**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 June 30, 2007








o TRANSITION
      REPORT
      UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      transition period from _____________ to ___________.





Commission
      File Number: **000-50542**




**HYDROGEN
      ENGINE CENTER, INC.**


(Exact
      name of registrant as specified in its charter)


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





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


(Address
      of principal executive offices)





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





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.    Yes 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 August 2, 2007**Series
                A Preferred
            
            
            930,000Series
                B Preferred
            
            
            1,932,846Common
            
            
            26,078,914










**FORM
      10-QSB**




**TABLE
      OF CONTENTS**





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









**ITEM
      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**HYDROGEN
                  ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                  corporation in the development stage)Condensed
                  Consolidated Balance Sheet**June
                  30,****2007**(Unaudited)**ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              2,454,922Restricted
                  cash
              
              
              360,409Accounts
                  receivable
              
              
              134,918Inventories
              
              
              2,334,346Prepaid
                  expenses
              
              
              77,092Total
                  current assets
              
              
              5,361,687**Property,
                  Plant and Equipment**Leasehold
                  improvements
              
              
              17,156Building
              
              
              2,156,380Equipment
              
              
              912,182Land
                  and improvements
              
              
              472,504Construction
                  in progress
              
              
              111,8943,670,116Less
                  accumulated depreciation
              
              
              300,947Net
                  property and equipment
              
              
              3,369,169**Total
                  Assets**
              
              $
              8,730,856




See
        accompanying notes.




3





**HYDROGEN
                ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                corporation in the development stage)Condensed
                Consolidated Balance Sheet**June
                30,****2007**(Unaudited)**LIABILITIES
                AND EQUITY****Current
                Liabilities**Notes
                payable, bank
            
            $
            1,413,435Current
                portion long-term debt
            
            
            42,926Current
                installments of obligation under capital lease
            
            
            42,617Accounts
                payable
            
            
            189,818Accrued
                expenses
            
            
            372,417Unearned
                project reimbursements
            
            
            102,972Unearned
                grants
            
            
            48,871Total
                current liabilities
            
            
            2,213,056Long-term
                debt, net of current maturities
            
            
            756,019Obligation
                under capital lease, excluding current installments
            
            
            104,237860,256Total
                liabilities
            
            
            3,073,312**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,1,932,846
                shares issued and outstanding
            
            
            1,933Common
                stock, $0.001 par value; 100,000,000 shares authorized,26,078,914
                shares issued and outstanding
            
            
            26,079Additional
                paid-in capital
            
            
            15,660,960Accumulated
                other comprehensive loss - foreign currency
            
            
            (16,364
            )Deficit
                accumulated during the development stage
            
            
            (10,015,994
            )Total
                stockholders' equity
            
            
            5,657,544**Total
                Liabilities and Stockholders’ Equity**
            
            $
            8,730,856


See
          accompanying notes.
 
 4


**HYDROGEN
                  ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                  corporation in the development stage)Condensed
                  Consolidated Statements of Operations(Unaudited)**From
                  Inception****Three
                  months ended**
              
              **Six
                  months ended**
              
              **(May
                  19,****June
                  30,**
              
              **June
                  30,**
              
              **2003)
                  to****2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **June
                  30, 2007****Sales**
              
              $
              203,383
              
              $
              47,119
              
              $
              441,673
              
              $
              75,709
              
              $
              763,577**Cost
                  of Sales**
              
              
              170,180
              
              
              39,580
              
              
              372,844
              
              
              55,256
              
              
              650,111**Gross
                  Profit**
              
              
              33,203
              
              
              7,539
              
              
              68,829
              
              
              20,453
              
              
              113,466**Operating
                  Expenses**Sales
                  and marketing
              
              
              78,234
              
              
              172,200
              
              
              166,748
              
              
              412,488
              
              
              1,147,909General
                  and administrative
              
              
              717,739
              
              
              965,762
              
              
              1,541,160
              
              
              1,573,731
              
              
              5,222,314Research
                  and development
              
              
              338,097
              
              
              421,100
              
              
              745,454
              
              
              504,752
              
              
              2,625,806Settlement
                  of vendor dispute
              
              
              -
              
              
              -
              
              
              448,011
              
              
              -
              
              
              577,500Decline
                  in market value of inventory, net of recoveries
              
              
              -
              
              
              447,737
              
              
              -
              
              
              447,737
              
              
              428,1471,134,070
              
              
              2,006,799
              
              
              2,901,373
              
              
              2,938,708
              
              
              10,001,676**Operating
                  Loss**
              
              
              (1,100,867
              )
              
              (1,999,260
              )
              
              (2,832,544
              )
              
              (2,918,255
              )
              
              (9,888,210
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              24,245
              
              
              12,415
              
              
              35,746
              
              
              25,913
              
              
              126,741Interest
                  expense
              
              
              (44,601
              )
              
              (37,822
              )
              
              (86,239
              )
              
              (50,782
              )
              
              (254,525
              )(20,356
              )
              
              (25,407
              )
              
              (50,493
              )
              
              (24,869
              )
              
              (127,784
              )**Net
                  Loss**
              
              $
              (1,121,223
              )
              $
              (2,024,667
              )
              $
              (2,883,037
              )
              $
              (2,943,124
              )
              $
              (10,015,994
              )**Weighted-average
                  shares outstanding**
              
              
              25,737,648
              
              
              24,860,561
              
              
              25,737,648
              
              
              24,857,733**Basic
                  and diluted net loss per share**
              
              $
              (0.04
              )
              $
              (0.08
              )
              $
              (0.11
              )
              $
              (0.12
              )


See
        accompanying notes.
  5


**HYDROGEN
                  ENGINE CENTER, INC. AND SUBSIDIARIES**(a
                  corporation in the development stage)Condensed
                  Consolidated Statements of Cash Flows(Unaudited)**From
                  Inception****Three
                  months ended**
              
              **Six
                  months ended**
              
              **(May
                  19,****June
                  30,**
              
              **June
                  30,**
              
              **2003)
                  to****2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **June
                  30, 2007****Cash
                  Flows from Operating Activities**Net
                  loss
              
              $
              (1,121,223
              )
              $
              (2,024,667
              )
              $
              (2,883,037
              )
              $
              (2,943,124
              )
              $
              (10,015,994
              )Adjustments
                  to reconcile net loss to net cash used in operations:Depreciation
              
              
              61,294
              
              
              25,424
              
              
              118,507
              
              
              44,001
              
              
              300,947Compensation
                  to directors and employees of stock options and restricted
                  stock
              
              
              188,947
              
              
              282,531
              
              
              325,036
              
              
              436,146
              
              
              1,199,913Compensation
                  to consultants of stock options
              
              
              2,463
              
              
              14,999
              
              
              4,925
              
              
              36,666
              
              
              182,035Warrants
                  issued in vendor dispute
              
              
              577,500
              
              
              -
              
              
              577,500
              
              
              -
              
              
              577,500Change
                  in assets and liabilities:Accounts
                  receivable
              
              
              153,632
              
              
              26,404
              
              
              68,457
              
              
              (22,546
              )
              
              (134,918
              )Inventories
              
              
              28,875
              
              
              (577,040
              )
              
              (333,342
              )
              
              (755,302
              )
              
              (2,334,346
              )Prepaid
                  expenses
              
              
              90,030
              
              
              (9,367
              )
              
              (7,210
              )
              
              (97,752
              )
              
              (77,092
              )Accounts
                  payable
              
              
              (466,413
              )
              
              489,044
              
              
              (328,278
              )
              
              601,717
              
              
              273,674Accrued
                  expenses
              
              
              (586,194
              )
              
              375,056
              
              
              91,759
              
              
              398,192
              
              
              392,197Unearned
                  project reimbursements
              
              
              -
              
              
              -
              
              
              -
              
              
              126,772
              
              
              102,972Unearned
                  grants
              
              
              (9,308
              )
              
              75,364
              
              
              (17,792
              )
              
              -
              
              
              48,871Net
                  cash used in operating activities
              
              
              (1,080,397
              )
              
              (1,322,252
              )
              
              (2,383,475
              )
              
              (2,175,230
              )
              
              (9,484,241
              )**Cash
                  Flows from Investing Activities**Increase
                  in restricted cash
              
              
              (3,977
              )
              
              -
              
              
              (7,825
              )
              
              -
              
              
              (360,409
              )Purchases
                  of property, plant, and equipment
              
              
              (62,762
              )
              
              (719,659
              )
              
              (102,039
              )
              
              (1,335,087
              )
              
              (2,930,184
              )Net
                  cash used in investing activities
              
              
              (66,739
              )
              
              (719,659
              )
              
              (109,864
              )
              
              (1,335,087
              )
              
              (3,290,593
              )**Cash
                  Flows from Financing Activities**Proceeds
                  from note payable, bank
              
              
              -
              
              
              832,690
              
              
              250,000
              
              
              832,690
              
              
              1,806,046Payments
                  on note payable, bank
              
              
              (2,975
              )
              
              -
              
              
              (5,258
              )
              
              -
              
              
              (655,258
              )Proceeds
                  from long-term debt
              
              
              -
              
              
              -
              
              
              -
              
              
              100,000
              
              
              1,172,052Payments
                  on long-term debt
              
              
              (22,165
              )
              
              (12,296
              )
              
              (33,638
              )
              
              (25,621
              )
              
              (98,636
              )Proceeds
                  from exercise of stock option
              
              
              -
              
              
              3,000
              
              
              -
              
              
              8,000
              
              
              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
              
              
              3,316,095
              
              
              -
              
              
              3,595,095
              
              
              -
              
              
              3,595,095Issuance
                  of common stock in private placements, net of expenses
              
              
              -
              
              
              2,797,301
              
              
              -
              
              
              2,797,301
              
              
              6,639,008Net
                  cash provided by financing activities
              
              
              3,290,955
              
              
              3,620,695
              
              
              3,806,199
              
              
              3,712,370
              
              
              15,246,120**Effect
                  of Exchange Rates on Cash and Cash Equivalents**
              
              
              (5,961
              )
              
              2,940
              
              
              (7,145
              )
              
              2,929
              
              
              (16,364
              )**Net
                  Increase in Cash and Cash Equivalents**
              
              
              2,137,858
              
              
              1,581,724
              
              
              1,305,715
              
              
              204,982
              
              
              2,454,922**Cash
                  and Cash Equivalents – Beginning of Period**
              
              
              317,064
              
              
              969,506
              
              
              1,149,207
              
              
              2,346,248
              
              
              -**Cash
                  and Cash Equivalents – End of Period**
              
              $
              2,454,922
              
              $
              2,551,230
              
              $
              2,454,922
              
              $
              2,551,230
              
              $
              2,454,922
  -
        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-**From
                  Inception****Three
                  months ended**
              
              **Six
                  months ended**
              
              **(May
                  19,****June
                  30,**
              
              **June
                  30,**
              
              **2003)
                  to****2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **June
                  30, 2007****Supplemental
                  Cash Flow Information**Interest
                  paid
              
              $
              66,457
              
              $
              5,920
              
              $
              80,370
              
              $
              12,775
              
              $
              150,579**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
              
              $
              -
              
              $
              9,945
              
              $
              -
              
              $
              32,594
              
              $
              232,208Receivable
                  for state loan
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              100,000


See
          accompanying notes.
  7


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


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


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      30, 2007**




**1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Overview
      of Companies*





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





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





HEC
      Canada was incorporated as a Canadian corporation on August 25, 2005, for the
      purpose of establishing a research and development center to assist in the
      development of alternative fuel and hydrogen engines and generator sets. HEC
      Canada is located in Quebec, and works with Universite Du Quebec a
      Trois-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. We are developing engines that are fueled by ammonia. Our engines
      and
      engine products are sold under the brand name Oxx Power TM .





Through
      June 30, 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, manufacturing
      processes, and intellectual property.





*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. Through July 31, 2007 we have sold 1,932,846 shares for $3,865,692
      and
      have incurred expenses of $270,597 as a result of this offering. We also issued
      57,985 warrants in connection with the sale of the Series B Preferred Stock.
      The
      warrants were issued at an exercise price of $2.00 and expire May 15, 2012.
      Shares of the Series B Preferred Stock are no longer being offered by the
      Company. However, we plan to raise additional funds through another private
      placement of either debt or equity securities.





*Principles
      of Consolidation*





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





8




*Going
      Concern*





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





Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses in 2007. 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 to raise new capital.
      As of August 9, 2007 we had cash of $2,025,213 accounts receivable of $100,286
      and accounts payable of $35,274. As our funding efforts continue, 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 a capital raise,
      we would curtail expenditures for research and development including engine
      certification and engine development. With our existing capital, and projected
      sales revenue, we anticipate that we can fund our operations through November,
      2007, without additional capital. 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 investment banking firms to assist in obtaining funding needed to
      implement our business plan. There can be no assurance that we will successfully
      complete this offering or that these proceeds, if completed, will be sufficient
      to satisfy capital requirements. Also, there are no assurances that additional
      funding will be available at terms that will be acceptable to us. These
      conditions raise substantial doubt about the ability to continue as a going
      concern.





*Fair
      Value of Financial Instruments*





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





*Foreign
      Currency Translation*





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





*Cash
      and Cash Equivalents*





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





*Restricted
      Cash*





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





*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 June 30, 2007, we believe that such accounts will
      be collectible and thus, an allowance is not necessary. Accounts are considered
      past due if payment is not made on a timely basis in accordance with our credit
      policy. Accounts considered uncollectible are written off. Credit terms are
      extended to customers in the normal course of business. We perform ongoing
      credit evaluations of our customers’ financial condition and, generally, require
      no collateral.




9




*Inventories*





Inventories
      consist mainly of parts, work-in-process and finished goods that are stated
      at
      the lower of cost (determined by the first-in, first-out method) or market
      value
      (Note 2).





*Property,
      Plant and Equipment*





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





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





*Warranty
      Reserve*





We
      record
      a warranty reserve at the time products are sold 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 and six months ended June 30, 2007
      of
      $4,663 and $20,661, respectively and have recorded $39,058 in accrued expenses
      from inception (May 19, 2003) to June 30, 2007.





*Revenue
      Recognition*





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





*Shipping
      and Handling Costs*





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





*Business
      Agreements*





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




10




*Sales
      and Marketing Costs*





Sales
      and
      marketing expenses include payroll, employee benefits, stock-based compensation,
      and other costs associated with sales and marketing personnel and advertising,
      promotions, tradeshows, seminars and other marketing-related programs. We
      expense advertising costs as incurred. Advertising costs for the three months
      and six months ended June 30, 2007 were $2,086 and $20,096, respectively. For
      the period from inception (May 19, 2003) to June 30, 2007 advertising costs
      were
      $227,126.





*General
      and Administrative Costs*





General
      and administrative costs include payroll, employee benefits, stock-based
      compensation, and other costs associated with general and administrative costs
      including administrative personnel, professional fees, consulting fees and
      office expense. We allocate overhead and direct production expense to products
      manufactured. However, because we have not reached our production capacity,
      excess manufacturing costs are expensed as incurred as general and
      administrative costs. Expenses related to pre-production include salaries for
      production personnel, purchasing costs and the costs associated with production
      ramp up. Total pre-production costs included in general and administrative
      expenses for the three months and six months ending June 30, 2007, were $175,581
      and $378,715, respectively. For the period from inception (May 19, 2003) to
      June
      30, 2007 pre-production expense was $1,100,431.





*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 reviewed our tax positions and have not
      identified any positions that are not 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.




11




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





*Use
      of Estimates*





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





*Stock-Based
      Compensation*





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





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





SFAS
      123R
      requires the use of a valuation model, explained in Note 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****June
                30, 2007**Net
                loss, as reported
            
            $
            (10,015,994
            )Add:
                options and restricted stock-based employee compensationexpense
                included in reported net loss
            
            
            1,199,913Deduct:
                options and restricted stock-based employee compensationexpense
                determined under fair value based method
            
            
            (1,385,715
            )Pro
                forma net loss
            
            $
            (10,201,796
            )





Total
      employee non-cash stock compensation expense, net of forfeitures, for the three
      months and six months ended June 30, 2007 was $188,947 and $325,036,
      respectively.





For
      purposes of pro forma disclosures, the estimated fair value of the options
      granted is amortized to expense over the option vesting periods as services
      are
      performed (Note 6).





*Warrants*





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





*Recent
      Accounting Pronouncements*





FASB
      Statement No. 157


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





FASB
      Statement No. 159


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





*Reclassifications*





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





13





**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
            
            $
            1,809,763Work
                in process
            
            
            22,172Finished
                goods
            
            
            502,411Total
            
            $
            2,334,346




We
      follow
      the provisions of SFAS 151, “Inventory Costs” that amends the guidance in
      Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing” (ARB No.
      43). Under this guidance, we allocate fixed production overhead to inventory
      based on the normal capacity of the production facilities, any expense incurred
      as a result of idle facility expense, freight and handling costs are expensed
      as
      period costs. For the three months and six months ended June 30, 2007, we
      allocated approximately $4,500 and $9,500, respectively, of overhead to
      inventory. We allocated approximately $31,500 of overhead to inventory from
      inception (May 19, 2003) to June 30, 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 June 30, 2007,
      the balance on the line of credit was $250,000.





On
      December 18, 2006, we refinanced the two short-term notes, for $568,693 from
      a
      bank. The balance of this note on June 30, 2007 was $564,726. This note matures
      on December 15, 2007, and carries a variable interest rate of 8.25% with monthly
      principal and interest payments of $4,484. The building serves as
      collateral.





**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 five 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 $149,608 at June 30, 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 June 30, 2007:





2007
            
            $
            28,7242008
            
            
            57,4482009
            
            
            57,4482010
            
            
            19,8892011
            
            
            11,586Thereafter
            
            
            635Total
                minimum lease payments
            
            
            175,730Less
                amount representing interest
            
            
            28,875Present
                value of minimum lease payments
            
            
            146,855Less
                amounts due within one year
            
            
            42,617Totals
            
            $
            104,238





**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 August 9, 2007 we
      have
      not been notified that we have any tax returns under review. We have sustained
      net operating losses in each of these years, in the United States and for 2005
      and 2006 in Canada. We h ave
      reviewed our calculations of unrecognized tax benefits that may result from
      tax
      uncertainties, and we believe that our estimate for unrecognized tax benefits
      is
      appropriate. We recognize interest and penalties related to uncertain tax
      positions in our provision for income taxes. As a
      result of the adoption, of FIN 48 there has been no change in unrecognized
      tax
      benefits.





**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 June 30, 2007, there were 622,334 shares available for grant
      and 1,377,666 shares granted. Of the shares granted, 361,000 were granted as
      restricted stock, 201,666 were granted as non-employee stock options, and
      815,000 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 $29 million and $1.4 billion, in addition to our actual history over
      a
      twenty-two month period.





15




**Period
                from Inception****For
                the three months ending**
              **June
                30,**
            
            **For
                the six months ending**
              **June
                30,**
            
            **(May
                19, 2003)to****2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **June
                30, 2007**Risk-free
                interest rate
            
            
            4.9%
            
            
            4.6%
            
            
            4.7%
            
            
            4.6%
            
            
            4.2%Expected
                volatility
            
            
            99.5%
            
            
            113.5%
            
            
            100.4%
            
            
            113.5%
            
            
            155.5%Expected
                life (in years)
            
            
            5.5
            
            
            5.5
            
            
            5.5
            
            
            5.5
            
            
            7.9Dividend
                yield
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Weighted-average
                estimated fair value of options granted during the period
            
            
            $1.34
            
            
            $2.94
            
            
            $2.08
            
            
            $2.94
            
            
            $1.73





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





**Options
                Outstanding****Number
                of Shares**
            
            **Weighted-Average
                Exercise Price**
            
            **Weighted-Average
                Remaining Contractual Term**
              **(in
                years)**
            
            **Aggregate
                Intrinsic Value**
              **(1)**Balance
                at December 31, 2006
            
            
            838,666
            
            $
            1.85Granted
            
            
            170,000
            
            $
            2.62Balance
                at June 30, 2007
            
            
            1,008,666
            
            $
            1.98
            
            
            8.6
            
            $
            359,883Vested
                and exercisable asof
                June 30, 2007
            
            
            404,666
            
            $
            1.42
            
            
            7.6
            
            $
            216,233Vested
                and expected to vest asof
                June 30, 2007
            
            
            993,536
            
            $
            1.98
            
            
            8.6
            
            $
            354,485





(1)
            The
                aggregate intrinsic value is calculated as approximately the difference
                between the weighted-average exercise price of the underlying awards
                and
                our closing stock price of $1.65 on June 29, 2007, the last day of
                trading
                in June.





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





As
      of
      June 30, 2007, there was approximately $1,447,117 of unrecognized compensation
      cost related to outstanding stock options, net of forecasted forfeitures. This
      amount is expected to be recognized over a period of four years. To the extent
      the forfeiture rate is different than we have anticipated, stock-based
      compensation related to these awards will be different from expectations.





The
      following table summarizes the activity for the unvested restricted stock for
      the six months ended June 30, 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 June 30, 2007
            
            
            153,000
            
            $
            1.00





As
      of
      June 30, 2007, there was approximately $100,634 of unrecognized compensation
      cost related to unvested restricted stock. This amount is expected to be
      recognized over a weighted-average period of 2.4 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 June 30, 2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Price**
            
            **Options
                Outstanding**
            
            **Weighted-Average
                Remaining Contractual Life**
            
            **Weighted-Average
                Exercise Price**
            
            **Shares
                Exercisable**
            
            **Weighted-Average
                Exercise Price**$1.00
            
            
            553,666
            
            
            8.2
            
            
            $1.00
            
            
            332,666
            
            
            $1.00$3.50
            
            
            285,000
            
            
            8.7
            
            
            $3.50
            
            
            48,000
            
            
            $3.50$2.95
            
            
            85,000
            
            
            9.6
            
            
            $2.95
            
            
            17,000
            
            
            $2.95$3.15
            
            
            35,000
            
            
            9.7
            
            
            $3.15
            
            
            7,000
            
            
            $3.15$1.70
            
            
            50,000
            
            
            9.9
            
            
            $1.70
            
            
            -
            
            
            $1.701,008,666
            
            
            8.6
            
            
            $1.99
            
            
            404,666
            
            
            $1.42





**7.
      WARRANTS**





On
      May 8,
      2007, we issued 375,000 warrants in lieu of cash to settle a dispute with a
      former supplier. 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
      expensed. 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 $0 and $448,010 for the settlement for the three months and six
      months ended June 30, 2007 and $577,500 for the period (May 19, 2003) to June
      30, 2007.





On
      May
      17, 2007, we issued 57,985 warrants in connection with our Series B Private
      Placement. The warrants carry a five-year term and an exercise price of
      $2.00.





**8.**  **COMMITMENTS
      AND CONTINGENCIES**





*Component
      Parts Procurement*





At
      July
      31, 2007, we had issued approximately $158,814 in purchase orders to several
      vendors for inventory, engine certification, and equipment to support our
      business plan. These purchase orders have been issued with delivery dates
      through June 2008.





*Potential
      Inventory Impairment*





At
      June
      30, 2007 we recorded inventory of $2,223,246, which includes approximately
      $350,000 for engine blocks, purchased from our supplier in China. Currently
      we
      are estimating that the rate of rejection for these engine blocks could be
      as
      high as 50% after inspection. Based upon the Warranty and Replacement Terms
      agreement with the supplier, dated March 22, 2007, we expect that the supplier
      will replace the rejected products at no additional cost to us. However, delays
      have occurred which increases the possibility that we may need to obtain engine
      blocks from another source. If we can not collect on the warranty claim, we
      may
      need to expense approximately $175,000 of engine block inventory.





17





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





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




THE
      FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE OTHER
      FINANCIAL INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
      APPEARING IN THIS FORM 10-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.) is a Nevada corporation
      originally organized in Idaho on July 12, 1983. On
      August
      30, 2005, the company completed the acquisition of Hydrogen Engine Center,
      Inc.,
      an Iowa corporation (“HEC Iowa”). To accomplish the acquisition, we merged our
      newly created, wholly-owned subsidiary with and into HEC Iowa, with HEC Iowa
      being the surviving entity (the “Merger”). In connection with the Merger, we
      changed our name from Green Mt. Labs, Inc. to Hydrogen Engine Center,
      Inc.





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


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





**Overview**





We
      are a
      development stage company being built
      upon the vision of carbon-free, energy independence. We have been working to
      build engines and gensets that provide the ability to generate and use clean
      power on demand, where needed. Engines and generator systems are available
      today
      that run
      efficiently, with minor adjustments, on hydrogen, gasoline, propane, natural
      gas
      or ethanol. We expect to soon add ammonia to the list of fuel alternatives
      for
      our products. The engines can run on regular grade hydrogen, or on mixed gases
      such as natural gas and hydrogen. We
      have
      generated 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 and
      assist with funding for our research and development efforts relating to our
      clean energy solutions .




18




**Results
      of Operations**





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





Summary
      Statement of Operations


(unaudited)


**From
                  Inception****Three
                  Months Ended**
              
              **Six
                  Months Ended**
              
              **(May
                  19,****June
                  30**
              
              **June
                  30**
              
              **2003)
                  to****2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **June
                  30, 2007**Sales
              
              $
              203,383
              
              $
              47,119
              
              $
              441,673
              
              $
              75,709
              
              $
              763,577Cost
                  of Sales
              
              
              170,180
              
              
              39,580
              
              
              372,844
              
              
              55,256
              
              
              650,111Gross
                  Profit
              
              
              33,203
              
              
              7,539
              
              
              68,829
              
              
              20,453
              
              
              113,466Operating
                  Expenses
              
              
              1,134,070
              
              
              2,006,799
              
              
              2,901,373
              
              
              2,938,708
              
              
              10,001,676Operating
                  Loss
              
              
              (1,100,867
              )
              
              (1,999,260
              )
              
              (2,823,544
              )
              
              (2,918,255
              )
              
              (9,888,210
              )Other
                  Income (Expense)
              
              
              (20,356
              )
              
              (25,407
              )
              
              (50,493
              )
              
              (24,869
              )
              
              (127,784
              )Net
                  Loss
              
              $
              (1,121,223
              )
              $
              (2,024,667
              )
              $
              (2,883,037
              )
              $
              (2,943,124
              )
              $
              (10,015,994
              )




Our
      sales
      for the three and six month periods ended June 30, 2007 have increased
      considerably from the three and six month periods ended June 30, 2006, due
      primarily to the sales efforts of our power products distributors. We expect
      this trend to continue.





During
      the six months ended June 30, 2006 we realized a gross profit margin of 27%,
      while our gross profit margins for all other periods reported above were
      approximately 15%-16%. The higher gross margin for the six months ended June
      30,
      2006 was due primarily to the sale of one 6.8L hydrogen fueled engine. We
      anticipate that our gross margins on hydrogen and other alternative fueled
      products will continue to be higher than gross margins on traditional-fueled
      products. We expect, therefore, that our gross margins will increase only to
      the
      extent we are successful in marketing our hydrogen and other clean-energy
      products. This is consistent with our mission of offering tangible technologies
      that produce clean energy solutions.




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




Our
      sales
      and marketing expenses have decreased $93,966 and $245,740, respectively, for
      the three and six months ended June 30, 2007 as compared to the respective
      periods in 2006. We have encountered obstacles while implementing our sales
      and
      marketing initiatives. We underestimated the time it would take to find
      qualified engine and generator sales people as well as qualified project
      engineers. Our recruiting efforts have also been slowed because we have been
      concentrating on fundraising and product development.





We
      are
      currently recruiting sales professionals, two for outside engine sales and
      two
      for outside distributed generation sales. We intend to be more involved in
      the
      distributed generation market because of the tightening of governmentally
      imposed emissions standards. For that reason we expect to also add some program
      management personnel to work directly with government agencies, both here and
      in
      Canada. We expect sales and marketing expense to increase during the remainder
      of 2007 as we make these additional hires.





Our
      general and administrative expenses decreased from $965,762 for the three months
      ended June 30, 2006 to $717,739 for the three months ended June 30, 2007.
      General and administrative expenses for the six months ended June 30, 2007
      and
      2006 were $1,541,160 and $1,573,731 respectively. These reductions were due
      primarily to our efforts to control expenses of operation. Our general and
      administrative expenses include salaries, employee benefits, stock-based
      compensation, and the cost of compliance. Compliance costs include legal and
      accounting fees and the costs incurred for investor relations.




19




Our
      general and administrative expense also includes overhead and direct production
      expenses related to preproduction costs, which costs, if we had reached
      production capacity, would be allocated to products manufactured. Expenses
      related to pre-production include salaries for production personnel, purchasing
      costs and the costs associated with production ramp up. Total pre-production
      costs included in general and administrative expenses for the three months
      and
      six months ended June 30, 2007, were $175,581 and $378,715, respectively. For
      the period from inception (May 19, 2003) to June 30, 2007, pre-production
      expense was $1,100,431.





Our
      operating expenses include $191,410 and $329,961 for the three months and six
      months ending June 30, 2007, in employee stock options, nonemployee stock
      options and restricted stock compensation for directors and employees. We view
      our stock option compensation as a key tool that allows us to attract talented,
      experienced employees and directors without having to increase cash
      compensation. Although we have been able to preserve cash with this tool, we
      have recognized, since inception (May 19, 2003), an aggregate amount of
      $1,381,948 in stock-based compensation expense. This expense has been allocated
      among sales and marketing, general and administrative, and research and
      development expenses.





Since
      inception (May 19, 2003) we have accrued approximately $165,000 in expenses
      related to forgivable loans and grants from state and local government sponsored
      programs. These expenses will continue to accrue until we meet certain criteria
      for job creation. If we can comply with the job creation criteria, these
      expenses would be recorded, at the time of forgiveness, as other income. Further
      information about these programs is provided below under, “Grants and Government
      Programs.”





We
      plan
      to add additional administrative personnel in the next few months, and have
      been
      successful in recruiting a highly qualified accountant to assist our principal
      financial officer. We expect that general and administrative expenses will
      increase to reflect the costs associated with our efforts to raise additional
      capital, additional costs associated with compliance with Section 404 of the
      Sarbanes Oxley Act, as well as expenses associated with any additional hires.





Costs
      recorded for research and development for the three months and six months ended
      June 30, 2007 were $338,097 and $745,454 respectively. Our Chief Executive
      Officer who also serves as our Chief Technical Officer has been concentrating
      his efforts on compiling technological data as support for the four patent
      applications filed thus far in 2007.





Our
      research and development costs also include payroll, employee benefits,
      stock-based compensation, engine certification expense, and other costs
      associated with product development. Because these costs are expensed as they
      are incurred, our investments in technology and patent applications are recorded
      at zero in our financial statements, regardless of their value. We currently
      have nine patents pending (seven filed and two in process) related to various
      aspects of engine technology. Patents pending and filed include the
      following:





·
            precision
                alignment hub, filed April 7, 2005





·
            material
                neutral process, filed as a provisional patent October 10,
                2006





·
            pigtailed
                stator windings for electrical generator, filed December 28,
                2006





·
            dual
                connecting rod piston, filed April 20,
                2007





·
            large
                displacement engine, filed May 23,
                2007





·
            laminated
                internal combustion engine design and fabrication technique, filed
                May 29,
                2007





·
            carbon
                free hydrogen and ammonia fueled internal combustion engine, filed
                May 29,
                2007.





We
      have
      two patents in process that we expect to file in the near future and up to
      63
      additional patents in various stages of preparation.





We
      have
      recently been successful in recruiting a highly qualified engineer with industry
      experience to work specifically with our 4+1 technology and other systems
      technologies and may add additional personnel in the research and development
      area. Management believes that, assuming receipt of additional capital, research
      and development expenses will increase during the remainder of 2007 as we
      continue to pursue development of our technology and intellectual property.




20




During
      the six month period ended June 30, 2007, we also realized expense in the amount
      of $448,011 to recognize the value of warrants issued to a former supplier
      to
      settle a dispute while preserving company cash. Since inception (May 19, 2003),
      we have realized expense in the amount of $577,500 to settle this dispute.
      The
      warrants were issued on May 9, 2007 and the settlement has been completed.





At
      June
      30, 2007 we recorded inventory of $2,334,346, which amount includes
      approximately $350,000 for engine blocks purchased from our supplier in China.
      We inspect each block before incorporation into one of our products, and have
      rejected a number of them. Currently we are estimating that the rate of
      rejection could be as high as 50% after completion of all inspections. Based
      upon the Warranty and Replacement Terms dated March 22, 2007, as well as
      personal conversations with this supplier, we expect that the supplier will
      replace the rejected products at no additional cost to us. The supplier,
      however, has experienced delays in the process of relocating its operations
      to a
      modern facility capable of meeting our exact specifications for design and
      operating performance. It is possible that we will be required to obtain engine
      blocks from other, more expensive sources, if these problems cannot be addressed
      prior to the end of 2007.





For
      the
      three months ended June 30, 2007 we recorded a net loss of $ 1,121,223  compared
      to a net loss of $2,024,667 for the three months ended June 30, 2006. For the
      six months ended June 30, 2007 we recorded a net loss of $2,883,037 compared
      to
      a net loss of $2,943,124 for the six months ended June 30, 2006. We recorded
      a
      net loss of $10,015,994 from inception (May 19, 2003) through June 30, 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.





21





**Liquidity
      and Capital Resources**





*Short-Term
      and Long-Term Debt Sources*





From
      incepti on
      through June 30, 2007 ,
      we have
      used $ 9,484,241
      in cash in our operating activities and $3,290,593 in capital expenditures.





Net
      cash
      used in operating activities was $1,080,297 for the three months ended
      June 30, 2007, compared to $1,322,252 cash used in operating activities in
      the three months ended June 30, 2006. Net cash used in operating activities
      was $2,383,475 for the six months ended June 30, 2007, compared to
      $2,175,230 cash used in operating activities in the six months ended
      June 30, 2006.





Net
      cash
      used in investing activities was $66,739 for the three months ended
      June 30, 2007, compared to $719,659 cash used in investing activities in
      the three months ended June 30, 2006. During the six-month period ended
      June 30, 2007, we used $109,864 of cash in investing activities compared to
      $1,335,087 of cash in the comparable period of 2006. The reduction is primarily
      due to construction costs incurred during 2006.





We
      have
      funded our operations from inception through June 30, 2007, through a series
      of
      financing transactions, including:





·
            an
                investment of $151,487 by Theodore G. Hollinger;





·
            proceeds
                from convertible loans in the amount of $557,051,





·
            $7,126,964
                in gross proceeds from two private offerings of Common Stock,





·
            $3,022,500
                in gross proceeds from the private offering of Series A Preferred
                Stock,





·
            $3,865,692
                in gross proceeds from the private offering of Series B Preferred
                Stock.





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





We
      incurred expenses in connection with the Merger of $353,611. We
      incurred 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 $297,597 in connection with the private
      placement of our Series B Preferred Stock.





We
      have
      received funding from government programs, including $400,000 in forgivable
      loans from the Iowa Department of Economic Development and $200,000 from the
      City of Algona revolving loan fund. We have also received $1,806,044 from bank
      financing, of which $655,258 has been repaid as of June 30, 2007.





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, and requires monthly interest and principal
      payments of $4,484.





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.





On
      February 21, 2007, we amended our loan agreement for a letter of credit with
      Bank of America, Algona, Iowa, and reduced the amount of the letter of credit
      from $330,000 to $80,000, thus allowing us to obtain a revolving line of credit
      of $250,000. The revolving line of credit carries a variable rate, currently
      8.25%, and will mature on October 16, 2007.





At
      June
      30, 2007, we had cash on hand of $2,454,922 ,
      compared to $1,149,207 on December 31, 2006. We
      had
      restricted cash, in the form of a bank certificate of deposit, of $360,409
      on
      June 30, 2007, compared to $352,584 on December 31, 2006.




22




Inventories
      increased from $2,001,004 at December 31, 2006 to $2,334,346 at June 30, 2007
      due primarily to the purchase of power unit component parts.





Our
      accounts payable decreased from $498,316 on December 31, 2006 to $189,818 on
      June 30, 2007.





At
      June
      30, 2007, we had current assets of $ 5,361,687 and
      stockholders’ equity of $ 5,657,544 ,
      compared to current assets of $3,776,052 and stockholders’ equity of $4,045,170,
      at December 31, 2006. Our aggregated net loss from inception was $10,015,994.
      Our cumulative net loss has resulted principally from expenditures related
      to
      the commencement of operations and development of our technologies.





*Going
      Concern*





Our
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates our continuation of operations, realization
      of
      assets and liquidation of liabilities in the ordinary course of business. Since
      inception, we have incurred substantial operating losses and expect to incur
      additional operating losses over the next several months. As of June 30, 2007,
      we had an accumulated deficit of approximately $10.0 million. Our accompanying
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.





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. Efforts are ongoing to raise new capital. We have engaged an
      investment banking firm to assist in our efforts. Funding is needed to implement
      our business plans. As of August 9, 2007, we had cash of $2,025,213, accounts
      receivable of $100,286 and accounts payable of $35,274. If we are unable to
      raise sufficient funds, we would curtail expenditures for research and
      development including engine certification and engine development. With our
      existing capital, and projected sales revenue, we anticipate that we can fund
      our operations through November 2007 without additional capital. These
      timeframes will vary if events occur which negatively (or positively) affect
      our
      operations, including delays in anticipated sales. There can be no assurance
      that we will successfully raise additional capital in an amount sufficient
      to
      satisfy our requirements. Also, there are no assurances that additional capital
      will be available at terms acceptable to the company. These conditions raise
      substantial doubt about our ability to continue as a going concern.





*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, w e
      expect
      to continue to pursue development and marketing of the products that we believe
      to be the core of our future. We
      believe the global market for intellectual property in the alternative energy
      sector justifies our conviction and commitment to invest in research and
      development. We have identified the following four near-term goals that we
      believe will enhance results of operation, as well as facilitate our ability
      to
      bring alternative solutions to the world’s energy and environmental
      needs.





·
            Patents:
                We intend to pursue broad protection of our intellectual property,
                which
                we view as a material portion of the long-term value of our company.
                We
                expect to file patents and receive patent pending status covering
                the
                alternative energy solutions described below. We believe that patent
                protection will allow us to pursue licensing and royalty business
                opportunities as they arise and to protect the markets we intend
                to serve.





·
            Ammonia
                (NH3):
                We are developing an ammonia-fueled engine with efficiency that we
                expect
                to exceed that of existing internal combustion engines while producing
                near-zero emissions. We believe that ammonia, which we refer to as
“the
                other hydrogen fuel,” has the potential to solve the fuel availability,
                transportation and storage problems associated with hydrogen. In
                an
                ammonia engine we see a significant opportunity to hasten the world’s
                transformation to environmentally friendly energy resources.




23




·
            1
                Megawatt 4 + 1TMhydrogen genset:
                We are working to develop a one megawatt, carbonless-fuel, 4 +
                1TMgenset using our large displacement, 23.4L, engines. We believe that
                this
                product will provide market opportunities in at least two
                areas:





·
            A
                one-megawatt hydrogen-fueled genset could offer a clean, economical
                energy
                solution to any large manufacturing facility that produces stranded
                hydrogen. The hydrogen that would otherwise be burned as a waste
                product
                could be used in this genset to produce clean, electrical energy
                that, in
                turn, could be used to power the
                facility.





·
            A
                one-megawatt hydrogen-fueled genset could be used, in conjunction
                with
                larger wind-farm turbines, to produce continuous electric power
                generation. Electric power and hydrogen would be generated from wind
                energy. Under slack wind conditions, that hydrogen could be used
                to fuel
                our 4 + 1TMgenset, thereby generating continuous electric power. This genset
                could
                reduce or eliminate the need to use fossil fuels to generate electric
                power when the wind is not blowing, thereby reducing operating costs
                and
                making wind projects of this kind environmentally clean. We believe
                a
                similar opportunity exists for use in conjunction with solar power
                generation facilities.





·
            Turn-key
                combined heat and power variable speed power generation
                system:
                We are working to develop an enclosed system capable of delivering
                both
                power and heat. The system would include a hydrogen-(or ammonia-)fueled
                engine and an electrolyzer and we believe the system would have a
                combined
                generator system efficiency greater than 90%. We see market opportunities
                with this technology because we believe that the system would generate
                carbon-free, zero emission electrical power while enabling the end-user
                to
                be independent of the power grid.





Currently
      we are expecting that ammonia will become our fuel of choice for a carbon-free
      power generation system. We are focusing on ammonia for a number of
      reasons:





·
            Ammonia
                is the densest carrier of hydrogen by weight, denser per pound than
                liquid
                hydrogen.





·
            Ammonia
                is, in our view, the best way to store and transport
                hydrogen.





·
            Ammonia
                is a carbonless fuel that can supply clean energy now.





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. We do not
      anticipate expanding our manufacturing facilities in 2007.





We
      will
      not be able to offer our engines for sale to Original Equipment Manufacturers
      (“OEMs”) 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 or ammonia, are not subject to the same
      requirements. We anticipate beginning the emissions certification process of
      our
      4.9L engine in the third quarter of 2007. We believe it will cost approximately
      $1.1 million to certify the 4.9L and 2.4L engines. This testing procedure will
      be an expense of research and development. We expect to incur approximately
      $300,000 for this certification process in 2007, subject to sufficient capital
      from anticipated financing.





*Grants
      and Government Programs*





On
      July
      7, 2005, we were notified by the Iowa Department of Economic Development of
      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




24




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 on 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
      June 30, 2007 we have 28 employees, 23 of whom are in Algona, Iowa, and five
      of
      whom are in Canada. We anticipate that we will create approximately 5-10
      additional new jobs in 2007, subject to receipt of sufficient capital from
      anticipated financing.





**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.




25




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements.




26





**ITEM
      3. 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 June 30, 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 and have retained a consultant to assist with this process.
      Although this process has not been formalized, we believe that the controls
      and
      procedures in place during the first and second quarters 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. **





27




**PART
      II OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





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





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





During
      the quarter ended June 30, 2007, we granted options to purchase 50,000 shares
      to
      employees and directors under the company’s 2005 Incentive Compensation Plan,
      all of which were granted with an exercise price of $1.70 per share. Further
      information about awards under the 2005 Incentive Compensation Plan is included
      in our Annual Report on Form 10-KSB filed with the Commission on April 17,
      2007,
      which report is incorporated herein by reference.





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





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





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





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





This
      Report on Form 10-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. Shares
      of
      the Series B Preferred Stock are no longer being offered by the
      company.





28




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





At
      the
      company’s Annual Meeting of
      Stockholders held on May 30, 2007, two matters were voted upon. A
      description of each matter and tabulation of the votes for each of the matters
      is as follows:




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




VotesNominee
            
            For
            
            WithheldTheodore
                G. Hollinger
            
            
            20,200,299
            
            
            3,625Thomas
                O. Trimble
            
            
            20,197,299
            
            
            6,625Edward
                T. Berg
            
            
            20,166,046
            
            
            37,875Philip
                G. Ruggieri
            
            
            20,197,299
            
            
            6,625





2.
      To
      ratify of the appointment of LWBJ, LLP, as the independent registered public
      accounting firm of the company for the fiscal year ended December 31,
      2007:




VotesFor
            
            Against
            
            Abstain20,198,924
            
            
            0
            
            
            5,000








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





Exhibit
                  No.
              
              Description31.1
              
              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.





29


**SIGNATURES**




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


**HYDROGEN
                ENGINE CENTER, INC.**Date:
              August 14, 2007
            By
            /s/
                THEODORE G. HOLLINGERTheodore
              G. HollingerPresident
              and
              Chief Executive Officer Date:
              August 14, 2007
            By
            /s/
              Sandra BattSandra
              BattChief
              Financial Officer


30