**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**FORM
      10-QSB**





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


For
      the
      quarterly period ended March 31, 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 S No  ̈




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





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerS




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 May 16, 2007**Series
                A Preferred
            
            930,000Series
                B Preferred
            
            1,879,846Common
            
            26,078,914









**FORM
      10-QSB**




**TABLE
      OF CONTENTS**





Page**PART
                I**
            
            **FINANCIAL
                INFORMATION**Item
                1.
            Condensed
                Consolidated Financial Statements (Unaudited)Condensed
                Consolidated Balance Sheets as of March 31, 2007
            
            3Condensed
                Consolidated Statements of Operations for the Three Months Ended
                March 31,
                2007 and 2006 and the period from inception (May 19, 2003) through
                March
                31, 2007
            
            5Condensed
                Consolidated Statements of Cash Flows for the Three Months Ended
                March 31,
                2007 and 2006 and the period from inception (May 19, 2003) through
                March
                31, 2007
            
            6Notes
                to Consolidated Financial Statements
            
            8Item
                2.
            Management's
                Discussion and Analysis of Financial Condition
              and
                Results of Operations
            
            18Item
                4.
            Controls
                and Procedures
            
            28**PART
                II.**
            
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            
            29Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            29Item
                6.
            Exhibits
                and Reports on Form 8-K
            
            30Notes
                About Forward-looking Statements
            
            30**SIGNATURES**
            
            
            
            31




2




**ITEM
      1. Condensed
      Consolidated Financial Statements (Unaudited)**


**HYDROGEN
                  ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                  corporation in the development stage)Condensed
                  Consolidated Balance Sheet**March
                  31,****ASSETS**
              
              **2007**(Unaudited)**Current
                  Assets**Cash
                  and cash equivalents
              
              $
              317,064Restricted
                  cash
              
              
              356,432Accounts
                  receivable
              
              
              288,550Inventories
              
              
              2,363,221Prepaid
                  expenses
              
              
              167,122Total
                  current assets
              
              
              3,492,389**Property,
                  Plant and Equipment**Leasehold
                  improvements
              
              
              17,156Building
              
              
              2,150,322Equipment
              
              
              872,371Land
                  and improvements
              
              
              467,188Construction
                  in progress
              
              
              100,3173,607,354Less
                  accumulated depreciation
              
              
              239,653Net
                  property and equipment
              
              
              3,367,701**Total
                  Assets**
              
              $
              6,860,090See
                  accompanying notes.




3





**HYDROGEN
                ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                corporation in the development stage)Condensed
                Consolidated Balance Sheet**March
                31,****LIABILITIES
                AND EQUITY**
            
            **2007**(Unaudited)**Current
                Liabilities**Notes
                payable, bank
            
            $
            1,416,410Current
                portion long-term debt
            
            
            36,902Current
                installments of obligation under capital lease
            
            
            30,521Accounts
                payable
            
            
            656,231Accrued
                expenses
            
            
            958,611Unearned
                project reimbursements
            
            
            102,972Unearned
                grants
            
            
            58,179Total
                current liabilities
            
            
            3,259,826Long-term
                debt, net of current maturities
            
            
            774,339Obligation
                under capital lease, excluding current installments
            
            
            126,202900,541Total
                liabilities
            
            
            4,160,367**Commitments
                and Contingencies****Stockholders'
                Equity**Preferred
                stock - Series A, $0.001 par value; 10,000,000 shares
                authorized,930,000
                shares issued and outstanding
            
            
            930Preferred
                stock - Series B, $0.001 par value; 5,000,000 shares
                authorized,150,000
                shares issued and outstanding
            
            
            150Common
                stock, $0.001 par value; 100,000,000 shares authorized,26,078,914
                shares issued and outstanding
            
            
            26,079Additional
                paid-in capital
            
            
            11,577,738Accumulated
                other comprehensive income - foreign currency
            
            
            (10,403
            )Deficit
                accumulated during the development stage
            
            
            (8,894,771
            )Total
                stockholders' equity
            
            
            2,699,723**Total
                Liabilities and Stockholders’ Equity**
            
            $
            6,860,090See
                accompanying notes.




4


**HYDROGEN
                  ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                  corporation in the development stage)Condensed
                  Consolidated Statements of Operations(Unaudited)**Three
                      months ended**March
                    31,
              
              **From
                        Inception**
                      **(May
                        19, 2003) to****2007**
              
              **2006**
              
              **March
                  31, 2007****Sales**
              
              $
              238,290
              
              $
              28,590
              
              $
              560,194**Cost
                  of sales**
              
              
              202,664
              
              
              15,676
              
              
              479,931**Gross
                  Profit**
              
              
              35,626
              
              
              12,914
              
              
              80,263**Operating
                  Expenses**Sales
                  and marketing
              
              
              88,514
              
              
              240,288
              
              
              1,069,675General
                  and administrative
              
              
              823,422
              
              
              607,969
              
              
              4,504,575Research
                  and development
              
              
              407,357
              
              
              83,652
              
              
              2,287,709Settlement
                  of vendor dispute
              
              
              448,011
              
              
              -
              
              
              577,500Decline
                  in market value of inventory
              
              
              -
              
              
              -
              
              
              428,1471,767,304
              
              
              931,909
              
              
              8,867,606**Operating
                  Loss**
              
              
              (1,731,678
              )
              
              (918,995
              )
              
              (8,787,343
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              11,501
              
              
              13,498
              
              
              102,496Interest
                  expense
              
              
              (41,637
              )
              
              (12,960
              )
              
              (209,924
              )(30,136
              )
              
              538
              
              
              (107,428
              )**Net
                  Loss**
              
              $
              (1,761,814
              )
              $
              (918,457
              )
              $
              (8,894,771
              )**Weighted-average
                  shares outstanding**
              
              
              25,472,024
              
              
              24,858,905**Basic
                  and diluted net loss per share**
              
              $
              (0.07
              )
              $
              (0.04
              )




See
                acccompanying notes.




5


**HYDROGEN
                  ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                  corporation in the development stage)Condensed
                  Consolidated Statements of Cash Flows(Unaudited)**Three
                    months ended**
                  **March
                    31,**
              
              **From
                    Inception**
                  **(May
                    19, 2003) to****2007**
              
              **2006**
              
              **March
                  31, 2007****Cash
                  Flows from Operating Activities**Net
                  loss
              
              $
              (1,761,814
              )
              $
              (918,457
              )
              $
              (8,894,771
              )Adjustments
                  to reconcile net loss to net cash used in operations:Depreciation
              
              
              57,213
              
              
              18,577
              
              
              239,653Compensation
                  to directors and employees from stock options and restricted
                  stock
              
              
              136,089
              
              
              153,615
              
              
              1,010,966Compensation
                  to consultants from stock options
              
              
              2,462
              
              
              21,667
              
              
              179,572Change
                  in assets and liabilities:Accounts
                  receivable
              
              
              (85,175
              )
              
              (48,950
              )
              
              (288,550
              )Inventories
              
              
              (362,217
              )
              
              (178,262
              )
              
              (2,363,221
              )Prepaid
                  expenses
              
              
              (97,240
              )
              
              (88,385
              )
              
              (167,122
              )Accounts
                  payable
              
              
              138,135
              
              
              112,673
              
              
              740,087Accrued
                  expenses
              
              
              677,953
              
              
              23,136
              
              
              978,391Unearned
                  project reimbursements
              
              
              -
              
              
              51,408
              
              
              102,972Unearned
                  grants
              
              
              (8,484
              )
              
              -
              
              
              58,179Net
                  cash used in operating activities
              
              
              (1,303,078
              )
              
              (852,978
              )
              
              (8,403,844
              )**Cash
                  Flows from Investing Activities**Increase
                  in restricted cash
              
              
              (3,848
              )
              
              -
              
              
              (356,432
              )Purchases
                  of property, plant, and equipment
              
              
              (39,277
              )
              
              (615,428
              )
              
              (2,867,422
              )Net
                  cash used in investing activities
              
              
              (43,125
              )
              
              (615,428
              )
              
              (3,223,854
              )**Cash
                  Flows from Financing Activities**Proceeds
                  from note payable, bank
              
              
              250,000
              
              
              -
              
              
              1,806,046Payments
                  on note payable, bank
              
              
              (2,283
              )
              
              -
              
              
              (652,283
              )Proceeds
                  from long-term debt
              
              
              -
              
              
              100,000
              
              
              1,172,052Payments
                  on long-term debt
              
              
              (11,473
              )
              
              (13,325
              )
              
              (76,471
              )Proceeds
                  from exercise of stock option
              
              
              -
              
              
              5,000
              
              
              8,000Issuance
                  of preferred stock (Series A) in private placement, net of
                  expenses
              
              
              -
              
              
              -
              
              
              2,779,813Issuance
                  of preferred stock (Series B) in private placement, net of
                  expenses
              
              
              279,000
              
              
              -
              
              
              279,000Issuance
                  of common stock in private placements, net of expenses
              
              
              -
              
              
              -
              
              
              6,639,008Net
                  cash provided by financing activities
              
              
              515,244
              
              
              91,675
              
              
              11,955,165**Effect
                  of Exchange Rates on Cash and Cash Equivalents**
              
              
              (1,184
              )
              
              (11
              )
              
              (10,403
              )**Net
                  Increase (Decrease) in Cash and Cash Equivalents**
              
              
              (832,143
              )
              
              (1,376,742
              )
              
              317,064**Cash
                  and Cash Equivalents – Beginning of Period**
              
              
              1,149,207
              
              
              2,346,248
              
              
              -**Cash
                  and Cash Equivalents – End of Period**
              
              $
              317,064
              
              $
              969,506
              
              $
              317,064-
                  Continued -See
                  accompanying notes.




6


**HYDROGEN
                  ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                  corporation in the development stage)Condensend
                  Consolidated Statements of Cash Flows(Unaudited)-Continued-**Three
                    months ended**
                  **March
                    31,**
              
              **From
                    Inception**
                  **(May
                    19, 2003) to****2007**
              
              **2006**
              
              **March
                  31, 2007****Supplemental
                  Cash Flow Information**Interest
                  paid
              
              $
              13,913
              
              $
              6,835
              
              $
              84,122**Supplemental
                  Disclosures of Noncash****Investing
                  and Financing Activities**Additional
                  paid-in capital contributionfor
                  expenses paid by founder
              
              $
              -
              
              $
              -
              
              $
              103,636Issuance
                  of common stock for equipment
              
              $
              -
              
              $
              -
              
              $
              47,851Issuance
                  of common stock forconversion
                  of debt
              
              $
              -
              
              $
              -
              
              $
              557,051Acquistion
                  of property, plant, and equipmentthrough
                  financing
              
              $
              111,450
              
              $
              51,101
              
              $
              692,081Payables
                  for construction in progress
              
              $
              -
              
              $
              22,649
              
              $
              232,208Receivable
                  for state loan
              
              $
              -
              
              $
              -
              
              $
              100,000See
                  accompanying notes.




7




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


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


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**March
      31, 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 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-Rivieras.





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





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





We
      design, manufacture and distribute alternative fuel internal combustion engines,
      engine controls and generator systems for use in the industrial and power
      generation markets. These engines are designed to run on alternative fuels
      including but not limited to gasoline, propane, natural gas, ethanol and
      hydrogen. The engines and engine products are sold under the brand name Oxx
      Power TM .





Through
      March 31, 2007, we remain in the development stage. This stage is characterized
      by minimal revenues, with efforts focused on fund raising and significant
      expenditures for the design and development of our products and manufacturing
      processes.





*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 may incur expenses of approximately 7% of the total proceeds from
      this offering and may issue warrants exercisable over five years to purchase
      a
      number of shares equal in value to 5.0% of the total proceeds from this
      offering. There can be no assurances that the full 5,000,000 shares will be
      sold
      and issued.





*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.





*Going
      Concern*





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




8




Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses in the foreseeable future. We have financed
      operations since inception through equity and debt financings. We anticipate
      our
      expenses will increase as we continue to expand our operations. Efforts are
      ongoing in our current private placement to raise $10 million in new capital.
      As
      of May 16, 2007, we have sold 1,879,846 shares of Series B Preferred Stock
      for a
      total of $3,759,692. As of May 16, 2007 we had cash of $2,928,837, accounts
      receivable of $89,075 and accounts payable of $111,259. As the private placement
      progresses, we plan to stage investment growth to expand our sales and marketing
      programs, add key personnel, and proceed with essential engine certification
      and
      product development. If we are unable to raise additional funds through our
      private placement, we would curtail expenditures for research and development
      including engine certification and engine development. With this reduction
      in
      expenditures along with subscriptions received, plus our existing capital,
      and
      projected sales revenue, we anticipate that we can fund our operations through
      September, 2007. These timeframes will vary if events occur which negatively
      (or
      positively) effect our operations, including delays in anticipated sales.





Continuing
      operations is dependent upon obtaining significant further financing. We have
      engaged an investment banking firm 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.





*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 *Other
      comprehensive income (loss).*





*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.





*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 March 31, 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.
      Depreciation expense was $57,213 for the three months ended March 31, 2007
      and
      $239,653 from inception (May 19, 2003) to March 31, 2007. Maintenance and
      repairs are expensed as incurred; major improvements and betterments are
      capitalized.




9




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 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. We recorded
      a
      warranty reserve during the three months ended March 31, 2007 of $15,998 in
      accrued expenses and have recorded $34,395 in warranty reserve from inception
      (May 19, 2003) to March 31, 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.”





*Business
      Agreements*





Income
      is
      also derived through business agreements for the development and/or
      commercialization of products based upon our proprietary technology. Some of
      the
      business agreements have stipulated performance milestones and deliverables
      where others require “best efforts” with no performance criteria. The business
      agreements require that payments be made to us as certain milestones are reached
      prior to delivery of the product to the customer. Accordingly, income related
      to
      business agreements are recorded as a reduction in research and development
      expense, when title and risk of ownership transfers to the customer. Expenses
      we
      incur are recorded as research and development costs. During the three months
      ended March 31, 2007, and from inception (May 19, 2003) to March 31, 2007,
      we
      have recorded $30,000 and $81,200, respectively, as a reduction in research
      and
      development expense. We have recorded $102,972 as “Unearned project
      reimbursements” for projects which are in process at March 31,
      2007.





*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 grant
      income”.




*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
      ended March 31, 2007 and from inception (May 19, 2003) to March 31, 2007 were
      $18,010 and $225,040, respectively.





*General
      and Administrative Costs*





General
      and administrative costs include payroll, employee benefits, stock-based
      compensation, and other costs associated with general and administrative costs
      including administrative personnel, professional fees, consulting fees and
      office expense. We allocate overhead and direct production expense to products
      manufactured. However, because we have not reached our production capacity,
      excess manufacturing costs are expensed as incurred as general and
      administrative costs. Expenses related to pre-production include salaries for
      production personnel, purchasing costs and the costs associated with production
      ramp up. Total pre-production costs included in general and administrative
      expenses for the three months ending March 31, 2007 and for the period from
      inception (May 19, 2003) to March 31, 2007 are $203,134 and $924,850,
      respectively.




10




*Research
      and Development Costs*





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





*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 adjusted our financial statements and
      disclosures to reflect only those tax positions that are more-likely-than-not
      to
      be sustained. 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
      5).





*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 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 quarterly period ended March 31, 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.





*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.




11




*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 6, 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 6), is recorded
      as an expense over the vesting terms. Options issued to non-employees and
      employees are issued using the same methodology and assumptions.





12




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****March
                31, 2007**Net
                loss, as reported
            
            $
            (8,894,771
            )Add:
                options and restricted stock-based employee compensationexpense
                included in reported net (loss)
            
            
            1,010,966Deduct:
                options and restricted stock-based employee compensationexpense
                determined under fair value based method
            
            
            (1,196,768
            )Pro
                forma net loss
            
            $
            (9,080,573
            )





Total
      employee non-cash stock compensation expense, net of forfeitures, for the three
      months ended March 31, 2007 was $136,089.





As
      a
      result of adopting SFAS 123R, our net loss from continuing operations, net
      loss
      and net loss before income taxes for the three months ended March 31, 2007,
      was
      $(1,761,814) and would have been $136,089 less if we had continued to account
      for employee stock-based compensation under APB 25. Furthermore, basic and
      diluted earnings per share for the three months ended March 31, 2007 was $(0.07)
      and would have been $(0.01) less if we had continued to account for share-based
      compensation under APB No. 25. There was no effect on cash as it pertains to
      cash flow from operations or cash flow from financing activities as a result
      of
      adopting SFAS 123R.





For
      purposes of pro forma disclosures, the estimated fair value of the options
      granted is amortized to expense over the option vesting periods as services
      are
      performed. See Note 6 for further discussion of stock-based
      compensation.





*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.





*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 anticipate adopting SFAS 159 in the first
      quarter of 2008.




13




*Reclassifications*





Certain
      amounts in the Condensed Consolidated Statement of Cash Flow, for the three
      months ended March 31, 2006 have been reclassified to conform to the current
      year presentation. These reclassifications had no effect on net loss as
      previously reported.





**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
            
            $
            1,810,405Work
                in process
            
            
            45,967Finished
                goods
            
            
            506,849Total
            
            $
            2,363,221




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. At March 31, 2007, we allocated approximately $5,000 of overhead
      to inventory and approximately $27,000 of overhead from inception (May 19,
      2003)
      to March 31, 2007. The balance of fixed production overhead is recorded in
      general and administrative costs.





**3.
      NOTES PAYABLE, BANK**





On
      April
      4, 2007, we renewed a $600,000 short-term note from a bank. The note now bears
      interest at 7.25%, matures April 3, 2008 and requires monthly interest and
      principal payments of $4,340. The loan is secured by real estate.





On
      February 21, 2007, we amended our loan agreement for our letter of credit.
      The
      amendment reduces the letter of credit with the bank from $330,000 to $80,000.
      This amendment allows us to obtain a revolving line of credit for $250,000.
      The
      interest rate per year is equal to the bank’s prime rate, which is currently
      8.25%, and requires that interest be paid monthly. The line of credit expires
      October 16, 2007, and is secured by a certificate of deposit. At March 31,
      2007,
      the balance on the line of credit was $250,000.





**4.
      CAPITALIZED LEASES**





We
      entered into a capital lease agreement on February 14, 2007, to purchase
      equipment totaling approximately $111,000 that will be 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 5-year periods. The purchase price for this
      equipment was $49,940 and has monthly lease payments of $1,032.





The
      net
      book value of capital lease assets was $155,702 at March 31, 2007. Amortization
      of assets held under capital lease is included with depreciation expense.





14




The
      following is a schedule, by years of future minimum payments, required under
      the
      lease together with their present value as of March 31, 2007:





2007
            
            $
            48,6332008
            
            
            57,4482009
            
            
            57,4482010
            
            
            19,8892011
            
            
            11,586Thereafter
            
            
            635Total
                minimum lease payments
            
            
            195,639Less
                amount representing interest
            
            
            38,916Present
                value of minimum lease payments
            
            
            156,723Less
                amounts due within one year
            
            
            50,521Totals
            
            $
            106,202





**5.
      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 May 16, 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 Untied 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.





**6.**  **STOCK-BASED
      COMPENSATION**





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





We
      may
      also issue restricted stock under the Incentive Plan. Restricted stock awards
      made under this program vest over periods designated by the Board of Directors,
      generally two to four years. The aggregate number of shares authorized for
      employee stock options, non-employee stock options and restricted stock awards
      is 2,000,000. At March 31, 2007, there were 672,334 shares available for grant
      and 1,327,666 shares granted. Of the shares granted, 361,000 were granted as
      restricted stock, 201,666 were granted as non-employee stock options, and
      765,000 were granted as employee and director stock options.





The
      following table presents the weighted-average assumptions post repricing, used
      to estimate the fair values of the stock options granted to employees and
      non-employees in the periods presented, using the Black-Scholes option pricing
      formula: The risk-free interest rate for periods within the contractual life
      of
      the option is based on the U.S. Treasury yield curve in effect at the time
      of
      grant. The expected life is based on our historical data of option exercise
      and
      forfeiture. Expected volatility is based on the average reported volatility
      and
      vesting period of a representative
      sample of eight comparable companies in the alternative fuel technology and
      services niches with market capitalizations between $45 million and $2.2
      billion, in addition to our actual history over a nineteen-month period.




15




**For
                  the three months ending**
                **March
                  31,**
            
            **Period
                  from Inception**
                **(May
                  19, 2003) to March 31,****2007**
            
            **2006**
            
            **2007**Risk-free
                interest rate
            
            
            4.7%
            
            
            4.6%
            
            
            4.2%Expected
                volatility
            
            
            100.8%
            
            
            113.5%
            
            
            157.6%Expected
                life (in years)
            
            
            5.5
            
            
            5.5
            
            
            8.0Dividend
                yield
            
            
            -
            
            
            -
            
            
            -Weighted-average
                estimated fair value of optionsgranted
                during the period
            
            
            $2.38
            
            
            $2.94
            
            
            $1.74





The
      following table summarizes the activity for outstanding employee and
      non-employee stock options for the three months ended March 31,
      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
            
            
            120,000
            
            
            $3.01Balance
                at March 31, 2007
            
            
            958,666
            
            
            $1.99
            
            
            8.8
            
            
            $729,000Vested
                and exercisable asof
                March 31, 2007
            
            
            404,666
            
            
            $1.42
            
            
            8.0
            
            
            $538,000Vested
                and expected to vest asof
                March 31, 2007
            
            
            944,286
            
            
            $1.99
            
            
            8.8
            
            
            $718,000





(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 $2.75 on March 30, 2007, the last day
                of
                trading in March.




There
      were no stock options exercised during the three months ending March 31, 2007.




As
      of
      March 31, 2007, there was approximately $1,589,561 of unrecognized compensation
      cost related to outstanding stock options, net of forecasted forfeitures. This
      amount is expected to be recognized over a period of 3.2 years. To the extent
      the forfeiture rate is different than we have anticipated, stock-based
      compensation related to these awards will be different from expectations.





The
      following table summarizes the activity for the unvested restricted stock for
      the three months ended March 31, 2007:




**Unvested
                Restricted Stock****Number
                of**
              **Shares**
            
            **Weighted-Average**
              **Grant
                Date**
              **Fair
                Value**Unvested
                at December 31, 2006
            
            
            218,000
            
            
            $1.00Forfeited
            
            
            (65,000)
            
            
            $1.00Unvested
                at March 31, 2007
            
            
            153,000
            
            
            $1.00





As
      of
      March 31, 2007, there was approximately $117,417 of unrecognized compensation
      cost related to unvested restricted stock. This amount is expected to be
      recognized over a weighted-average period of 2.6 years. To the extent actual
      forfeiture rate is different than we have anticipated, the numbers of restricted
      stock expected to vest would be different from expectations.


16




The
      following table summarizes additional information about stock options
      outstanding and exercisable as of March 31, 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
            
            
            553,666
            
            
            8.4
            
            
            $1.00
            
            
            332,666
            
            
            $1.00$3.50
            
            
            285,000
            
            
            9.0
            
            
            $3.50
            
            
            48,000
            
            
            $3.50$2.95
            
            
            85,000
            
            
            9.8
            
            
            $2.95
            
            
            17,000
            
            
            $2.95$3.15
            
            
            35,000
            
            
            10.0
            
            
            $3.15
            
            
            7,000
            
            
            $3.15958,666
            
            
            8.8
            
            
            $1.99
            
            
            404,666
            
            
            $1.42





**7.**  **COMMITMENTS**





*Component
      Parts Procurement*





At
      April
      30, 2007, we had issued approximately $149,000 in purchase orders to several
      vendors for inventory to support the engine build. These purchase orders have
      been issued with product delivery dates through May 2007.





**8.**  **SETTLEMENT
      OF VENDOR DISPUTE**





On
      May 3,
      2007, we settled a vendor dispute by agreeing to issue 375,000 warrants as
      a
      settlement. The warrants carry a three year term and an exercise price of $2.00.
      We account for warrants issued to vendors and suppliers 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 the vendor, was calculated,
      using
      the Black Scholes Option pricing formula, and has been accrued as an expense
      at
      March 31, 2007. Our assumptions included an expected life of three years, a
      risk-free interest rate of 4.65%, and a volatility rate of 100.73%. The
      calculation yielded a per warrant price of $1.54 and total expense of $577,500.
      We recognized $448,010 for the settlement during the period ended March 31,
      2007
      and $577,500 for the period (May 19, 2003) to March 31, 2007.




17




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





**Going
      Concern**





Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses in the foreseeable future. We have financed
      operations since inception primarily through equity and debt financings. We
      anticipate our expenses will increase as we continue to expand our operations.
      Our Board of Directors has approved the sale of 5,000,000 shares of Series
      B
      Preferred Stock. Efforts are ongoing in this private placement to raise $10
      million in new capital. We have engaged an investment banking firm to assist
      in
      our Series B Preferred Stock private offering, which we commenced on March
      13,
      2007. Funding from this offering is needed to implement our business plans.
      Through May 16, 2007, a total of $3,759,692 in subscriptions have been received
      and deposited by the company. As of May 16, 2007, we had cash of $2,928,837,
      accounts receivable of $89,075 and accounts payable of $111,259. If we are
      unable to raise additional funds through our private placement, we would curtail
      expenditures for research and development including engine certification and
      engine development. With this reduction in expenditures along with subscriptions
      received, plus our existing capital, and projected sales revenue, we anticipate
      that we can fund our operations through September 2007. 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 this additional funding or that these proceeds, if completed,
      will be sufficient to satisfy capital requirements. Also, there are no
      assurances that additional funding will be available at terms acceptable to
      the
      company. These conditions raise substantial doubt about our ability to continue
      as a going concern.





Our
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates our continuation of operations, realization
      of
      assets and liquidation of liabilities in the ordinary course of business. Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses over the next several months. As of March 31, 2007,
      we had an accumulated deficit of approximately $9.0 million. Our accompanying
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.





We
      have
      financed our operations since inception primarily through equity and debt
      financings and loans from our officers, directors and stockholders. Continuing
      our operations is dependent upon obtaining further financing during 2007. There
      can be no assurance that we will successfully obtain financing sufficient to
      satisfy our capital requirements. These conditions raise substantial doubt
      about
      our ability to continue as a going concern.




THE
      FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE OTHER
      FINANCIAL INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
      APPEARING IN THIS FORM 10-QSB. THIS DISCUSSION CONTAINS FORWARD LOOKING
      STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS WILL DEPEND
      UPON A NUMBER OF FACTORS BEYOND OUR CONTROL AND COULD DIFFER MATERIALLY FROM
      THOSE ANTICIPATED IN THE FORWARD LOOKING STATEMENTS. 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.





**Corporate
      History**





The
      company (previously known as Green Mt. Labs, Inc.) was originally organized
      in
      Idaho on July 12, 1983 to acquire and develop mining claims. The company
      initially acquired certain unpatented mineral claims located in the Miller
      Mountain Mining District near Idaho City, but the claims were eventually written
      off in 1997. Corporate records do not indicate the extent to which the company
      developed the property. Because the company had no available funds, it was
      unable to continue to pay the necessary assessment fees related to the claims
      and, in 1997, the claims were abandoned and written off because management
      was
      unable to determine the future value of the claims.





In
      January 1996, the company effected a 1 share for 10 shares reverse stock split
      of its 10,000,000 shares of common stock then issued and outstanding. This
      reverse split resulted in 1,000,000 shares being issued and outstanding.


18





In
      August
      2000, the company formed a new Nevada corporation for the purpose of
      transferring the company's domicile from Idaho to Nevada. In March 2001, the
      company implemented the change of domicile by effecting a merger between the
      Idaho and Nevada corporations, resulting in the Nevada corporation being the
      surviving entity and the Idaho corporation being dissolved.





On
      August
      30, 2005, we completed the acquisition of HEC Iowa. The acquisition was made
      pursuant to an Agreement and Plan of Merger entered into on June 3, 2005, and
      revised on July 6, 2005 and July 29, 2005 (the “Merger”). To accomplish the
      acquisition, we merged our newly created, wholly-owned subsidiary, Green Mt.
      Acquisitions, Inc., with and into HEC Iowa with HEC Iowa being the surviving
      entity. Just prior to the acquisition, we had completed a 3.8 shares for 1
      share
      forward stock split of our issued and outstanding common stock. As a result
      of
      the forward stock split, our outstanding shares of common stock increased from
      1,006,000 shares to approximately 3,822,800 shares, representing 19% of the
      total outstanding shares following consummation of the acquisition. Under the
      terms of the acquisition agreement, we issued 16,297,200 shares of our
      post-split common stock (representing 81% of our total outstanding shares
      (post-split) immediately following the transaction) to Ted Hollinger, who was
      the sole stockholder of HEC Iowa, in exchange for 100% of HEC Iowa’s outstanding
      capital stock. HEC Iowa has become our wholly-owned subsidiary. In connection
      with the acquisition, we have changed our name from Green Mt. Labs, Inc. to
      Hydrogen Engine Center, Inc.




As
      a
      result of the merger transaction and acquisition of HEC Iowa, we assumed all
      of
      the operations, assets and liabilities of HEC Iowa and HEC Canada. HEC Iowa
      and
      HEC Canada are both development stage companies engaged in designing, developing
      and manufacturing internal combustion engines and generation systems that use
      alternative fuels.





We
      have
      funded our operations from inception through March 31, 2007, through a series
      of
      financing transactions, including an investment of $151,487 by Ted Hollinger;
      $7,126,964 gross proceeds from two private offerings of Common Stock (as
      described below) $3,022,500 in gross proceeds from the private offering of
      Series A Preferred Stock, $300,000 in gross proceeds from the private offering
      of Series B Preferred Stock, and convertible loans in the amount of $557,051.
      Also, we have raised an additional $3,459,692 in gross proceeds from the private
      offering of Series B Preferred Stock during the period from April 11, 2007
      through May 16, 2007. We anticipate that we will require approximately $6
      million in additional capital in order to consummate our business plan. Without
      this necessary funding, we will not be able to fully achieve our
      goals.





·
            On
                October 11, 2005, we closed a private placement of our common stock(“First
                Private Offering”)at
                $1.00 per share. We sold 3,948,500 shares of our common stock, $.001
                par
                value, for a total of $3,948,500 to 93 investors,which
                represents 13.40% of the 29,470,010 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 1,879,846 shares
                of
                Series B Preferred Stock convertible into 1,879,846 shares of Common
                Stock) as of May 16, 2007.
                We sold the shares in a private transaction and we relied on an exemption
                from registration pursuant to Regulation D, Rules Governing the Limited
                Offer and Sale of Securities without Registration under the Securities
                Act
                of 1933.





·
            On
                October 2, 2006, we closed the private offering of our Series A Preferred
                Stock (the “Series A Preferred Offering”) having sold a total of 930,000
                shares (convertible into 1,511,250 shares of common stock) at $3.25
                per
                share, which number represents, on an as-converted basis, 5.13% of
                the
                29,470,010 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 1,879,846 shares of Series B Preferred
                Stock
                convertible into 1,879,846 shares of Common Stock) as of May 16,
                2007.





·
            On
                October 15, 2006, we closed the sale of 978,009 shares of common
                stock in
                our Second Private Offering of common stock (“Second Private Offering”) at
                $3.25 per share for a total of $3,178,464 to 41 investors, which
                represents 3.32% of the 29,470,010 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 1,879,846 shares of Series
                B
                Preferred Stock convertible into 1,879,846 shares of Common Stock)
                as of
                May 16, 2007.


19




·
            As
                of May 16, 2007 we have sold 1,879,846 shares (convertible into 1,879,846
                shares of common stock) of our Series B Preferred Stock (the “Series B
                Preferred Offering”) at $2.00 per share, which number represents, on an
                as-converted basis, 6.38% of the 29,470,010 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 1,879,846 shares
                of
                Series B Preferred Stock convertible into 1,879,846 shares of Common
                Stock) as of May 16, 2007.





The
      shares in all four of our private placements (the “Private Offerings”) were sold
      in reliance upon an exemption from registration pursuant to Regulation D, Rules
      Governing the Limited Offer and Sale of Securities without Registration under
      the Securities Act of 1933.





The
      accompanying condensed consolidated balance sheet as of March 31, 2007, and
      the
      condensed consolidated statements of operations and consolidated statements
      of
      cash flows for the three months ended March 31, 2007 and 2006, and from
      inception (May 19, 2003) to March 31, 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 and after giving effect to the Private
      Offerings.





**Overview**





As
      a
      result of the Merger, we own all of the issued and outstanding shares of HEC
      Iowa and all of the issued and outstanding shares of Hydrogen Engine Center
      (HEC) Canada, Inc. (“HEC Canada”). HEC Iowa is a development stage company being built
      upon the vision of carbon-free, energy independence. We have been working to
      build engines and gensets that provide the ability to generate and use clean
      power on demand, where needed. Engines are available today that run
      efficiently, with minor adjustments, on hydrogen, gasoline, propane, natural
      gas
      or ethanol. The engines can run on regular grade hydrogen, or on mixed gases
      such as natural gas and hydrogen.





We
      have
      focused recently on efforts to generate revenue through the sale of open power
      units and generator systems using our high-quality, reliable remanufactured
      engines and our new Oxx Power engines. We believe that revenue from these
      sources will help support our continuing operations, assist with funding for
      our
      research and development efforts, and make it possible for us to introduce
      the
      products that we believe to be the core of our future.





We
      have
      funded our operations from inception through March 31, 2007, through a series
      of
      financing transactions, including the convertible loans and the Private
      Offerings described above. We anticipate that we will need approximately $6
      million in additional capital during 2007 in order to consummate our business
      plan. Without this necessary funding, the company will not be able to fully
      achieve its goals.





20




**Results
      of Operations**





A
      summary
      statement of our operations, for the periods ended March 31, 2007 and 2006
      and
      for the period from inception through March 31, 2007 follows:




**Three
                Months Ended**
              **March
                31**
            
            **From
                Inception (May 19, 2003) to****2007**
            
            **2006**
            
            **March
                31, 2007**Revenues
            
            $
            238,290
            
            $
            28,590
            
            $
            560,194Cost
                of Sales
            
            
            202,664
            
            
            15,676
            
            
            479,931Gross
                Profit
            
            
            35,626
            
            
            12,914
            
            
            80,263Operating
                Expenses
            
            
            1,767,304
            
            
            931,909
            
            
            8,867,606(Loss)
                from Operations
            
            
            (1,731,678
            )
            
            (918,995
            )
            
            (8,787,343
            )Other
                Income (Expense)
            
            
            (30,136
            )
            
            538
            
            
            (107,428
            )Net
                (Loss)
            
            $
            (1,761,814
            )
            $
            (918,457
            )
            $
            (8,894,771
            )




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





During
      the quarter ended March 31, 2006 we realized $ 28,590
      from the sale of four 4.9L remanufactured engines and one 6.8 L hydrogen engine.
      During the period ended March 31, 2007 we realized $ 238,290 from the
      sale of eight Oxx Power engines, thirty-three open power units and eighteen
      remanufactured engines. Since inception we have realized total sales of
      $560,194.





During
      the period ended March 31, 2007 we realized project reimbursements in the amount
      of $30,000 from delivery of one 50kW hydrogen genset.  We record project
      reimbursements as a reduction of research and development costs.





During
      the period ended March 31, 2007 we also realized expense in the amount of
      $448,011 to recognize the value of warrants issued to a vendor in settlement
      of
      a dispute. The warrants were issued on May 9, 2007.





We
      are in
      the process of accelerating our efforts toward full commencement of operations.
      We are now in the process of marketing our open power units, hiring new
      personnel, purchasing additional equipment, initiating the engine certification
      process and purchasing inventory parts we will need to manufacture engines
      and
      gensets. The sales and marketing expense for the quarters ended March 31, 2007
      and 2006 were $88,514 and $240,288 respectively and the total expense from
      inception (May 19, 2003) to March 31, 2007, was $1,069,675. We expect this
      number to increase significantly during the remainder of 2007 as we pursue
      national and international sales opportunities.





General
      and administrative expenses increased $215,453 from $607,969 for the quarter
      ended March 31, 2006 to $823,422 for the quarter ended March 31, 2007. General
      and administrative expenses from inception (May 19, 2003) through March 31,
      2007
      were $4,504,575. Management expects similar increases during the remainder
      of
      2007 in general and administrative expenses due to the anticipated hiring of
      additional personnel and other costs related to the expansion of our
      operations.





Costs
      related to research and development increased $323,705 from $83,652 for the
      quarter ended March 31, 2006 to $407,357 for the quarter ended March 31, 2007.
      We have incurred $2,287,709 in costs related to research and development since
      inception (May 19, 2003) to March 31, 2007. Management believes that, assuming
      receipt of additional capital, research and development expenses will increase
      significantly during the remainder of 2007.


21





Since
      inception (May 19, 2003) we have recorded a decline in market value of inventory
      of $428,147. The inventory write-downs were a direct result of engaging in
      the
      production of remanufactured engines as part of the training, testing and other
      steps necessary for the commencement of operations. Prior to 2006 there were
      no
      inventory write-downs.





For
      the
      quarter ended March 31, 2007 we recorded a net loss of $ 1,761,814  compared
      to a net loss of $918,457 for the quarter ended March 31, 2006. We recorded
      a
      net loss of $8,894,771 from inception (May 19, 2003) through March 31, 2007.
      We
      expect to continue to operate at a net loss during 2007.




**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.





*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
      incepti on
      through March 31, 2007 ,
      we have
      used $ 8,403,844
      in cash in our operating activities and $3,223,854 in capital expenditures.
      Cash
      for our operations came from various financing transactions, including
      $3,948,500 in gross proceeds from the First Private Offering, $3,022,500 in
      gross proceed from the private offering of our Series A Preferred Stock,
      $3,178,464 in gross proceeds from the Second Private Offering, $300,000 in
      gross
      proceed from the private offering of our Series B Preferred Stock, and
      convertible loans in the amount of $557,051. We also received $400,000 in
      forgivable loans from the Iowa Department of Economic Development, $200,000
      from
      the City of Algona revolving loan fund, and $1,153,763 from bank financing
      (not
      including a $650,000 bank loan which was repaid in 2005 and $2,283 of a bank
      loan repaid in first quarter 2007). We incurred expenses in connection with
      the
      merger of $353,611, expenses of $134,345 in connection with the private
      placement of our common stock, expenses of $242,687 in connection with the
      private placement of our Series A Preferred Stock and expenses of $21,000 during
      first quarter 2007 in connection with the private placement of our Series B
      Preferred Stock. Our aggregated net loss from inception was $ 8,894,771. Our
      cumulative net loss has resulted principally from expenditures related to the
      commencement of operations and development of our technologies.


22




At
      March
      31, 2007, we had cash on hand of $317,064 ,
      compared to $969,506 at March 31, 2006.





On
      December 18, 2006, we secured a note from Iowa State Bank, Algona, Iowa, in
      the
      principal amount of $568,693. This note replaces two notes which matured on
      December 16, 2006, and is secured by the mortgage on Lot 1 of Snap-on Industrial
      Park in Algona. The note carries a variable rate, currently 8.25%, and will
      mature on December 15, 2007.





On
      April
      4, 2006, we secured a mortgage with Farmers State Bank for $600,000 at an annual
      adjustable rate of 6.0%. The mortgage is secured by a mortgage on Lots 3, 4,
      and
      5 of Snap-on Industrial Park in Algona, the site of our main production
      facility. On April 4, 2007, we renewed this note with the bank. The note now
      bears interest at 7.25%, matures April 3, 2008 and requires monthly interest
      and
      principal payments of $4,340.





Inventories
      increased from $384,353 at March 31, 2006 to $2,363,221 at March
      31, 2007 due to the purchase of engine part components.





Our
      accounts payable increased from $349,014 on March 31, 2006 to $656,231 on March
      31, 2007 primarily because of inventory and supply costs associated with
      commencement and expansion of our operations.





We
      had
      accrued expenses of $958,611 at March
      31, 2007, compared to $ 92,904 at March
      31, 2006. The increase in accrued expenses primarily related to the settlement
      of the vendor dispute of $448,010 and accrued interest of $125,691.





At
      March
      31, 2007, we had current assets of $ 3,492,389 and
      stockholders’ equity of $ 2,699,723 ,
      compared to current assets of $1,602,069 and stockholders’ equity of $2,466,347,
      at March 31, 2006.





*Plan
      of Operation*





We
      strongly believe that the core value of our company lies with the alternative
      energy solutions we are developing. Even though we have not to date received
      the
      level of financing we anticipated, we have identified the following key
      performance goals ("metrics") that we believe will enhance our results of
      operation as well as facilitate our ability to bring alternative solutions
      to
      the world's energy and environmental needs.





·
            **1
                MW 4+1 hydrogen genset.**This metric could be met only when we have developed a genset with
                engines
                using hydrogen or any other fuel that allows the system to achieve
                one
                megawatt or more of power.





·
            **Turn
                key combined heat and power variable speed generation system.**This
                metric could be met only when we have developed an enclosed system
                capable
                of delivering both power and heat. The system must include a
                hydrogen-fueled engine and an electrolyzer (or equivalent) and have
                a
                combined generator system efficiency greater than 90%.





·
            **Ammonia
                (NH3) fueled engine.**This
                metric could be met only when we have developed an ammonia-fueled
                engine
                with efficiency that exceeds existing internal combustion engines
                while
                producing near-zero emissions.





·
            **Oxx
                Boxx.**This
                metric could be met only when sales of our Oxx Boxx controller, whether
                alone or in connection with the products described above, have reached
                defined levels.





·
            **Patents.**This
                metric will be considered completed when we have filed patents and
                have
                received a patent pending status covering the alternative energy
                solutions
                described above.





·
            **Breakeven.**Although these metrics are not listed in order of importance, the
                financial goal of reaching a breakeven point is clearly essential.
                This
                metric could be met only when we have achieved positive cash flow
                (or
                similar financial measurement) over a defined period of time by
                implementing aggressive value engineering programs and aggressive
                sales
                and marketing programs.




23





Mr.
      Hollinger is planning to offer key employees the right to purchase up to
      1,000,000 shares of his own personal stock, at a price yet to be determined.
      The
      right to purchase the shares would be tied to these metrics as an award system
      for such key employees. The Board of Directors will be the final judge of
      whether any of the metrics has been met. We believe that these metrics can
      provide the structure and incentives required to optimize the limited resources
      we have available.





Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses in the foreseeable future. We have financed
      operations since inception primarily through equity and debt financings. We
      anticipate our expenses will increase as we continue to expand our operations.
      Our Board of Directors has approved the sale of 5,000,000 shares of Series
      B
      Preferred Stock. Efforts are ongoing in this private placement to raise $10
      million in new capital. We have engaged an investment banking firm to assist
      in
      our Series B Preferred Stock private offering, which we commenced on March
      13,
      2007. Funding from this offering is needed to implement our business plans.
      Through May 16, 2007, a total of $3,759,692 in subscriptions have been received
      and deposited by the company. As of May 16, 2007, we had cash of $2,928,837,
      accounts receivable of $89,075 and accounts payable of $111,259. If we are
      unable to raise additional funds through our private placement, we would curtail
      expenditures for research and development including engine certification and
      engine development. With this reduction in expenditures along with subscriptions
      received, plus our existing capital, and projected sales revenue, we anticipate
      that we can fund our operations through September 2007. These timeframes will
      vary if events occur which negatively (or positively) affect our operations,
      including delays in anticipated sales.




We
      expect
      to be required to raise significant amounts of additional capital resources
      during 2007. We anticipate that increased sales of our products could commence
      the second half of 2007, subject to timely receipt of parts ordered from
      suppliers and receipt of anticipated purchase orders, which may add to cash
      reserves. Additional cash will be needed to sustain our planned operations,
      or
      if management determines to accelerate the expansion of our operations, we
      may
      seek additional funds through private or public sources and/or the sale of
      securities. There is no assurance that we will be able to raise the necessary
      capital from such an offering, that funds will be available from any other
      source, or, if they are available, that they will be available on terms that
      will be acceptable to us.





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





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





We
      strongly believe that the core value of our company lies with the alternative
      energy solutions we are developing and for that reason we have developed the
      metrics described above. We believe also that the manufacture and sale of our
      current Oxx Power engines, open power units and gensets are important first
      steps toward our vision of a carbon-free, energy independent future. We
      have
      not received the amount of capital we anticipated receiving from investors
      to
      date. We have also experienced delays in the receipt of quality parts for our
      engines and we have experienced delays in initiating the certification process
      of our engines. Although our long-term vision has not changed, these factors
      have caused us to focus short-term efforts on generating revenue through the
      sale of open power units and generator systems using our high-quality, reliable
      remanufactured engines. We anticipate that revenue from these sources will
      help
      support our continuing operations, assist with funding for our research and
      development efforts, and make it possible for us to introduce the products
      that
      we believe to be the core of our future.





Our
      basic
      business plans include the design, production and marketing of engines and
      gensets to provide clean power on demand, where needed. Our ability to attain
      this vision depends upon our ability to obtain necessary capital. We have a
      patent pending covering a method and apparatus for aligning a generator and
      an
      engine of a generator set. The invention comprises an alignment hub for defining
      an alignment position between an engine and a single bearing generator and
      maintaining the alignment within a predetermined tolerance. We have a patent
      pending related to a “material neutral process” for the generation of electrical
      power. We have a third patent pending, which covers a method and apparatus
      for
      more efficient heat distribution and dissipation for use with an electrical
      generator. On April 26, 2007 we filed a fourth patent which covers a dual
      connecting rod piston for a large displacement engine.




24





We
      anticipate that we could produce 10,000 base 4.9L engines at full capacity,
      in
      our 30,000 square foot manufacturing facility. We anticipate that if we are
      successful in obtaining sufficient funds through private or public sources,
      we
      may need to explore the expansion of our present facilities.





We
      do not
      anticipate expanding our manufacturing facilities in 2007. We anticipate our
      capital expenditures and research and development costs for 2007 will be
      approximately $2.0 to $6.0 million, depending upon the availability of capital.





On
      June
      12, 2006, we completed validation of the form, fit and durability of our first
      Oxx Power 4.9L engine by running the engine on a dynamometer, using propane
      as a
      fuel, for a minimum of three hundred hours. In addition to the durability
      testing, we hot test each individual Oxx Power engine for approximately thirty
      minutes prior to shipment. We anticipate the warranty on our 4.9L engines will
      be 3 years or 3,000 hours, whichever comes first. We expect that durability
      testing for emission certification will involve a minimum of 5,000 hours. We
      expect that the validation process for our other engines will be substantially
      the same.





In
      March
      2007 we commenced shipping our Oxx PowerTM open power unit s
      (OPU).
      An open power unit is a user-configurable system that allows for customization
      in the field. Distributors or end-user customers can install a variety of “power
      take off” devices including pumps, generators, compressors and more. Our OPUs
      run on a variety of fuels, such as gasoline, natural gas, propane, and hydrogen.
      We see our OPUs as a natural value-added product for our distributors to sell
      and service, and for customers to customize to meet a wide array of needs.
      Our
      OPUs are designed to be a solution for the global agricultural, irrigation
      and
      industrial segments.





In
      August
      2006, our sales and marketing department presented to each of our distributors,
      a new 4.9L Oxx Power engine. We are also in the process of developing service
      and warranty manuals for the 4.9L Oxx Power engine.





Our
      distributors will not be able to offer our engines for sale to original
      equipment manufacturers for mobile applications until the engines have passed
      U.S. Emissions Regulations which are defined and enforced by the Environmental
      Protection Agency and California Air Resources Board. In 2008, certification
      will be necessary in order to sell engines for distributed power generation
      and
      in 2009, certification will be necessary for stand-by power generation markets.
      Until such time, stand-by and replacement engines, and engines that operate
      on
      non-polluting fuels like hydrogen, are not subject to the same requirements.
      We
      anticipate beginning the emissions certification process of our 4.9L engine
      in
      the second quarter of 2007. We believe it will cost approximately $1.0 million
      to certify the 4.9L engine. This testing procedure will be an expense of
      research and development. We anticipate that our research and development costs
      could be approximately $2.0 million (including this certification process)
      in
      2007, subject to sufficient capital from anticipated financing.





We
      are
      dependent on a small number of vendors to supply the components for our 4.9L
      engines. As of March 31, 2007, we had total purchase orders outstanding to
      our
      suppliers of approximately $149,000. In July 2006 we established a relationship
      with a supplier abroad for production of the blocks used in our 4.9L engines.
      Although we are in the process of lining up second and third sources for these
      components, production flow of the 4.9L engine is dependent upon timely receipt
      of components from suppliers. Although we expect product flow and production
      of
      the new 4.9L engines to increase during the first half of 2007, further delivery
      delays from our suppliers would further delay sales of new 4.9L engines to
      our
      distributor network and would adversely affect our ability to generate revenue.





We
      are
      expanding our search for vendors who can manufacture component parts to our
      specifications.




25





*Grants
      and Government Programs*





On
      July
      7, 2005, we were notified by the Iowa Department of Economic Development the
      following funding assistance:





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





These
      awards were provided to assist us in the acquisition of machinery and equipment
      for our new 30,000 square foot manufacturing building. As a result, we agreed
      to
      make an investment of $1,543,316 in our Algona location and create 49 full-time
      equivalent positions. This agreement was amended September 28, 2006 to include
      both facilities on our production site and amends the job creation requirement
      to 59 full-time equivalent positions by June 28, 2008.




The
      Iowa
      Department of Economic Development has approved us for participation in the
      Enterprise Zone Program. Under the Program, we are eligible for the following
      benefits provided we continue to meet certain Program requirements:





·
            Funding
                for training new employees through a supplemental new jobs withholding
                credit equal to 3.0% of gross wages of the new jobs created;





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





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





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





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





In
      order
      to receive these benefits, we must create 59 new full-time equivalent jobs
      at
      the project site within three years of the date of the agreement, which was
      June
      28, 2005. We must also pay an average median wage for of $23.89 per hour and
      pay
      80% of our employees’ medical and dental insurance. Within three years of the
      effective date of the agreement, we must also make a capital investment of
      at
      least $1,329,716 within the Enterprise Zone. If we do not meet these
      requirements, we will have to repay all or a portion of the incentives and
      assistance we have received.





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




*Employees*





As
      of
      March 31, 2007 was have 25 employees, 20 of whom are in Algona, Iowa and five
      of
      whom are in Canada. We anticipate that we will create approximately 10 - 15
      additional new jobs in 2007, subject to receipt of sufficient capital from
      anticipated financing.





26




**Inflation**





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




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements.


27


**ITEM
      4. CONTROLS AND PROCEDURES**





Our
      management, including our Chief Executive Officer (the principal executive
      officer), Theodore G. Hollinger, and our Chief Financial Officer (the principal
      financial officer), Sandra Batt, have reviewed and evaluated the effectiveness
      of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
      the Securities Exchange Act of 1934, as amended) as of March 31, 2007. Based
      upon this review and evaluation, these officers have concluded that our
      disclosure controls and procedures are effective to ensure that information
      required to be disclosed in the reports that we file or submit under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods required by the forms and rules of the Securities and Exchange
      Commission; and to ensure that the information required to be disclosed by
      an
      issuer in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to our management including our principal executive
      officers, or persons performing similar functions, as appropriate to allow
      timely decisions regarding required disclosure.





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




28


**PART
      II OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





We
      settled a vendor dispute with Diesel Engine Parts, Inc. (“DHPS”) on May 3, 2007
      by agreeing to issue DHPS warrants to purchase shares of our common stock.
      The
      warrants are described above in the Notes to our financial statements. The
      settlement agreement also provides that DHPS and HEC release each other from
      past, present and future claims they may have against the other.





The
      settlement included dismissal of a lawsuit, notice of which we received on
      May
      1, 2007. The suit had been file on December 27, 2006, in the Circuit Court
      for
      Knox County, Tennessee, but service was not effected until May 1. This action
      was dismissed with prejudice on May 9, 2007. In the complaint, DHPS alleged
      breach of contract and tortuous interference with business relations. The breach
      of contract action was based on disputed invoices for tooling fees and engine
      parts. Their claim for interference with business relations arose out of
      purchase of certain engine parts directly from one of DHPS’ suppliers. The
      complaint sought damages for (1) the breach of contract claim in the amount
      of
      $129,489 for actual damages plus $1.2 million in incidental and consequential
      damages and (2) the interference with business claim in the amount of $8 million
      for lost profits.





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





During
      the quarter ended March 31, 2007, the company granted options to purchase
      120,000 shares to employees under the company’s 2005 Incentive Compensation
      Plan, 85,000 of which were granted with an exercise price of $2.95 per share
      and
      35,000 of which were granted with an exercise price of $3.15 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
      and sale has been conducted on behalf of the company by an NASD-licensed
      broker-dealer .
      We will
      incur expenses of approximately 7% of the total proceeds from this offering
      and
      will issue warrants exercisable over five years to purchase a number of shares
      equal in value to 5.0% of the total proceeds from this offering. As of May
      16,
      2007, we have received gross proceeds of $3,759,692. The proceeds of the
      Preferred Offering, net of fees, were immediately available to the company.





The
      terms
      of the Series B Preferred, 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-QSB 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.


29


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





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







**NOTES
      ABOUT FORWARD-LOOKING STATEMENTS**





Statements
      contained in this current report which are not historical facts, including
      some
      statements regarding the effects of the Merger, may be considered
      "forward-looking statements" under the Private Securities Litigation Reform
      Act
      of 1995. Forward-looking statements are based on current expectations and the
      current economic environment. We caution readers that such forward-looking
      statements are not guarantees of future performance. Unknown risks and
      uncertainties as well as other uncontrollable or unknown factors could cause
      actual results to materially differ from the results, performance or
      expectations expressed or implied by such forward-looking
      statements.  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 18, 2007
            By
            /s/ THEODORE
              G. HOLLINGERTheodore
                G. Hollinger
              President
                and Chief Executive Officer Date: May 18, 2007
            By
            /s/ Sandra
              BattSandra
                Batt
              Chief
                Financial Officer




31