss of $1,636,593 for the three months ended September 30, 2006.
      For
      the nine months ended September 30, 2007 we recorded a net loss of $4,169,452
      compared to a net loss of $4,579,717 for the nine months ended September 30,
      2006. We recorded a net loss of $11,302,409 from inception (May 19, 2003)
      through September 30, 2007. We expect to continue to operate at a net loss
      during 2007.





During
      the nine months ended September 30, 2007 we accreted a beneficial conversion
      dividend to the Series A stockholders of $1,889,063, resulting in a net loss
      attributable to common stockholders of $6,058,515. We recorded net losses
      attributable to common stockholders totaling $13,191,472 from inception (May
      19,
      2003) through September 30, 2007. We did not record any dividends during the
      nine months ended September 30, 2006.




**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.





*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.





*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.


25


*Merger
      and Stock-based Compensation*





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





**Liquidity
      and Capital Resources**





*Short-Term
      and Long-Term Debt Sources*





From
      inception through September 30, 2007, we have used $10,328,944 in cash in our
      operating activities and $3,324,429 in capital expenditures.





Net
      cash
      used in operating activities was $844,703 for the three months ended September
      30, 2007, compared to $2,101,182 cash used in operating activities in the three
      months ended September 30, 2006. Net cash used in operating activities was
      $3,228,178 for the nine months ended September 30, 2007, compared to
      $4,379,712 cash used in operating activities in the nine months ended
      September 30, 2006.





Net
      cash
      used in investing activities was $33,836 for the three months ended
      September 30, 2007, compared to $153,370 cash used in investing activities
      in the three months ended September 30, 2006. During the nine-month period
      ended September 30, 2007, we used $143,700 of cash in investing activities
      compared to $1,385,157 of cash in the comparable period of 2006. The reduction
      is primarily due to construction costs incurred during 2006.




We
      have
      funded our operations from inception through September 30, 2007, through a
      series of financing transactions, including four private offerings. The shares
      in all four of our private placements were sold in reliance upon an exemption
      from registration pursuant to Regulation D, Rules Governing the Limited Offer
      and Sale of Securities without Registration under the Securities Act of 1933.





On
      October 3, 2007, we paid off a $250,000 line of credit with Bank of America,
      Algona, Iowa, with proceeds from a certificate of deposit. In addition, we
      amended our loan agreement dated February 21, 2007, and increased our letter
      of
      credit with the bank from $80,000 to $108,000. We secured the letter of credit
      with a certificate of deposit in the amount of $114,000.





At
      September 30, 2007, we had cash on hand of $ 1,563,728,
      compared to $1,149,207 on December 31, 2006. We
      had
      restricted cash, in the form of a bank certificate of deposit, of $364,430
      on
      September 30, 2007, compared to $352,584 on December 31, 2006. However,
      subsequent to September 30, 2007 our certificate of deposit is now equal to
      $114,000 as stated in the previous paragraph.





Inventories
      increased from $2,001,004 at December 31, 2006 to $2,130,524 at September 30,
      2007 due primarily to the purchase of component parts for open power
      units.





Our
      accounts payable decreased from $498,316 on December 31, 2006 to $222,697 on
      September 30, 2007.





At
      September 30, 2007, we had current assets of $4,229,593 and stockholders’ equity
      of $ 4,561,792,
      compared to current assets of $3,776,052 and stockholders’ equity of $4,045,170,
      at December 31, 2006. Our aggregated net loss from inception is $13,191,472.
      Our
      cumulative net loss has resulted principally from expenditures related to the
      commencement of operations and development of our technologies.





*Going
      Concern*





Our
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates our continuation of operations, realization
      of
      assets and liquidation of liabilities in the ordinary course of business. Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses over the next several months. As of September 30,
      2007, we had an accumulated deficit of approximately $11.3 million. Our
      accompanying financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.


26


We
      have
      financed operations since inception primarily through equity and debt
      financings. We anticipate our expenses will increase as we continue our
      operations. Efforts are ongoing to raise new capital. We have engaged an
      investment banking firm that is experienced in our sector to assist in our
      efforts. Funding is needed to implement our business plans. As of November
      9,
      2007, we had cash of $1,059,588, accounts receivable of $196,283 and accounts
      payable of $90,323. If we are unable to raise sufficient funds, we would curtail
      expenditures for research and development including engine certification and
      engine development. With our existing capital, and projected sales revenue,
      we
      anticipate that we can fund our operations through February 2008 without
      additional capital. These timeframes will vary if events occur which negatively
      (or positively) affect our operations, including delays in anticipated sales.
      There can be no assurance that we will successfully raise additional capital
      in
      an amount sufficient to satisfy our requirements. Also, there are no assurances
      that additional capital will be available at terms acceptable to the company.
      These conditions raise substantial doubt about our ability to continue as a
      going concern.





*Employees*





As
      of
      September 30, 2007 we have 29 employees, 24 of whom are in Algona, Iowa, and
      five of whom are in Canada. Since September 30, 2007, four employees have either
      left the company or will be leaving the company to pursue other
      opportunities.





**Inflation**




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





O **ff-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements.




27


**ITEM
      3. CONTROLS AND PROCEDURES**





Our
      management, including our Chief Executive Officer (the principal executive
      officer), Donald C. Vanderbrook, and our Chief Financial Officer (the principal
      financial officer), Sandra Batt, have reviewed and evaluated the effectiveness
      of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
      the Securities Exchange Act of 1934, as amended) as of September 30, 2007.
      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 upon
      this review and evaluation, these officers have concluded that our disclosure
      controls and procedures were not effective as of the end of the period covered
      by this report because of the material weakness noted when we evaluated our
      controls over valuation and treatment of stock conversions.





In
      connection with the material weakness described above management plans to
      enhance its review and approval procedures and to provide education and
      implement accounting reviews as they pertain to stock valuation and treatment
      of
      stock conversions. In addition, management will have future conversions reviewed
      by an external subject matter expert.





CHANGES
      IN INTERNAL CONTROLS OVER FINANCIAL REPORTING





We
      are in
      the process of implementing additional financial and management controls, and
      reporting systems and procedures. We are currently undergoing a comprehensive
      effort in preparation for compliance with Section 404 of the Sarbanes-Oxley
      Act
      of 2002. This effort, under the direction of senior management, includes
      documentation, and testing of our general computer controls and business
      processes. We are currently in the process of formalizing our internal audit
      plan that includes performing a risk assessment, establishing a reporting
      methodology and testing internal controls and procedures over financial
      reporting.




Except
      as
      described above, there has been no change in our internal control over financial
      reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred
      in
      the third quarter ended September 30, 2007 that have materially affected, or
      are
      reasonably likely to materially affect, our internal control over financial
      reporting.


28


**PART
      II OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





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





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





During
      the quarter ended September 30, 2007, we granted options to purchase 25,000
      shares to employees and directors under the company’s 2005 Incentive
      Compensation Plan, all of which were granted with an exercise price of $1.34
      -
      $1.40 per share. Further information about awards under the 2005 Incentive
      Compensation Plan is included in our Annual Report on Form 10-KSB filed with
      the
      Commission on April 17, 2007, which report is incorporated herein by reference.





On
      March
      13, 2007, we commenced the private placement of our Series B Preferred Stock.
      The Board of Directors authorized 5,000,000 shares of Series B Preferred Stock
      at $2.00. The
      offer
      was conducted on behalf of the company by an NASD-licensed
      broker-dealer .
      We
      incurred expenses of approximately 7% of the total proceeds from this offering
      and issued warrants exercisable over five years to purchase a number of shares
      equal in value to 5.0% of the total proceeds from this offering. The proceeds
      of
      the Preferred Offering, net of fees, were immediately available to the company.





We
      received gross proceeds of $3,865,692 from the sale of 1,932,846 shares of
      our
      Series B Preferred Stock (convertible into 1,932,846 shares of common stock),
      which number represents, on an as-converted basis, 6.55% of the 29,523,010
      issued and outstanding shares of common stock (including 930,000 shares of
      Series A Preferred Stock convertible into 1,511,250 shares of Common Stock
      and
      1,932,846 shares of Series B Preferred Stock convertible into 1,932,846 shares
      of Common Stock).





The
      terms
      of the Series B Preferred Stock, including but not limited to its rights and
      preferences, are set forth in the Certificate of Determination of Series B
      Convertible Preferred Stock attached as Exhibit 3.6 to the company’s Form 10-KSB
      filed with the Commission on April 17, 2007 and incorporated by reference
      herein.





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.





This
      Report on Form 10-QSBA is neither an offer to sell nor a solicitation of an
      offer to buy any of these securities. This portion of this report is being
      filed
      pursuant to and in accordance with Rule 135c under the Securities Act. Shares
      of
      the Series B Preferred Stock are no longer being offered by the
      company.


29


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





None





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





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








**NOTES
      ABOUT FORWARD-LOOKING STATEMENTS**





Statements
      contained in this current report which are not historical facts, including
      some
      statements regarding the effects of the Merger, may be considered
      "forward-looking statements" under the Private Securities Litigation Reform
      Act
      of 1995. Forward-looking statements are based on current expectations and the
      current economic environment. We caution readers that such forward-looking
      statements are not guarantees of future performance. Unknown risks and
      uncertainties as well as other uncontrollable or unknown factors could cause
      actual results to materially differ from the results, performance or
      expectations expressed or implied by such forward-looking
      statements.  Readers
      should carefully review the our financial statements and the notes thereto,
      as
      well as the "risk factors" described in the documents we file from time to time with the Securities and
      Exchange Commission, including our annual report on Form 10-KSB for the year
      ended December 31, 2006.


30


**SIGNATURES**




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





**HYDROGEN
                ENGINE CENTER, INC.**Date:
                May 19, 2008
            By
                /s/ Donald C. VanderbrookDonald
                C. VanderbrookPresident
                and Chief Executive OfficerDate:
                May 19, 2008
            By
                /s/ Sandra BattSandra
                BattChief
                Financial Officer


31