UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2008

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

Commission file number 000-50542

HYDROGEN ENGINE CENTER, INC.

(Exact name of registrant as specified in its charter)

Nevada		82-0497807
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

2502 East Poplar Street, Algona, Iowa 50511

(Address of principal executive offices)

(515) 295–3178

(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

$0.001 par value Common Stock

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨Yes xNo

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. ¨Yes xNo

Indicate by check mark whether 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. xYes ¨No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Code Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this From 10-K or any amendment to this form.

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

Large accelerated filer ¨	Accelerated Filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of June 30, 2008, we had 13,206,486 shares held by persons not considered affiliates of the company. The closing price on that date was $0.47 for an aggregate market value of shares held by non-affiliates of $6,207,048.

As of March 24, 2009, we had 30,214,902 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report.

TABLE OF CONTENTS

		Page
PART I

ITEM 1.	BUSINESS	4
ITEM 1A.	RISK FACTORS	16
ITEM 2.	PROPERTIES	25
ITEM 3.	LEGAL PROCEEDINGS	25
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	25

PART II

ITEM 5.	MARKET FOR COMMON EQUITY, RELATED STOCKHOLER MATTERS	26
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	39
ITEM 9.	CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES	70
ITEM 9A(T).	CONTROLS AND PROCEDURES	70
ITEM 9B.	OTHER INFORMATION	71

PART III

ITEM 10.	DIRECTORS, EXECUTIVES, OFFICERS AND CORPORATE GOVERNANCE	71
ITEM 11.	EXECUTIVE COMPENSATION	71
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	71
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	72
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	72

PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	73

SIGNATURES		74

AVAILABLE INFORMATION

Information about us is also available at our website at www.hydrogenenginecenter.com, under “Investor Relations, SEC Filings,” which includes links to reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Form 10-K.

PART I.

ITEM 1. BUSINESS.

Business Development

Hydrogen Engine Center, Inc., a Nevada corporation (the “company,” “HYEG,” “us,” “we,” or “our”) was organized for the purpose of developing and commercializing clean solutions for today’s energy needs. We offer technologies that provide alternative-fuel energy solutions for the industrial and power generation markets. Our systems use spark-ignited internal combustion engines (ICE) powered by alternative fuels such as hydrogen, ethanol, methanol, or ammonia. We use our proprietary engine controller and software to efficiently distribute ignition spark and fuel to injectors. Our business plan is centered on technologies that we expect to play an increasing role in addressing the world’s energy needs as well as its environmental concerns. We expect future revenue generation from the sale of hydrogen engines and gensets for dedicated uses, such as airport ground support and wind power generation.

Our common stock trades on the OTC Bulletin Board under the symbol “HYEG.OB.”

Our Founder, Ted Hollinger, formerly Director of Engineering at Ford Motor Company and Vice President of the Power Conversion Group at Ballard Power Systems and Dr. Tapan Bose who was President of HEC Canada until his death in 2008, are recognized leaders in the development of technologies for the use of hydrogen as a fuel.

Our primary objective is to provide the most reliable, most efficient and lowest emission energy storage and power generation solutions, utilizing renewable fuels, to the global industrial market and to become the undisputed leader in the development and deployment of turn-key low carbon and carbonless fueled energy solutions.

We are currently focusing on the following market segments:

Distributed power generation via renewable power support

Power generation using clean-burning by-product gases such as hydrogen

Industrial applications for our engine controls and fuel distribution systems

Since inception, we have invested in the resources and technology we believe necessary to deliver carbon free energy technology. As such, we have incurred substantial operating losses and we expect to incur additional losses in 2009. We continue to take steps to lower our monthly cash expenditures.

During 2008, we sold all of our “remanufactured” 4.9L engine inventory and most of our “new” 4.9L engine inventory to fund our operations. We believe that we overestimated the market size for these engines which resulted in increased costs per engine unit. In an effort to achieve profitability we plan to eliminate our traditional-fueled products and concentrate on selling products with increased profit margins, such as the hydrogen products we offer.

In March 2009, we signed an agreement to be involved in a hydrogen demonstration project focused on testing hydrogen technologies and fueling infrastructures for the ground support industry. We have received purchase orders totaling $470,572 under this agreement. Once the agreement has been accepted by all parties involved, we expect that numerous hydrogen usages will be tested as part of this project. We are pursuing strategic alliances to assist us in marketing our hydrogen products. We plan to concentrate our efforts on “wind to hydrogen” projects like the project we have completed with Xcel Energy and the project we have underway with Newfoundland Labrador Hydro. We also expect to engage in a capital raise. However, a capital raise could be adversely affected due to the severe weakening of the economy and the recent fluctuation and general decline in the trading price of our shares.

Effective March 17, 2009, Ted Hollinger, our Company’s founder, entered into an agreement with Steven C. Waldron, under which Mr. Hollinger granted Mr. Waldron the option to purchase all of his shares of Common Stock of the Company at a price of $0.02 per share. Mr. Hollinger currently owns 15,661,037 shares or 51.83% of the total number of shares of Common Stock outstanding. Mr. Waldron has paid the amount of $15,000 to acquire the option. If the option is not exercised, Mr. Hollinger will be obligated to transfer 750,000 shares of his stock to Mr. Waldron. In the event Mr. Waldron exercises the option, he will pay Mr. Hollinger an additional $298,221.

Under the terms of the agreement, Mr. Waldron has the right to conduct due diligence on our Company over a period of 45 days before determining whether to exercise his option. If the option is exercised, Mr. Waldron will have purchased voting control of our Company and will be able to control the business plans and direction of the Company. Mr. Waldron is associated with Pinnacle Wind Energy, a company dedicated to the efficient development of wind power. Should Mr. Waldron gain control of our Company, Company resources likely will be primarily dedicated to this goal. Subject to approval of the Board of Directors, the March 17 agreement would also have allowed Mr. Hollinger to retain five patent applications not directly associated with wind energy generation and would have granted us a right of first refusal to license any technologies associated with those patents. In order to allow him to develop the patents, the agreement also anticipated that Mr. Hollinger would be released from his agreement not to compete with us. The Board was generally supportive of the agreement, but requested that a royalty agreement, or other means of providing compensation to the company, be put in place. However, on March 24, 2009, Mr. Hollinger and Mr. Waldron modified the agreement by removing the provisions regarding the patents and Mr. Hollinger’s noncompete.

Corporate History

Hydrogen Engine Center, Inc., an Iowa corporation (“HEC Iowa”) was incorporated on May 19, 2003 by Theodore G. Hollinger, formerly Director of Engineering at Ford Motor Company and Vice President of the Power Conversion Group at Ballard Power Systems responsible for development of hydrogen engine gensets. Operations commenced with the lease of the facilities in Algona, Iowa. Mr. Hollinger left Ballard with the ultimate intention of continuing the commercialization of hydrogen engines. HEC Iowa was founded with the goal of establishing a “hydrogen engine center of excellence” to foster the development of alternative fuel engines and generator systems.

On August 25, 2005, we incorporated Hydrogen Engine Centre (HEC) Canada, Inc., a Canadian corporation (“HEC Canada”). HEC Canada is located in Quebec and works with Universite Du Quebec at Trois-Rivieres on matters related to hydrogen research. HEC Canada was founded with the goal of establishing a research and development center to assist in the development of alternative fuel and hydrogen engines and generator systems. The actual development and assembly of our products is completed in the United States. An engine controller used to program the engines to run on alternative fuels and hydrogen has been manufactured in small quantities at the Universite Du Quebec a Trois-Rivieres in Canada.

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

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

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

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

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

We funded our operations from inception through December 31, 2008, through a series of financing transactions, including $7,126,964 gross proceeds from two private offerings of common stock (as described below), $3,022,500 in gross proceeds from the private offering of Series A Preferred Stock, $3,865,692 in gross proceeds from the private offering of Series B Preferred Stock, $57,131 in gross proceeds under our Standby Equity Distribution Agreement and convertible loans in the amount of $557,051.

On October 11, 2005, we closed a private placement of our common stock (“First Private Offering”) at $1.00 per share. We sold 3,948,500 shares of our common stock, $.001 par value, for a total of $3,948,500 to 93 investors, which represents 13.07% of the 30,214,902 issued and outstanding shares of common stock as of March 24, 2009. We sold the shares in a private transaction and we relied on an exemption from registration pursuant to Regulation D, Rules Governing the Limited Offer and Sale of Securities without Registration under the Securities Act of 1933.

On October 2, 2006, we closed the sale of 930,000 shares of our Series A Preferred Stock at $3.25 per share, (the “Series A Preferred Offering”), for a total of $3,022,500. All of the shares of Series A Preferred Stock have been converted into 1,511,250 shares of common stock, which number represents 5.00% of the 30,214,902 issued and outstanding shares of common stock at March 24, 2009.

On October 15, 2006, we closed the sale of 978,009 shares of common stock in our Second Private Offering of common stock (“Second Private Offering”) at $3.25 per share for a total of $3,178,464 to 41 investors, which represents 3.24% of the 30,214,902 issued and outstanding shares of common stock at March 24, 2009.

On May 31, 2007 we closed the sale of 1,932,846 shares of our Series B Preferred Stock (the “Series B Offering”) at $2.00 per share for a total of $3,865,692 to 19 investors. All of the shares of Series B Preferred Stock have been converted into 1,932,846 shares of common stock, which represents 6.40% of the 30,214,902 issued and outstanding shares of common stock at March 24, 2009.

On April 11, 2008, we entered into a Standby Equity Distribution Agreement (“SEDA”) to sell up to a maximum of $4,000,000 in equity securities over twenty-four months to an investor. The agreement required that we register stock prior to receiving any funds and subject to certain limitations, allows us to issue shares under the SEDA periodically in amounts not to exceed $350,000 at one time. The per share price for shares issued under the SEDA is dependent upon the market value of our stock at the time of funding. Our registration statement covering 4,054,541 of such equity securities, filed on May 20, 2008, was declared effective by the Securities and Exchange Commission on August 5, 2008.

It has not been possible to depend on the SEDA to fund our operations. According to the terms of the SEDA, once an advance is requested, the investor can begin selling shares which consequently drives the price of the stock lower. We began accessing the SEDA funds in August and at March 12, 2009, have sold 305,325 shares at an average price of $.21 and have received $63,531 in capital. The number of shares we can sell under the SEDA has also been adversely affected by the recent fluctuation and general decline in the trading price of our shares.

The shares in all of our private placements (the “Private Offerings”) were sold in reliance upon an exemption from registration pursuant to Regulation D, Rules Governing the Limited Offer and Sale of Securities without Registration under the Securities Act of 1933. All of the shares in the Private Offerings, other than those held by affiliates of the company, are now freely tradable under Rule 144 of the Securities Act of 1933.

In order to continue our operations we need to raise additional capital. If we are unable to raise additional capital within the next thirty to sixty days, we may be required to seek protection under the bankruptcy laws. This could cause our investors to sustain a loss of their investment in our shares.

Principal Products and Markets

Our goal is to develop cost effective, market driven products and technologies that will provide clean-energy solutions to the world’s energy needs. We manufacture and market products under the brand name Oxx Power® Oxx Power® engines and gensets are assembled and tested at our Algona, Iowa facility. Our Oxx Boxx™ engine controller, which is critical to our ability to offer clean energy solutions, was developed through HEC Canada in collaboration with the University of Quebec. We expect the airport ground support industry and “wind to hydrogen projects” to offer a near-term opportunity for revenue generation.

Current Product Offerings and Commercial Applications of our Products

Our current product line includes:

Zero-Emissions Engines for Industrial Mobile Equipment

4.9L, 6 Cylinder Oxx Power® Hydrogen Engines

Add-On Systems for the Wind Power Industry

Hydrogen-fueled 50kW Oxx Power® Generator Systems

Hydrogen-fueled 250kW 4 + 1™ Generator Systems

Zero-Emissions Engines for Industrial Mobile Equipment

We have produced an immediate solution for Ground Support Equipment (GSE) markets, as well as other industrial mobile equipment markets, to allow immediate conversion of existing off-road mobile fleets to hydrogen-fueled engines. The Oxx Power® hydrogen-fueled engine is capable of meeting the needs of industrial markets while providing clean power. We believe many airports are seeking clean-energy solutions for operation of ground support vehicles. The Oxx Power® hydrogen-fueled engine can be utilized in the GSE fleets of many logistical service companies.

We have achieved near-zero NOx emissions when using hydrogen fuel in our engines. CO and CO2 are not present. The projected cost of a hydrogen internal combustion engine is as little as one-tenth the cost of a comparable fuel cell. The hydrogen internal combustion engine has the benefit of being understood by experienced engine technicians with only a basic review of differences respective of this engine. It can then be serviced by these technicians using the tools they already possess. There is no need to change the transmission or any other part of the power train to use a hydrogen engine. Oil changes and other servicing are similar to gasoline engines with few exceptions. There is no need for a catalytic converter nor is there a danger from the exhaust fumes. Special spark plugs, engine tuning, engine control system and a crank case ventilation system are required, but they appear merely as transparent or additional items to the service technician.

In March 2009, we signed an agreement to be involved in a hydrogen demonstration project. Once the agreement has been accepted by all parties involved, we expect that numerous hydrogen usages will be tested as part of this project.

Add-On Systems for the Wind Power Industry

To provide continuous power, a wind-hydrogen system links wind turbines to electrolyzers, which pass wind-generated electricity through an electrolyzer to split water into hydrogen and oxygen. The hydrogen is then stored and used later during slack wind conditions to generate electricity through our integrated power generation systems.

A combined wind and hydrogen energy system adds considerable value to wind power producers, allowing them to produce constant power by:

Providing start-up energy to off-the-grid wind power facilities;

Storing energy produced during off-peak hours to be used during peak hours;

Serving as a backup source of power when wind becomes unavailable;

Allowing wind producers to meet their bid obligations;

Absorbing excess wind power when transmission lines are congested; and

Providing backup energy to the grid.

We have focused our attention on developing and marketing our turn-key, 1 MW N+1TM power generation system to be used to store energy and generate electricity with wind power. Wind power is the fastest growing electricity source in the world. According to the Global Wind Energy Council (“GWEC”), global wind energy capacity grew by 28.8% last year, even higher than the average over the past decade, to reach total global installations of more than 120.8 GW at the end of 2008. Over 27 GW of new wind power generation capacity came online in 2008, 36% more than in 2007.

In line with the tremendous opportunities existing in wind storage, our systems, which store clean energy and generate electricity, are designed to be tied to the power grid. The systems stabilize the peaks and valleys in wind energy production. This is a valuable feature to wind power producers, who need to prove “constant power” in order to gain access to the grid.

Our current involvement with wind-to-hydrogen projects with Xcel Energy and Newfoundland Labrador Hydro provide examples of how our power generation systems can be combined with a renewable resource to provide intermittent or continuous power generation. In these systems, when the wind blows, the wind turbines provide electric power. If the power created exceeds the demand, excess electricity will be used to create hydrogen through electrolysis (separation of water into hydrogen and oxygen). The hydrogen is then stored to be utilized to fuel our power generation system during peak usage of electricity or when wind energy is unavailable.

We believe that we are the only company that can provide wind storage for constant power generation. Many other technologies, including fuel cells, are in early or development stage. Our primary target market is on-the-grid and off-the-grid wind power facilities, where wind storage could contribute substantially to the value proposition of this renewable source of energy.

Integrated Engine and Power Generator Systems (N+1TM)

We expect the flagship of our energy systems, the power generation system, will be marketed under the name N+1TM. Individual key components of the power generation system are marketed under the brand names Oxx Power® (engines), and Oxx Boxx® (engine controllers). We plan to integrate our power generation modules with wind power generation plants to produce additional power and manage power loads. Another application of such systems is the direct generation of electrical power from hydrogen and in some cases the “unwanted” byproducts of other processes.

The core of our turn-key energy systems will have a modular, standardized design. The systems’ front end will easily adapt to different fuel delivery systems. To deliver the systems, we plan to partner with companies that have extensive expertise in the areas of hydrogen production, transport and storage.

The N+1 TM format refers to interchangeable modules that can produce more or less energy, depending on the customer’s demand. Each N+1 TM power generation module comprises an N number of internal combustion engines (Oxx Power®) with controllers (OxxBoxx®), and power generators, plus another complete redundancy set (hence the name N+1 TM). For example, a 1 MW 4 + 1® power generation system comprises a total of five (four + 1) 250 kW engine/generator combinations running and generating power. Four of the engine/generators combinations are working, while the fifth one is waiting in standby, should it be needed. The systems will combine all the switching technology on board to minimize installation effort and complexity. Emissions from the N+1 TM will be virtually eliminated. The near zero emissions will be achieved by using non petroleum-based hydrogen fuel and a lean-burn strategy. The only carbon-based emissions will be from a minuscule amount of burned and unburned oil present in the combustion chamber.

Synergistic Collaborations

We are constantly seeking synergistic collaborations with others in the development and marketing of our technologies. In addition to our efforts related to the ground support industry, we have entered into other collaborative projects for the purpose of developing, testing and promoting the use of the company’s hydrogen genset technology. Some of those projects are discussed below.

We entered into a strategic alliance with Startech Environmental Corporation, a Connecticut based firm, on February 19, 2008. Startech designs and manufactures plasma conversion waste processing equipment. Startech believes that it can produce gas from its waste mitigation process that can be used to create power from both traditional and non-traditional power generation systems. We have supplied Startech a single 50kW genset which has been integrated with its system in order to prove concept. Trials have been successful and we are pursuing joint sales opportunities.

In January 2007, we shipped one of our 4 + 1™ 250 kW Oxx Power® generator systems to a demonstration site in Toronto as part of our contract to deliver the generator system to Natural Resources Canada (“NRCan”). The HEC Oxx Power® generator system was successfully tested in Canada for several months, generating power by burning non-polluting hydrogen fuel. The generator system is controlled by our Oxx Boxx™ technology developed by HEC Canada, whereby four engines run in parallel while one is always in reserve. This design maximizes both output and reliability, to become a key part of extending the use of both wind power and the power grid.

On August 15, 2008, we received a purchase order from Newfoundland Labrador Hydro for $145,510 for additional work to provide grid connectivity to the 4 + 1® which was purchased by Natural Resources Canada. The unit has been returned to Iowa for the additional work. We estimate that the generator enhancements will be completed by the end of March and the unit installed on the Ramea Island, sometime during the second quarter of 2009. We believe that this Oxx Power® 4 + 1™ system is highly scalable and can be an integral part of large-scale power generation systems. NRCan is seeking power generation solutions that are environmentally clean and economically viable. By integrating wind-based energy with our Oxx Power® generator system, NRCan, Newfoundland Labrador Hydro, and HEC plan to bring on-line a sustainable solution that extends the reach of wind energy, and reduces customers’ dependence on petroleum and gas burning technology. During slack wind conditions, hydrogen, which is produced by water electrolysis when the wind is blowing, will be used to fuel the 4 + 1™ power generation system, thereby extending the use of wind energy sources.

On November 6, 2006, we entered into a Memorandum of Understanding with ITM Power plc (“ITM”), one of the UK’s leading innovators within the alternative energy industry. The parties plan to jointly develop products for a non-polluting, grid-independent energy system which can undergo early field trial testing. We anticipate that ITM can offer an assured supply of hydrogen using ITM’s low cost electrolyzer technology. ITM anticipates that HEC will provide an early route to the provision of a complete system package using our proven engine technology. The combination of a hydrogen-fueled internal combustion engine and a low cost electrolyzer could provide the essential technology to convert low-value, intermittent, renewable energy (wind, solar) into a reliable, non-fossil energy supply. Subject to the production of satisfactory results from the field trials, the company and ITM will progress into detailed discussions with the intention of entering into a more formal commercial exploitation arrangement.

In April 2006, we received a purchase order from National Renewable Energy Lab and Xcel Energy Services Inc. for the purchase of one 50kW hydrogen fueled genset. This genset was delivered in December 2006 and is being tested in a wind farm setting in Colorado. The following internet link provides an animation where the overall process can be reviewed;

http://www.nrel.gov/hydrogen/proj_wind_hydrogen_animation.html

During 2009, we do not expect to generate more than nominal revenue from our power generation products until the fourth quarter of 2009; however we do expect that we will be aggressively booking business for future orders of our hydrogen products.

During 2008, we generated $1,358,647 in total sales, including $706,607 in revenue from the sale of products utilizing remanufactured Oxx Power® engines, $245,705 from the sale of products utilizing our new Oxx Power® engines, and $406,335 from the sale 4.9L engine parts and miscellaneous items. We expect the revenue from the sale of our traditional fueled 4.9L engines to decrease dramatically as we begin selling hydrogen powered 4.9L engines in 2009.

Distribution Methods for our Products and Services

Sales of our hydrogen powered generator systems and our hydrogen fueled engines are made directly by our internal sales staff. As we develop our products and intellectual property, we expect to add dealers and distributors to sell and support our products, both domestically and abroad. We are also constantly seeking synergistic collaborations with others in the development and marketing of our technologies.

During 2006, 2007 and 2008 we distributed our traditional engines through an existing network of industrial engine distributors. We entered into distribution agreements with major distributors in this industrial engine network. Two of these distributors are in Canada. This gives us nearly coast-to-coast distribution capability in both the United States and Canada. During 2008, we sold all of our “remanufactured” 4.9L engine inventory and most of our “new” 4.9L engine inventory. However, we plan to be able to use this existing distribution system for our hydrogen engines as demand grows.

Competition

The power generation and alternative fuel industry is highly competitive and is marked by rapid technological growth. Although there are several companies developing and/or marketing hydrogen engines, we are not aware of any significant production of alternative fueled industrial engines as of this date. We believe that the companies targeting production of hydrogen-fueled engines are automotive engine builders, such as Ford, GM, Honda, and BMW. We further believe that those engines will initially be used for automobiles and then for industrial applications. The gasoline-fueled industrial engine market is also served by GM and Ford.

Other competitors and potential competitors include H2Car Co., Cummins/Westport, Mazda, and Caterpillar. Many existing and potential competitors have greater financial resources, larger market share, and larger production and technology research capability, which may enable them to establish a stronger competitive position than we have, in part through greater marketing opportunities, however, we believe our size and flexibility is an asset in that we can respond rapidly to an emerging need.

Fuel cells may be perceived to be competition to our products, but we believe they are not at this time. Fuel cells cannot be currently manufactured in sufficient quantity to compete with hydrogen and other alternative fuel internal combustion engines. Also, fuel cells are more costly than the hydrogen internal combustion engines. However, the governments of the United States, Canada, Japan and certain European countries have provided significant funding to promote the development and use of fuel cells. Tax incentives have also been initiated in Japan, and have been proposed in the United States and other countries, to stimulate the growth of the fuel cell market by reducing the cost of these fuel cell systems to consumers. Our business does not currently enjoy any such advantages and, for that reason, may be at a competitive disadvantage to the fuel cell industry.

A major concern is that some competitors are likely to have considerably greater resources than we would have, thus potentially putting us at a disadvantage. We believe we can lessen that risk by exploiting our ability to react quickly to customer needs. Our larger competitors may not be able to act as quickly because of cumbersome internal processes and procedures.

Principal Suppliers

We out-source manufactured parts and bring them into our production facility as components ready for the assembly line. We then assemble all components to produce our products.

We purchase parts for our Oxx Power® engines and gensets from several different industrial parts suppliers. The parts are sourced from destinations located all over the world, including China. Our new Oxx Power® engine blocks were sourced to a supplier in China. We have rejected most of the engine blocks received from that supplier. Under the Warranty and Replacement Terms dated March 22, 2007, the supplier has agreed to replace the rejected products. We are aggressively pursuing efforts to recover losses we have recognized because of these rejected products. We visited the factory during 2008 to witness the production and participate in the inspection of the Oxx Power® blocks. We have also retained an engineer who can be on-site to inspect the engine blocks before they are shipped. One replacement block has been shipped to us and we are testing it to assure its quality. In addition, we have a relationship with a consultant who can assist us with the procurement of parts from China.

There are risks and uncertainties with respect to the supply of certain component parts that could impact availability in sufficient quantities to meet our needs. If, for any reason, a manufacturer is unable or refuses to manufacture our component parts, our business, financial condition and results of operations would be materially and adversely affected.

Dependence on One or Few Major Customers

We do not anticipate dependence on one or few major customers at this time.

Intellectual Property and Patent Protection

Hydrogen Engine Center is built on the vision of carbon-free energy independence through the development and commercialization of clean solutions for today’s energy needs. We have been working to expand our intellectual property portfolio and developing technologies to allow engines and gensets to generate and use clean power on demand, where needed. Some products and technologies are available today.

We believe that our developing technologies have the potential to revolutionize our world by removing the political and environmental problems generated by our ever-increasing appetite for energy sources. As our founder Ted Hollinger is fond of saying, there is no shortage of energy. There is only a shortage of wisdom and creativity in the methods we use to harness the energy that is all around us.

We have a number of patents pending and a number of potential patents in the development stage. These patents relate to energy efficiency and the use of hydrogen, ammonia and other alternative fuels for the production of cleaner energy. We also rely on trade secrets, common law trademark rights and trademark registrations. We intend to protect our intellectual property via non-disclosure agreements, license agreements and limited information distribution.

Our current patent filings are listed and briefly described below:

Precision Hi-speed Generator Alignment Fixture - A patent has been issued covering a method and apparatus allowing for precise alignment between engines and hi-speed alternators. The device solves the issue of misalignment, the cause of most failures associated with using hi-speed engines with 2-pole 3000 or 3600 rpm alternators. The device’s precise alignment of +/-.004 between engine crankshaft and alternator rotor shaft greatly reduces vibration and significantly increases the system’s life span. The device also acts as a safety hub preventing the destruction of the alternator, should there be a catastrophic failure of the coupler.

Permanent Magnet Generator Cooling - A patent has been filed and is pending covering the method and apparatus for the more efficient transfer of heat away from the permanent magnet generator. Permanent magnet generators represent a major step forward in the evolution of power generation. A stumbling block to the future widespread implementation of this technology is the increased heat associated with the design. Our method of reducing this heat represents a significant breakthrough in this area. These heat deflection capabilities will allow us to produce prime power alternators with one-third of the footprint of their air-cooled counterparts.

Dual Connecting Rod Piston - A patent has been filed and is pending covering a large displacement piston and connecting rod. The piston comprises a large bore piston and a plurality of connecting rods. A very large displacement engine is built using one piston with the plurality of connecting rods, wherein the one piston has the combined diameter of two pistons in a smaller bore engine. The connecting rods are spaced to operatively connect with a standard crankshaft style, where each connecting rod of the two smaller, standard pistons would connect to the crankshaft.

Indexed Segmented Crankshaft - A patent has been filed and is pending relating to the manufacture and assembly of a crankshaft for an internal combustion or diesel engine. The invention is comprised of a crankshaft that is made up of pieces or segments that are assembled together with the proper segment indexing to achieve a design that could not be achieved by casing or machining as a single component. Crankshafts are generally made by molding and designing to fit a specific engine and specific stroke. This design allows for changing the crankshaft design without having to make a new mold or undertake other associated steps.

Large Displacement Engine - A patent has been filed and is pending covering an engine block with a plurality of relatively large piston bores. The engine block is adapted for use of relatively large bore pistons, and preferably dual connecting rod pistons. Configured in this manner, the engine block has a relatively large displacement and is especially suited for use of low-btu fuels, more particularly hydrogen.

Laminated Internal Combustion Engine Design and Fabrication Technique - A patent has been filed and is pending covering an engine block for an internal combustion engine that is fabricated from laminated pieces of material instead of cast iron or cast aluminum. The advantages of this design are several. There is the flexibility of the design. Each lamination piece can be designed to complex three dimensional structures and/or passages. The lamination material itself can be changed to improve strength, thermal conductivity, reduce cost, or any other parameter that one might like to adjust. We believe this engine will have a manufacturing cost of half, or less, than the cost of a traditional cost engine.

Sealing system for Laminated Internal Combustion Engine - A patent has been filed and is pending covering a method of sealing the laminations of a laminated engine block to prevent water and other contaminants from entering the piston cylinders.

Carbon Free Hydrogen and Ammonia Fueled Internal Combustion Engine - A patent has been filed and is pending covering a spark ignited internal combustion engine with a dual-fuel system and a special engine control system, including special software. The engine control system starts the engine on either H2 or on a combination of H2 and NH3 where in the latter case the percentage of H2 is adjusted to ensure proper starting. Once the engine is running, the engine control system adjusts the percentage of hydrogen needed for proper operation. The percentage of hydrogen can be from about 5% to 100%, while the percentage of ammonia can be from 0% to about 95%. NH3 provides greater power and requires less storage space and is therefore the preferred fuel. The preferred way to operate the engine is to start with a hydrogen rich mixture and slowly decrease the percentage of H2 until the minimum amount required for proper engine operation is achieved. This minimum will be determined by several factors. The most notable is the flame velocity. At higher engine speeds (rpms) greater amounts of hydrogen will be required.

Gaseous/Liquid and Ammonia Fueled Internal Combustion Engine - A patent has been filed and is pending covering a spark ignited internal combustion engine with a dual-fuel system and a special engine control system, including special software. The engine control system starts the engine with either 100% of a gaseous or liquid fuel (such as natural gas, gasoline or ethanol and referred to as “standard fuel”) or a combination of standard fuel and NH3. In the latter case, the percentage of standard fuel is adjusted to ensure proper starting. Once the engine is running, the engine control system adjusts the percentage of standard fuel needed for proper operation. The percentage of standard fuel can be from approximately 5% to 100%, while the percentage of ammonia can be from 0% to approximately 95%. NH3 produces no CO2 emissions and is therefore the preferred fuel. The preferred way to operate the engine is to start with a gaseous fuel rich mixture and slowly decrease the percentage of standard fuel until the minimum amount required for proper engine operation is achieved. This minimum will be determined by several factors. The most notable is the flame velocity. At higher engine speeds (rpms) greater amounts of standard fuel will be required.

We also rely on trade secrets, common law trademark rights and trademark registrations. We intend to protect our intellectual property via non-disclosure agreements, license agreements and limited information distribution. The current status of our federal trademarks is summarized below:

Mark	Status	Reg./Serial No.

TM: 4 + 1	Registered	78/807,600

TM: HEC	Pending Filed on 4/5/2007	77/149,385

TM: OXX & Design	Registered	78/841,069

TM: OXX BOXX	Registered	78/846,909

TM: OXX POWER	Registered:	78/537,731

TM: OXX WORKS	Registered	78/807,587

TM: Part of the Solution	Allowed	77/036,246

Research and Development

We have spent a total of $4,075,731 on research and development activities with $825,228 being spent during calendar year 2008. As we are a development stage company, the costs of our research and development are not at this time borne directly by customers.

Hydrogen as a Fuel

Concerns motivating increased hydrogen acceptance include national security, economy, and the environment. An alternative fuel such as hydrogen would not be subject to the price volatility risk inherent in fossil fuels, and will reduce the country’s dependency on foreign fuels.

Federal and local governments in the US are enacting policies like the Hydrogen Fuel Initiative to encourage the use of alternative fuel, and establish goals for potentially requiring the use of alternatives. California’s Executive Order S704 orders building up a network of hydrogen fueling stations sufficient to make hydrogen available in the State by 2010.

Our system allows engines to run on a variety of fuels, including hydrogen. We believe that one of the key attributes of our technology is that a standard production internal combustion engine can be modified to achieve near-zero emissions. We have established a process for converting certain internal combustion engines to operate efficiently with hydrogen as a fuel.

We have achieved near-zero NOx emissions when using hydrogen fuel in our engines. CO and CO2 are not present. The projected cost of a hydrogen internal combustion engine is as little as one-tenth the cost of a comparable fuel cell. A further advantage of a spark-ignited, hydrogen-fueled engine is that it can run on regular welding grade hydrogen, or on mixed gases such as natural gas and hydrogen, versus the ultra pure hydrogen typically required for fuel cells, or on mixed gases such as natural gas and hydrogen. When produced renewably it has the potential to eliminate carbon based emissions.

The hydrogen internal combustion engine has the benefit of being understood by experienced engine technicians with only a basic review of differences respective of this engine. It can then be serviced by these technicians using the tools they already possess. There is no need to change the transmission or any other part of the power train to use a hydrogen engine. Oil changes and other servicing are similar to gasoline engines with few exceptions. There is no need for a catalytic converter nor is there a danger from the exhaust fumes. Special spark plugs, engine tuning, engine control system and a crank case ventilation system are required, but they appear merely as transparent or additional items to the service technician.

Issues Related to Government Approvals or Governmental Regulations

Our facilities are subject to health and safety regulations, building codes, and other regulations customary in any manufacturing enterprise in the United States.

Demand for alternative fuel technology abroad and in the United States could be influenced by numerous factors, such as the availability of affordable fossil fuels in troubled regions of the world, mandates by various government entities calling for the introduction of clean-energy alternatives, and the long-term acceptance of the Kyoto Treaty.

Approximately 183 countries and one regional economic integration organization, including all industrialized countries other than the United States, have signed the Kyoto Protocol. We believe the Kyoto Protocol could have substantial impact on the company. This treaty requires many of the large industrialized nations of the world to reduce emissions of greenhouse gases. Any weakening of this treaty or its symbolic value could have a negative impact on the potential demand for our products.

We may also be affected by governmental regulations relating to environmental matters, specifically emission standards.

Cost of Compliance with Environmental Laws

We out-source all manufactured parts and bring them into our production facility as components ready for the assembly line. We then assemble all components to produce our products. The assembly process uses no hazardous materials nor do they create any hazardous waste. Our engine-testing facility hot tests all engines on a dynamometer to ensure that they meet our specifications. This process is subject to air and water environmental laws and regulations. These laws and regulations will vary with the fuel choice that the testing procedure requires.

We have designed our buildings and have written our procedures to meet or exceed current environmental and fire code laws. Any changes in the laws at the state or federal level could require us to modify our testing procedures to comply with future environmental regulations.

Employees

As of December 31, 2008, HEC Iowa had 12 employees, all of whom were full time. During the first quarter of 2009, we began intermittently laying our employees off due to insufficient financing and lack of work in these slow economic times. Commencing with the first pay period in March 2008, Ted Hollinger, Sandy Batt and Mike Schiltz began receiving only 50% of their salaries. These steps were taken to reduce costs and preserve our available cash. As of December 31, 2008, HEC Canada had three employees, one full-time and two part-time. Beginning March 16, 2009, we laid off one full-time and one part-time employee of HEC Canada in order to conserve cash. Our employees are not members of any union, and they have not entered into any collective bargaining agreements. We believe that our relationship with our employees is good.

As of March 31, 2009, HEC Iowa has 10 employees, 6 of whom are currently working full time and 4 of which have been laid off temporarily. HEC Canada has three employees one of which is working part time and two of which have been temporarily laid off.

ITEM 1A. RISK FACTORS. -

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-K. 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. SOME OF THESE FACTORS ARE DISCUSSED BELOW AND ELSEWHERE IN THIS FORM 10-K.

Additional financing to proceed with our anticipated business activities is required. There can be no assurance that financing will be available on terms beneficial to us, or at all.

In order to continue our operations, we have reduced expenses by reducing salaries and eliminating other expenses. If we raise additional capital by selling equity or equity-linked securities, these securities will dilute the ownership percentage of our existing stockholders. Similarly, if we raise additional capital by issuing debt securities, those securities may contain covenants that restrict us in terms of how we operate our business, which could also affect the value of our common stock. We have financed our operations since inception primarily through equity and debt financings and loans from our officers, directors and stockholders. Although we expect to offer securities of the company for sale during 2009, there can be no assurance that we will successfully complete such an offering or that the proceeds of the offering, if completed, would be sufficient to satisfy our capital requirements. If we are unable to raise additional capital within the next thirty to sixty days, we may be required to seek protection under the bankruptcy laws. This could cause our investors to sustain a loss of their investment in our shares.

If we raise additional capital by issuing equity securities, our existing stockholders' percentage ownership will be reduced which may cause them to experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences, and privileges senior to those of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technology, or to grant licenses on terms that are not favorable to us. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, develop products and technologies, and otherwise respond to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations.

If we are not able to obtain the needed financing in a timely fashion, our ability to achieve profitability will be materially impaired.

We have a limited operating history and have not recorded an operating profit since our inception. Continuing losses may exhaust our capital resources and force us to discontinue operations.

HEC Iowa was incorporated on May 19, 2003, has a limited operating history, and has incurred net losses since inception. We incurred $3,358,255 of losses during the year ended December 31, 2008 and $15,863,933 of losses since inception. Prior to the merger of August 30, 2005, the company (then known as “Green Mt. Labs, Inc.”) had been inactive for several years. The potential for us to generate profits depends on many factors, including the following:

timely receipt of required financing which has to date been delayed beyond our initial expectations;

successful pursuit of our research and development efforts;

protection of our intellectual property;

quality and reliability of our products;

ability to attract and retain a qualified work force in a small town;

size and timing of future customer orders, milestone achievement, product delivery and customer acceptance;

success in maintaining and enhancing existing strategic relationships and developing new strategic relationships with potential customers;

actions taken by competitors, including suppliers of traditional engines, hydrogen fuel cells and new product introductions and pricing changes;

reliability of our suppliers, which to date have been less reliable than we had expected;

reasonable costs of maintaining our facilities and our operations;

We cannot assure you we will achieve success as to any of the foregoing factors or realize profitability in the immediate future or at any time.

A potential change in management creates uncertainty regarding our future business plans.

Effective March 17, 2009, our founder, Theodore G. Hollinger, entered into an agreement with Steven C. Waldron, under which Mr. Hollinger granted Mr. Waldron the option to purchase all of his shares of common stock. If the option is exercised, Mr. Waldron will have purchased voting control of the company and will be able to control the business plans and direction of the company. Mr. Waldron is associated with Pinnacle Wind Energy, a company dedicated to the efficient development of wind power. We cannot, however, at this time predict with any degree of certainty the future direction of our business plans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Plan of Operation” below.

The effects of the recent global economic crisis may impact our ability to raise capital.

The recent global economic crisis has caused disruptions and extreme volatility in global financial markets and increased rates of default and bankruptcy, and has impacted levels of investing. If the banking system or the financial markets continue to deteriorate or remain volatile, investors will be skeptical about new investments. These developments could adversely affect our ability to raise capital.

There are substantial risks associated with the Standby Equity Distribution Agreement.

In order to obtain needed capital, we entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA Global Investments, L.P., (the “Investor”) in April 2008. The terms of the SEDA are described below under “Liquidity and Capital Resources - Terms of the SEDA.”

The sale of shares pursuant to the SEDA has a dilutive impact on our stockholders. We believe the Investor has promptly re-sold the shares we have issued to them under the SEDA and that such re-sales have caused the market price of our common stock to decline significantly with Advances under the SEDA. To the extent of any such decline, any subsequent Advances would require us to issue a greater number of shares of common stock to the Investor in exchange for each dollar of the Advance. Under this circumstance our existing stockholders may have experienced greater dilution than we initially anticipated when we entered into the SEDA. The sale of our stock under the SEDA may have encouraged short sales by third parties, which may have contributed to the further decline of our stock price.

We began accessing the SEDA funds in August 2008 and at March 12, 2009 have sold 305,325 shares at an average price of $.21 and have received $63,531 in capital. The fees we have paid for the SEDA have been relatively expensive in relation to the capital we have received. We likely will not access further funds under the SEDA and therefore we will have to turn to other sources for needed future capital.

Reliance on principal suppliers.

We contract the manufacture of many of the components for our Oxx Power® engines to third parties, mainly in the United States and China. In many cases, we do not have an alternative supplier. Although finding a suitable replacement is time-consuming and expensive, we continue our efforts to find suitable alternative sources in different regions. We have experienced problems receiving quality parts needed for production of our Oxx Power® engines. These problems have adversely affected our operations and our financials results. If these problems persist, our business, financial condition, and results of operations could be materially and adversely affected.

We are dependent on a small number of vendors to supply the components for our 4.9L engines. We have rejected most of the engine blocks received from our Chinese supplier. Based upon the Warranty and Replacement Terms agreement with the supplier, dated March 22, 2007, and visits to the factory in China, we expect that the supplier will replace the rejected products at no additional cost to us. One replacement block has been shipped to us and we are testing it to assure its quality. There is, however, no assurance that we will not incur additional unexpected costs or that the replacement blocks we may receive will meet our quality standards. Continued problems with suppliers may have a materially adverse effect on our operations.

Because our capital raising has been slower than anticipated we may be required to take additional actions to reduce our operating costs in the near future.

During 2008 we took action to reduce our operating costs. The actions we have taken include a reduction in our workforce and the reduction of hours for some employees. We have also delayed payment of 50% of the salaries for the four officers of HEC Iowa. If we are not able to secure additional financing in the near future, we will be required to take additional steps to reduce costs. These reductions have an adverse impact on our ability to pursue our business plans and could have a materially adverse effect on our results of operation. We anticipate that some of the reductions (such as unpaid salary) will be temporary. There is no assurance that we will be successful in raising additional capital or that the disruption caused by these reductions will not have a permanent and material adverse effect on our operations.

We may be unable to hire the qualified employees we will need to pursue our business plans.

Because of our unmet needs for capital, we have been forced to reduce our workforce and have been unable to undertake efforts to recruit much-needed employees to assist with our engineering and marketing efforts. If we do receive sufficient capital, our history of financial losses may make it difficult to successfully recruit qualified people. Any inability on our part to do so will have a materially adverse effect on our product development, business, financial condition, and results of operations. As of December 31, 2008, HEC Iowa had 12 employees, all of whom were full time. During the first quarter of 2009, we began intermittently laying our employees off due to lack of work in these slow economic times. These steps were taken to reduce costs and preserve our available cash. As of December 31, 2008, HEC Canada had three employees, one full-time and two part-time. Beginning March 16, 2009, we laid off one full-time and one part-time employee of HEC Canada in order to conserve cash. Our employees are not members of any union, and they have not entered into any collective bargaining agreements. We believe that our relationship with our employees is good.

We may not be able to manage growth effectively, which could adversely affect our operations and financial performance.

If we were to receive sufficient capital to effect our business plans, the ability to manage and operate our business as we execute our development and growth strategy will require effective planning. Significant rapid growth could strain our management and other resources, leading to increased cost of operations, an inability to ship enough products to meet customer demand, and other problems that could adversely affect our financial performance. We expect that such efforts to grow would place a significant strain on personnel, management systems, infrastructure, and other resources. Our management team is currently under considerable strain with the current level of our operations and our limited financial capacity. Our ability to manage future growth effectively will require us to successfully attract, train, motivate, retain, and manage new employees and continue to update and improve our operational, financial, and management controls and procedures. If we do not manage our growth effectively, our operations could be materially adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.

If we are unable to continue to effectively and efficiently implement the necessary internal controls and procedures, there could be an adverse effect on our operations or financial results.

Our President and our Board of Directors continue to work with our Chief Financial Officer to update our internal controls and disclosure controls, and procedures in accordance with Sarbanes Oxley 404. This process has been challenging given the fact that our human resources and capital resources are strained.

Our future success depends on hiring, retaining and assimilating key employees. The loss of key employees or the inability to attract new key employees could limit our ability to execute our growth strategy, resulting in lost sales and a slower rate of growth.

Our future success depends in part on our ability to retain key employees. We currently do not carry "key man" insurance on our executives; however, we are considering the purchase of such insurance. It would be difficult for us to replace any one of these individuals. In addition, as we grow we will need to hire additional key personnel. We may experience difficulty in recruiting experienced engineers, management personnel, and others who are interested in living and working in the Algona area.

We may experience labor shortages.

Our production facilities are located in Algona, Iowa, a town with a population of approximately 5,500 people. To date, we have successfully attracted employees who possess a solid work ethic. We may find it difficult to hire and retain a workforce sufficient to meet our production needs and allow for sustained growth of our operations. Our ability to hire and retain qualified employees for our production facilities will be key to our success. Our inability to do this may have a materially adverse effect on our future results.

We have experienced delays in the commencement of production, which could materially and adversely impact our sales and financial results and the ultimate acceptance of our products.

We have, to date, been unable to transition to full production in our new facility or to fully finance the development of our intellectual property. Delays have been caused by lack of funding and unforeseen quality control issues. The disruption resulting from these delays may have a materially adverse effect on results of operation.

Our products may contain design faults.

Though we believe it unlikely, the technologies we have developed and are developing, and the products we produce in our new facility, could contain undetected design faults despite our careful design and testing. We may not discover these faults or errors until after our customers have used a product. Any such faults or errors may cause delays in product introduction and shipments, require design modifications, or harm customer relationships, any of which could adversely affect our business and competitive position. We understand that customer service is an important part of our mission and we feel poised to address any issues that may arise. If we are unable to successfully address any such issues, our results of operation could be materially and adversely affected.

We cannot assure you that there will be an active trading market for our common stock.

Even though our common stock is quoted on the OTC Bulletin Board, shares that may be issued in a private offering will be "restricted securities" within the meaning of Rule 144 promulgated by the SEC and are therefore subject to certain limitations on the ability of holders to resell such shares. Restricted shares may not be sold or otherwise transferred without registration or reliance upon a valid exemption from registration. Thus, holders of restricted shares of our common stock may be required to retain their shares for a long period of time.

Acceptance of hydrogen and ammonia as alternative fuels will affect our ability to achieve commercial application of our products and technologies.

Members of the public may be wary of hydrogen because hydrogen, as compared to other fuels, has the largest flammability limit (4% to 77% of hydrogen in air). This means that it takes very little hydrogen to start a fire. On the other hand, hydrogen is a light gas. As such, if there is a hydrogen leak, it will immediately diffuse into the surrounding air. People may be wary of ammonia because of its toxicity. With proper precaution, we believe that hydrogen and ammonia could be as safe as any other fuel. However, because neither hydrogen nor ammonia have been tested extensively as fuels in the market place, there can be no assurance that proper precautions will be taken, or that the costs of necessary precautions will be commercially reasonable. The main benefit of hydrogen or ammonia as a fuel is that it produces little or no pollution or greenhouse gases when it is used in an internal combustion engine. The development of a market for our technologies is dependent in part upon the development of a market for hydrogen and ammonia as fuels, which may be impacted by many factors, including:

consumer perception of the safety of hydrogen and ammonia and willingness to use engines powered by hydrogen or ammonia;

the cost competitiveness of hydrogen or ammonia as a fuel relative to other fuels;

the future availability of hydrogen or ammonia as a fuel;

adverse regulatory developments, including the adoption of onerous regulations regarding hydrogen, or ammonia, use or storage;

barriers to entry created by existing energy providers; and

the emergence of new competitive technologies and products.

Certain government regulations concerning electrical and hydrogen generation, delivery and storage of fuels and other related matters may negatively impact our business.

Our business is subject to and affected by federal, state, local, and foreign laws and regulations. These may include state and local ordinances relating to building codes, public safety, electrical and hydrogen production, delivery and refueling infrastructure, hydrogen storage, and related matters. The use of hydrogen inside a building will require architectural and engineering changes in the building to allow the hydrogen to be handled safely. We have received approval from the Iowa State Fire Marshall for limited use of hydrogen in the dynamometer room where we test our engines. Full occupancy was delayed subject to final inspection once new dynamometers, testing equipment, and sensors were installed. Similar delays could be experienced at other locations involving the use of hydrogen inside a building. As our engines and other new products are introduced into the market commercially, governments may impose new regulations. We do not know the extent to which any such regulations may impact our business or our customers’ businesses. Any new regulation may increase costs and could reduce our potential to be profitable.

The industry in which we operate may become competitive in the future and such competition could affect our results of operations, which would make profitability even more difficult to achieve and sustain.

The power generation and alternative fuel industry may become highly competitive and is marked by rapid technological growth. Other competitors and potential competitors include H2Car Co., Cummins, General Motors, BMW, Mazda, and Caterpillar. Many existing and potential competitors have greater financial resources, larger market share, and larger production and technology research capability, which may enable them to establish a stronger competitive position than we have, in part through greater marketing opportunities. The governments of the United States, Canada, Japan, and certain European countries have provided funding to promote the development and use of fuel cells. Tax incentives have also been initiated in Japan, and have been proposed in the United States and other countries, to stimulate the growth of the fuel cell market by reducing the cost of these fuel cell systems to consumers. Our business does not currently enjoy any such advantages and, for that reason, may be at a competitive disadvantage to the fuel cell industry. If we fail to address competitive developments quickly and effectively, we will not be able to grow.

Our business could be adversely affected by any adverse economic developments in the power generation industry and/or the economy in general.

We depend on the perceived demand for the application of our technology and resulting products. Our products are focused on reducing CO2 emissions and upon the use of alternative fuels for industrial uses, such as ground support vehicles, and for the power generation business. Therefore, our business is susceptible to downturns in the airline industry and the genset portion of the distributed power industry and the economy in general. Any significant downturn in the market or in general economic conditions would likely hurt our business.

We believe that we carry a reasonable amount of insurance. However, there can be no assurance that our existing insurance coverage would be adequate in term and scope to protect us against material financial effects in the event of a successful claim.

We could be subject to claims in connection with the products that we sell. There can be no assurance that we would have sufficient resources to satisfy any liability resulting from any such claim, or that we would be able to have our customers indemnify or insure us against any such liability. There can be no assurance that our insurance coverage would be adequate in term and scope to protect us against material financial effects in the event of a successful claim.

If we fail to keep up with changes affecting our technology and the markets that we will ultimately serve, we will become less competitive and future financial performance would be adversely affected.

In order to remain competitive and serve our potential customers effectively, we must respond on a timely and cost-efficient basis to the need for new technology, as well as changes in technology, industry standards and procedures, and customer preferences. We need to continuously develop new technology, products, and services to address new technological developments. In some cases changes may be significant and the cost of implementation may be substantial. We cannot assure you that we will be able to adapt to any changes in the future or that we will have the financial resources to keep up with changes in the marketplace. Also, the cost of adapting our technology, products, and services may have a material and adverse effect on our operating results.

Our long-term success depends upon our ability to develop and commercialize our technologies.

Our technologies are in the development stage. If we or our collaboration partners fail to complete the development and/or commercialize our technologies, we will not be able to generate significant revenues from the sale of licenses or from sales of our technologies. There is a risk that development and testing will demonstrate that our anticipated technologies are not suitable for commercialization, because they are inefficient, or too costly to manufacture, or because third party competitors market a more effective or more cost-effective product.

If we or our collaboration partners are unable to successfully develop and commercialize our technologies, we will not have a sufficient source of revenue.

Our ability to enter into successful collaborations cannot be assured.

A material component of our business strategy is to establish and maintain collaborative arrangements with third parties to co-develop our technologies and to commercialize products made using our technology. We also intend to establish collaborative relationships to obtain domestic or international sales, marketing and distribution capabilities.

The process of establishing collaborative relationships is difficult, time-consuming and involves significant uncertainty. Our partnering strategy entails many risks, including:

we may be unsuccessful in entering into or maintaining collaborative agreements for the co-development of our technologies or the commercialization of products incorporating our technology;

we may not be successful in applying our technology to or otherwise satisfying the needs of our collaborative partners;

our collaborators may not be successful in, or may not remain committed to, co-developing our technologies or commercializing products incorporating our technology;

our collaborators may seek to develop other proprietary alternatives;

our collaborators may not commit sufficient resources to incorporating our technology into their business;

our collaborators are not obligated to market or commercialize our technologies or products incorporating our technology, and they are not required to achieve any specific commercialization schedule;

our collaborative agreements may be terminated by our partners on short notice.

Furthermore, even if we do establish collaborative relationships, it may be difficult for us to maintain or perform under such collaboration arrangements, as our funding resources may be limited or our collaborators may seek to renegotiate or terminate their relationships with us due to unsatisfactory field results, a change in business strategy, or other reasons. If we or any collaborator fails to fulfill any responsibilities in a timely manner, or at all, our research, development or commercialization efforts related to that collaboration could be delayed or terminated. It may also become necessary for us to assume responsibility for activities that would otherwise have been the responsibility of our collaborator. Further, if we are unable to establish and maintain collaborative relationships on acceptable terms, we may have to delay or discontinue further development of one or more of our product candidates, undertake development and commercialization activities at our own expense or find alternative sources of funding.

Local, state, national, and international laws or regulations could adversely affect our business.

Our future success depends in part on laws and regulations that exist, or are expected to be enacted, around the world. Should these laws or regulations take an adverse turn, this could negatively affect our business and anticipated revenues. We cannot guarantee a positive outcome in direction, timing, or scope of laws and regulations that may be enacted which will affect our business.

We are limited in our ability to offer and sell our engines until the engines have been certified to have passed U.S. Emissions Regulations, which are defined and enforced by the Environmental Protection Agency and California Air Resources Board. Engine certification is necessary for us to sell engines to original equipment manufacturers for mobile off-road applications and will also be necessary for distributed power generation applications and stand-by power generation applications. To certify an engine to meet regulations for exhaust emissions, an engine must successfully pass stringent third-party testing. We have been delayed in the certification process because of our inability to obtain the necessary financing.

The use of hydrogen and ammonia may expose us to certain safety risks and potential liability claims.

Our business will expose us to potential product liability claims that are inherent in hydrogen or ammonia and products that use hydrogen or ammonia. Hydrogen is a flammable gas and therefore a potentially dangerous product. Ammonia is quite toxic. Any accidents involving our engines or other hydrogen- or ammonia-using products could materially impede widespread market acceptance and demand for our products. In addition, we might be held responsible for damages beyond the scope of our insurance coverage. We also cannot predict whether we will be able to maintain our insurance coverage on acceptable terms, or at all.

We may be unable to protect our intellectual property adequately or cost effectively, which may cause us to lose market share or reduce prices.

Our future success depends in part on our ability to develop, protect, and preserve our proprietary rights related to our technology and resulting products. We cannot assure you that we will be able to prevent third parties from using our intellectual property rights and technology without our authorization. We have currently been issued one patent and nine patent applications are pending. We also rely on trade secrets, common law trademark rights, and trademark registrations. We intend to protect our intellectual property via non-disclosure agreements, contracts, and limited information distribution, as well as confidentiality and work-for-hire, development, assignment, and license agreements with our employees, consultants, third party developers, licensees, and customers. However, these measures afford only limited protection and may be flawed or inadequate. Also, enforcing intellectual property rights could be costly and time-consuming and could distract management’s attention from operating business matters.

Our intellectual property may infringe on the rights of others, resulting in costly litigation.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In particular, there has been an increase in the filing of suits alleging infringement of intellectual property rights, which pressure defendants into entering settlement arrangements quickly to dispose of such suits, regardless of their merits. Other companies or individuals may allege that we infringe on their intellectual property rights. Litigation, particularly in the area of intellectual property rights, is costly and the outcome is inherently uncertain. In the event of an adverse result, we could be liable for substantial damages and we may be forced to discontinue our use of the subject matter in question or obtain a license to use those rights or develop non-infringing alternatives. Any of these results would increase our cash expenditures, adversely affecting our financial condition.

If the estimates we make and the assumptions on which we rely in preparing our financial statements prove inaccurate, our actual results may vary significantly.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges taken by us and related disclosure. Such estimates and judgments include the carrying value of our property, equipment and intangible assets, revenue recognition and the value of certain liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. However, these estimates and judgments, or the assumptions underlying them, may change over time, which could require us to restate some of our previously reported financial information. A restatement of previously reported financial information could cause our stock price to decline and could subject us to securities litigation. For a further discussion of the estimates and judgments that we make and the critical accounting policies that affect these estimates and judgments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" elsewhere in this annual report on Form 10-K.

Being a public company involves increased administrative costs, which could result in lower net income and make it more difficult for us to attract and retain key personnel.

As a public company, we incur significant legal, accounting and other expenses that we would not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC, have required changes in corporate governance practices of public companies. These rules and regulations increase our legal and financial compliance costs and make some activities more time consuming. For example, in connection with being a public company, we are required to create several board committees, implement and disclose additional internal controls and procedures retain a transfer agent and financial printer, adopt an insider trading policy, and incur costs relating to preparing and distributing periodic public reports in compliance with our obligations under securities laws. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

We do not anticipate paying dividends in the foreseeable future. This could make our stock less attractive to potential investors.

We anticipate that we will retain any future earnings and other cash resources for future operation and development of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition, and capital requirements. Corporations that pay dividends may be viewed as a better investment than corporations that do not.

The authorization and issuance of blank–check preferred stock may prevent or discourage a change in our management.

Our amended certificate of incorporation authorizes the board of directors to issue up to 10 million shares of preferred stock without stockholder approval having terms, conditions, rights, preferences and designations as the board may determine. The board of directors has designated 1,000,000 of the authorized preferred shares as the Series A Preferred Stock and 5,000,000 shares of the Series B Preferred Stock. Additional shares of preferred stock could be designated in the future. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of existing preferred stock and any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of discouraging a person from acquiring a majority of our outstanding common stock.

It may be difficult for a third party to acquire us, and this could depress our stock price.

Nevada corporate law includes provisions that could delay, defer, or prevent a change in control of our company or our management. These provisions could discourage information contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. For example:

Without prior stockholder approval, the board of directors has the authority to issue one or more classes of preferred stock with rights senior to those of common stock and to determine the rights, privileges, and preferences of that preferred stock;

There is no cumulative voting in the election of directors; and

Stockholders cannot call a special meeting of stockholders.

We may experience continued losses due to inventory and building impairments.

Since inception we have written down inventory by $1,223,487 to reflect changes in our marketing efforts of our remanufactured engine inventory. During 2008, we sold all of our “remanufactured” 4.9L engine inventory and most of our “new” 4.9L engine inventory to fund our operations. If demand for our products is less than we anticipate or our marketing efforts are unsuccessful, we may be forced to write down the inventory further to properly reflect the fair market value.

We do not currently have sufficient liquidity to continue to make the payments on all of our building loans unless we are able to raise additional capital and refinance or restructure existing debt. Since inception we have not been able to utilize the full capacity of our existing buildings. We could realize a loss due to the impairment of the value of one or more of our buildings if we are forced to sell them at less than recorded value.

ITEM 2. PROPERTIES.

We commenced operations in a 12,000 square foot armory, built in approximately 1949. This building is located at 602 Fair Street in Algona, Iowa and was under lease from the Kossuth County Agricultural Association. This facility was adequate for our initial needs and continued to serve us as the research and testing facility until March 14, 2008, when an agreement was entered into to buy out the lease. The lease required monthly rental payments of $700 and was to expire in May 2008. The total buyout totaled approximately $2,100 which included reimbursement for utilities.

On June 27, 2005 we purchased Lots 3, 4, and 5 of the Dana Hollinger Industrial Park on Poplar Street in Algona, Iowa. The land was purchased from the Algona Area Economic Development Corporation using proceeds of a loan from that entity, the terms of which are described below. Construction of our 30,000 square foot manufacturing facility on this site was completed in March 2006 and production of the 4.9L remanufactured engine began in April 2006. Construction costs on the new manufacturing building totaled approximately $1.6 million. We implemented an ‘engine cell’ production method in the new facility that we believe can speed production and reduce work-in-process inventory. Under this method, each engine cell is designed to match the assembly time of the next cell to eliminate inventory between cells, and minimize overall assembly time.

To reduce engine assembly contaminants introduced by forced-air heating, the new building has over five miles of PEX radiant heat pipe in the production floor. It also has a unique mono-roof design that allows planned building expansion without production line shut-down.

Late in December of 2005 we acquired an existing 30,000 square foot building shell located on Lot #1 of the Dana Hollinger Industrial Park in Algona, Iowa for a purchase price of $332,901. The building is located across the street from the new manufacturing building on Poplar Street. We have finished a portion of the building to provide office space. The building was only a shell when purchased and some interior construction was necessary to make the building useful to us. Construction costs on this building totaled approximately $547,000. We are currently using the building only for storage.

At December 31, 2008, our facilities are subject to mortgages in favor of Iowa State Bank in the amount of $540,161; Farmers State Bank for $576,747; Algona Area Economic Development Corporation in the amounts of approximately $146,124 and $87,500; City of Algona in the amount of $140,000 and the Iowa Department of Economic Development $400,000. The mortgages to Algona Area Development Corporation include a subordination in favor of Iowa State Bank.

HEC Canada leases a small facility from the Universite Du Quebec at Trois-Rivieres for approximately US $812 per month.

We believe that all of our properties are adequately insured.

ITEM 3. LEGAL PROCEEDINGS.

None.

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

None.

PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

Our common stock is quoted on the OTC Bulletin Board under the trading symbol "HYEG.OB." Inclusion on the OTC Bulletin Board permits price quotations for our shares to be published by such service.

The following table sets forth the high and low bid quotations for our common stock for the period from January 1, 2007 through December 31, 2008.

	High Bid		Low Bid

First Quarter ended March 31, 2007		3.55		2.50
Second Quarter ended June 30, 2007		3.08		1.35
Third Quarter ended September 30, 2007		1.75		0.95
Fourth Quarter ended December 31, 2007		1.85		0.65
First Quarter ended March 31, 2008		.80		.32
Second Quarter ended June 30, 2008		.51		.40
Third Quarter ended September 30, 2008		.47		.23
Fourth Quarter ended December 31, 2008		.40		.07

The foregoing quotations represent inter-dealer prices without retail mark-up, mark-down, or commission, and may not represent actual transactions.

As of March 24, 2009, there were 231 holders of record of the company’s common stock, including broker-dealers and clearing firms holding shares on behalf of their clients, as reported by our transfer agent. This figure does not take into account those individual shareholders whose certificates are held in the name of broker-dealers or other nominees.

As of March 24, 2009, we had 30,214,902 shares of common stock issued and outstanding. Of the total outstanding shares, all may be sold, transferred or otherwise traded in the public market without restriction, unless held by an affiliate or controlling shareholder. Of these shares we have identified 16,021,327 shares as being held by affiliates.

Under Rule 144 as currently in effect, a person who is not an affiliate (and has not been an affiliate for the preceding three months) of an issuer that has met reporting requirements for at least 90 days, may resell the securities after a six-month holding period. If the issuer has not filed all required reports for at least twelve months prior to the sale (or for a shorter period if the issuer has been subject to reporting requirements for less than twelve months), the holding period is extended to one year.

If the issuer has met reporting requirements for at least 90 days and has filed all required reports for at least twelve months prior to the sale (or for a shorter period if the issuer has been subject to reporting requirements for less than twelve months), an affiliate can resell securities after the expiration six months, subject to certain other conditions:

The number of securities to be resold must fall within specified volume limitations;

The resale must comply with the revised "manner of sale" conditions; and

The seller may be required to file a Form 144 reporting the sale (or proposed sale), subject to the new reporting threshold.

A person who is not deemed to be an "affiliate" and has not been an affiliate for the most recent three months, and who has held restricted shares for at least one year would be entitled to sell such shares without regard to the reporting status of the issuer.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.

Securities authorized for issuance under equity compensation plans as of December 31, 2008

We have granted employees, directors and consultants restricted stock and stock options under our incentive compensation plan:

	Stock Option Awards		Exercise Price			Restricted Stock Awards		Grant Date Fair Value
Employees and directors		212,500	$	1.34	Employees and directors		356,000	$	1.00
		93,000	$	1.00			-
		20,000	$	.40			-
		40,000	$	.20			-
		365,500					356,000

Consultants		139,666	$	1.00	Consultants		5,000	$	1.00
		30,000	$	.50			-
		169,666					5,000

The above numbers include shares issued upon exercise of options to purchase a total of 8,000 shares at $1.00 per share. These numbers do not include options to purchase 845,834 shares that have been cancelled, or 65,000 shares of restricted stock that have been forfeited, because of termination of service.

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R. As prescribed in SFAS No. 123R, “Share-Based Payment,” we elected to use the ‘‘modified prospective method.” 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. Prior to January 1, 2006, 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.

In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 107 providing supplemental implementation guidance for SFAS 123R. We have applied the provisions of SAB 107 in its adoption of SFAS 123R. We record restricted stock awards at the fair value at the date of the grant and amortize the expense over the vesting period as services are performed.

The following table provides information as of December 31, 2008.

Plan Category	Number of Securities to be issued upon exercise of outstanding options, warrants and rights (a)			Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans, excluding securities reflected in column (a) (c)

Equity compensation plans approved by security holders		535,166	1	$	1.02		1,103,834	3

Equity compensation plans not approved by security holders		795,270	2	$	2.14		—

Total		1,330,436		$	1.69		1,103,834	3

1. Options issued under the company’s 2005 Incentive Compensation Plan to purchase 535,166 shares, including employee/director options for 365,500 shares and consultant options for 169,666 shares, less options to purchase 8,000 shares that have been exercised. Does not include 361,000 shares of restricted stock issued under the company’s 2005 Incentive Compensation Plan, 46,000 of which remain subject to forfeiture as of December 31, 2008.

2. 795,270 shares of common stock underlying warrants, 69,640 of which were issued in the First Private

Offering, 134,346 of which were issued in the Second Private Offering, 120,900 of which were issued in the

Series A Preferred Offering, 57,985 of which were issued in the Series B Preferred Offering, 12,399 of which will be issued under the SEDA, 375,000 of which were issued to settle a vendor dispute and 25,000 of which were issued for the purchase of inventory.

3. This amount equals the number of shares remaining to be issued under the company’s 2005 Incentive Compensation Plan.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Hydrogen Engine Center, Inc. (“HEC” or the “company”) was organized for the purpose of developing and commercializing clean solutions for today’s energy needs. We offer technologies that provide alternative-fuel energy solutions for the industrial and power generation markets. Our systems, when coupled with traditional wind-driven generators, enable the generation of constant power. We accomplish this by using excess energy produced by wind turbines to first make hydrogen, and then use this hydrogen to power a proprietary engine/generator system to produce electricity during wind-still times. Our systems use spark-ignited internal combustion engines (ICE) powered by alternative fuels such as hydrogen, ethanol, methanol, or ammonia. We use our proprietary engine controller and software to efficiently distribute ignition spark and fuel to injectors. Our business plan is centered on technologies that we expect to play an increasing role in addressing the world’s energy needs as well as its environmental concerns. We expect future revenue generation from the sale of hydrogen engines and gensets for dedicated uses, such as airport ground support and power generation. However, because of a possible change in control of the company as discussed below, we cannot describe, with any degree of certainty, the future course of our business plans.

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

Overview

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

We have funded our operations from inception through December 31, 2008, through a series of financing transactions, including the convertible loans and the Private Offerings described above. In April 2008, we entered into a Standby Equity Distribution Agreement (the “SEDA”), which was intended to provide us the opportunity to access limited additional capital.

We did not receive the amount of capital we anticipated receiving from investors during 2008. We have also experienced delays in the receipt of quality parts for our engines. These factors caused us to focus during 2008 on efforts to generate revenue through the sale of engines and open power units using our high-quality, reliable remanufactured engines. In an effort to achieve profitability we plan to eliminate our traditional-fueled products and concentrate on selling products with increased profit margins, such as the hydrogen products we offer.

In March 2009, we secured an agreement to be involved in a hydrogen demonstration project focused on testing hydrogen technologies and fueling infrastructures for the ground support industry. We are pursuing strategic alliances to assist us in marketing our hydrogen products. We also plan to concentrate our efforts on “wind to hydrogen” projects like the project we have completed with Xcel Energy and the project we have underway with Newfoundland Labrador Hydro. We also expect to engage in a capital raise. We believe that the combination of these opportunities and potentials can help provide needed cash flow for our operations.

Under the terms of the agreement, Mr. Waldron has the right to conduct due diligence on our Company over a period of 45 days before determining whether to exercise his option. If the option is exercised, Mr. Waldron will have purchased voting control and will be able to control the business plans and direction of the Company. Mr. Waldron is associated with Pinnacle Wind Energy, a company dedicated to the efficient development of wind power. Should Mr. Waldron gain control of the Company, our resources likely will be primarily dedicated to this goal. Subject to approval of the Board of Directors, the March 17 agreement would also have allowed Mr. Hollinger to retain five patent applications not directly associated with wind energy generation and would have granted the Company a right of first refusal to license any technologies associated with those patents. In order to allow him to develop the patents, the agreement also anticipated that Mr. Hollinger would be released from his agreement not to compete with the Company. The Board was generally supportive of the agreement, but requested that a royalty agreement, or other means of providing compensation to the company, be put in place. However, on March 24, 2009, Mr. Hollinger and Mr. Waldron modified the original agreement by removing the provisions regarding patents and Mr. Hollinger’s noncompete.

Results of Operations

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

	2008			2007			From Inception (May 19, 2003) to December 31, 2008
Revenues	$	1,358,647		$	740,799		$	2,421,350
Cost of Sales		1,544,449			1,178,393			3,428,256
Gross Profit (Loss)		(185,802	)		(437,594	)		(1,006,906	)

Operating Expenses		3,040,277			4,828,292			14,540,725
Loss from Operations		(3,226,079	)		(5,265,886	)		(15,547,631	)

Other Income (Expense)		(132,176	)		(106,835	)		(316,302	)
Net Loss	$	(3,358,255	)	$	(5,372,721	)	$	(15,863,933	)

Series A Preferred Stock Beneficial Conversion Feature Accreted as a Dividend		-			(1,889,063	)	$	(1,889,063	)

Net Loss Attributable to Common Stockholders	$	(3,358,255	)	$	(7,261,784	)	$	(17,752,996	)

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

We continue to operate as a development stage company. As a development stage company we are engaging in the research and development of our products, we continue to foster relationships with vendors and customers and we are in the process of raising additional capital to support our business plan.

Revenues

Our revenues in 2008 totaled $1,358,647, an increase of $617,848 compared to revenues of $740,799 in 2007. The increase in revenues for 2008 resulted from the sale of our 4.9L remanufactured engines and power units, revenues from the sale of our new 4.9L Oxx Power® engines and Oxx Power® units and the sale of 4.9L engine replacement parts. From inception to date we have realized revenues of $2,421,350.

We also have derived income through business agreements for the development and/or commercialization of our hydrogen and ammonia products, which are not reflected in our revenue. We record income related to business agreements as a reduction in research and development expense. The expenses we incur are recorded as research and development costs. We did not realize any revenue from business agreements in 2008. In 2007, we received project reimbursements of $222,713 from business agreements we entered into with Natural Resources Canada, for a 4 + 1® hydrogen generator set and Grasim Industries, Ltd. of India for a 50kW hydrogen generator set. From inception (May 19, 2003) to December 31, 2008, we have recorded $273,913, as a reduction in research and development expense.

Cost of Sales and Gross Profit

We realized negative gross profit on our revenues of approximately $185,802 in 2008 and $437,594 in 2007, in part as a result of writing down our new and remanufactured engine inventory, establishing an inventory allowance account for engine blocks obtained from our supplier in China and selling inventory at a loss to meet current cash needs. At this time, we do not expect to record further declines in the market value of our inventory and we do not expect to increase our inventory allowance account. We would expect to realize gross profit margins of approximately 15% as long as our primary sales are composed of traditional fueled engines. We expect our gross profit margins to increase as we increase our alternative fuel sales.

In order to sell our remanufactured engine inventory and our new engine inventory, we recorded a decline in the market value of our inventory. The inventory mark-down was necessary in order to align the selling price of our engines with other engine remanufacturers and resellers. We recorded a decline in the market value of our inventory, net of recoveries of $261,464 for the year ended December 31, 2008 and $533,876 for the year ended December 31, 2007. The total decline in market value of inventory, net of recoveries is $1,223,487 from inception (May 19, 2003) to December 31, 2008. During 2008, we sold all of our “remanufactured” 4.9L engine inventory and most of our “new” 4.9L engine inventory to fund our operations.

For the year ended December 31, 2007, we established an inventory allowance account in the amount of $333,162 for substandard inventory received from a supplier located in China. The inventory is covered under warranty. We are aggressively pursuing efforts to recover losses we have recognized because of these rejected products. We visited the factory during 2008 to witness the production and participate in the inspection of the Oxx Power® blocks. We have also retained an engineer who can be on-site to inspect the engine blocks before they are shipped. We are encouraged by recent news from our engineer and expect to receive an Oxx Power® engine block to test within the next 10 days. In addition, we have a relationship with a consultant who can assist us with the procurement of parts from China.

Operating Expenses

Our sales and marketing expenses for the years ended 2008 and 2007 are $183,724 and $219,875, respectively and the total expense from inception to date (May 19, 2003) is $1,384,760. Assuming receipt of sufficient additional financing, we will continue our search for technically qualified sales personnel which we feel is a key element in the success of our company. We expect to be more involved in the distributed generation and wind energy markets because of the tightening of governmentally imposed emission standards and our quest to lessen our dependence on foreign oil. We also plan to aggressively market our hydrogen products in 2009 and expect that our sales and marketing expense will increase significantly as we pursue national and international sales opportunities.

General and administrative expenses decreased from $2,790,255 for the year ended December 31, 2007 to $2,031,325 for the year ended December 31, 2008. General and administrative expenses from inception (May 19, 2003) through December 31, 2008 were $8,502,734. Our general and administrative costs include payroll, employee benefits, stock-based compensation, and other costs associated with general and administrative costs such as investor relations, accounting and legal fees.

Our general and administrative expenses also include overhead and direct production expense related to pre-production costs, which costs, if we had reached production capacity, would be allocated to products manufactured. Expenses related to pre-production include salaries for production, personnel, purchasing costs and costs associated with production ramp up. Total pre-production expenses included in general and administrative expense for the years ended December 31, 2008 and 2007 respectively, are $437,044 and $621,718. Pre-production expense from inception (May 19, 2003) through December 31, 2008 totaled $1,780,478. We do not expect our administrative costs to increase substantially in 2009, as we begin to align expenses with our revenues.

We view our stock based compensation as a key tool that could allow 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 $374,194 in stock option expense for employees and directors in the year ended December 31, 2008 and $499,542 in stock option and restricted stock expense for the year ended December 31, 2007. Total stock option compensation for employees and directors from inception (May 19, 2003) through December 31, 2008 was $1,748,613. Stock option expense is allocated among sales and marketing expense, general and administrative expense and research and development expense.

Since inception (May 19, 2003), we have accrued approximately $80,297 in accrued property taxes and approximately $57,319 in accrued program costs related to forgivable loans and grants from state and local government sponsored programs. These expenses have also been recorded as general and administrative expenses. Expenses related to forgivable loans and grants will continue to accrue until we meet certain criteria for job creation. If we can comply with the job creation criteria, these expenses would be recorded, at the time of forgiveness, as other income.

Costs related to research and development were $825,228 and $1,370,151 for the years ended December 31, 2008 and 2007, respectively. Total expense for research and development expense from inception (May 19, 2003) to December 31, 2008 is $4,075,731. Management believes that, assuming receipt of additional capital, research and development expenses will increase significantly during 2009. Research and development costs for 2009 is expected to include the cost of the N + 1TM 1 MW Hydrogen Generator System.

Our research and development costs included costs associated with controller design that we entered into with a company co-founded by one of the members of our Board of Directors. The scope of work provided for the development and testing by the contractor and us working to create a production-ready controller. The cost of the development work incurred through December 31, 2008 was $60,203. We estimated the total cost of the project to be approximately $225,000, however the project was suspended until we could obtain the financing needed to sustain the development.

For the years ended December 31, 2008 and 2007 respectively, we recorded an expense of $0 and $448,011 to settle a dispute with a vendor who was supplying us with engine parts. The settlement payment made in 2007 included the issuance of 375,000 warrants with a three year term and an exercise price of $2.00. The fair value of the warrants was calculated using the Black Scholes Option pricing formula.

Other Income (Expense)

We had total interest income for the year ended December 31, 2008 of $6,813 as compared to interest income received for the year ended December 31, 2007 of $73,057. We realized interest income from inception (May 19, 2003) to December 31, 2008 of $170,866.

Interest expense for the year ended December 31, 2008 was $138,989 and $173,158 for the year ended December 31, 2007. Our interest expense from inception (May 19, 2003) to December 31, 2008 totaled $480,434. We accrue interest expense related to forgivable loans and grants from state and local government sponsored programs. From inception (May 19, 2003) through December 31, 2008 we have accrued approximately $172,000 in accrued interest expense related to our forgivable loans and grants and will continue to accrue these expenses until we meet certain criteria for job creation. If we can comply with the job creation criteria, these amounts would be recorded, at the time of forgiveness, as other income.

During the year ended December 31, 2007 we realized a loss from the sale of assets of $6,734. We did not realize a gain or loss from the sale of any assets during the year ended December 31, 2008.

Net Loss

We recorded a net loss of $3,358,255 for the year ending December 31, 2008 compared to a net loss of $5,372,721 for the year ended December 31, 2007. We recorded net losses totaling $15,863,933 from inception (May 19, 2003) through December 31, 2008. We expect to continue to operate at a net loss during 2009.

During the twelve months ended December 31, 2007 we accreted a beneficial conversion dividend to the Series A stockholders of $1,889,063, resulting in a net loss to common stockholders of $7,261,784 for that year. We recorded net losses attributable to common stockholders totaling $17,752,996 from inception (May 19, 2003) through December 31, 2008. We did not record any dividends during the twelve months ended December 31, 2007 or 2008.

Critical Accounting Policies

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

Inventories

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

Warranty Reserve

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

Revenue Recognition

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

Stock-based Compensation

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

Liquidity, Capital Resources and Going Concern

Operating Budget and Financing of Operations

Effective March 17, 2009, Ted Hollinger, the Company’s founder, entered into an agreement with Steven C. Waldron, under which Mr. Hollinger granted Mr. Waldron the option to purchase all of his shares of Common Stock of Hydrogen Engine Center at a price of $0.02 per share. Mr. Hollinger currently owns 15,661,037 shares or 51.83% of the total number of shares of Common Stock outstanding. Mr. Waldron has paid the amount of $15,000 to acquire the option. If the option is not exercised, Mr. Hollinger will be obligated to transfer 750,000 shares of his stock to Mr. Waldron. In the event Mr. Waldron exercises the option, he will pay Mr. Hollinger an additional $298,221. Under the terms of the agreement, Mr. Waldron has the right to conduct due diligence on our Company over a period of 45 days before determining whether to exercise his option. If Mr. Waldron were to exercise the option to purchase all of Mr. Hollinger’s shares, he would face challenging liquidity concerns as the new majority shareholder.

Mr. Hollinger entered into this agreement because he believes it is in the best interest of HEC and its shareholders. He believes potential synergies between HEC and Pinnacle Wind Energy could enhance our ability to commercialize our technology in the wind industry.

During 2008, liquidity has been our primary concern. On April 11, 2008, we entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA Global Investments, L.P., which was intended to provide us with the opportunity to access additional capital in the maximum amount of $4 million in increments not to exceed $350,000 each. However, the SEDA has proved to be ineffective and it has not been possible to depend on the SEDA to fund our operations. According to the terms of the SEDA, once an advance is requested, the investor can begin selling shares which consequently drives the price of the stock lower. We began accessing the SEDA funds in August and at December 31, 2008, have sold 247,977 shares at an average price of $.23 and have received gross proceeds of $57,131 in capital. The number of shares we were able to sell under the SEDA may have been adversely affected by the severe weakening of the economy and the recent fluctuation and general decline in the trading price of our shares.

On March 13, 2009, we secured an agreement to be involved in a hydrogen demonstration project scheduled to be completed by March 2011. Once the agreement has been accepted by all parties involved, we expect that numerous hydrogen usages will be tested as part of this project. We continue to take steps to lower our monthly cash expenditures and work on the development of our 1 MW N+1 TM hydrogen generator system. We have received encouraging news from the engineer we engaged to inspect our new Oxx Power 4.9L engine blocks being manufactured in China. Therefore, we expect to continue sales of our new 4.9L Oxx Power engines once these parts arrive. We are pursuing strategic alliances to assist us in marketing our wind to hydrogen products. We also expect to engage in a capital raise.

We do not currently have sufficient liquidity to continue to make the payments on all of our loans, capital leases and past due payables unless we are able to raise additional capital and refinance or restructure existing debt. As of March 24, 2008, we had cash of $30,103, trade receivables of $42,357 and $420,262 in trade payables. We have sales orders of $545,710 which includes our hydrogen project agreement of $470,752. We will be dependent on our ability to raise additional capital as well as on revenue from our existing projects and engine sales to fund our involvement in new research and development projects and sustain our operations. If we are unable to raise additional funds within a thirty to sixty day time period, we may need to seek reorganization under Chapter 11 or file for protection under Chapter 7 of the bankruptcy code.

We have not been able to make our first payment on our Line of Credit which currently carries a principal balance of $250,000. The payment totals approximately $23,300, including interest and was due March 1, 2009. The note has additional terms which require us to pay interest on the unpaid balance at an interest rate of 3.8% above the current variable rate of 5.5% otherwise payable. In addition, with this same bank, we have not been able to make our building payment which was due March 15, 2009. The balance on this note is $537,115. The note requires a principal and interest payment of $4,484 each month. This note also has additional terms which require us to pay interest on the unpaid balance at an interest rate of 3.8% above the variable rate of 5.0% we are currently paying. The increased interest rate becomes effective for both notes, if our scheduled payments are more than 3 days past due and becomes retroactive to the first day the payment becomes past due. We are currently in negotiations on this matter.

We have defaulted on one of our capital leases, which according to the lease could cause the lessor to demand payment in full immediately and any additional costs and fees they may incur. The balance on the lease is $42,048. Past due payments total $3,756.

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 December 31, 2008, we had an accumulated deficit of approximately $15.9 million, or $17.8 million including $1.9 million related to the beneficial conversion feature accreted to common stockholders upon conversion of the Series A Preferred stock. Our accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Terms of the SEDA

The SEDA was to provide us the opportunity, for a two-year period beginning August 5, 2008, to sell shares of our common stock to an Investor for a total purchase price of up to $4 million. For each share of common stock purchased under the SEDA, the Investor would pay 93% of the lowest daily volume weighted average price (“VWAP”) during the five consecutive trading days after the Advance Notice Date (as such term is defined in the SEDA). Each such sale (“Advance”) may be for an amount not to exceed $350,000 and each Advance Notice Date was to be no less than five trading days after the prior Advance Notice Date. The Advance request was reduced to the extent the price of our common stock during the five consecutive trading days after the Advance Notice Date is less that 85% of the VWAP on the trading day immediately preceding the Advance Notice Date.

We paid $15,000 to the Investor as a Structuring and Due Diligence Fee and issued $160,000 worth of stock as a Commitment Fee under the SEDA. We have been obligated to pay a monthly monitoring fee of $3,333 during the term of the agreement. We have also been obligated to pay 7% of the gross proceeds of each draw and issue warrants covering shares of common stock equal to 5% of each draw under an existing investment banking relationship. We may terminate the SEDA upon 15 trading days of prior notice to the Investor, as long as there are no Advances outstanding and we have paid to the Investor all amount then due.

We claim an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”) for the private placement of our shares in the SEDA pursuant to Section 4(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder. The transactions with the Investor do not involve a public offering, the Investor is an “accredited investor” and/or qualified institutional buyer and the Investor has access to information about the Company and its investment.

Cash Flow From Operations

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

							From Inception
	Year ended December 31,						(May 19, 2003) to
	2008			2007			December 31, 2008
Net cash used in operating activities	$	(931,275	)	$	(4,067,546	)	$	(12,099,587	)
Net cash provided by (used in) investing activities		114,357			89,393			(2,976,979	)
Net cash provided by financing activities		135,048			3,536,428			15,111,397

Net cash used in operating activities decreased approximately $3.1 million during the year ended December 31, 2008 compared to the same period in 2007. The decrease is primarily the result of an increase in sales, a decrease in inventory purchasing activity and efforts to reduce our operating expenses. From inception (May 19, 2003) through December 31, 2008 we have used $12,099,587 to fund our operating activities.

At December 31, 2008 we had cash on hand of $36,482 compared to cash on hand of $713,289 at December 31, 2007, compared to $1,149,207 at December 31, 2006, compared to $2,346,248 at December 31, 2005, $19,808 at December 31, 2004, and $49,857 as of December 31, 2003.

Cash Flow Used in Investing Activities

Net cash provided by investing activities increased by $24,964 during the year ended December 31, 2008. We withdrew the balance of restricted cash on hand at December 31, 2007, of $115,157 and we purchased equipment totaling $800. During 2007, we withdrew $237,427 of restricted cash for operations, sold equipment for $36,500 and purchased property and equipment for $184,534. We have used approximately $3.0 million for the purchase of property and equipment since inception (May 19, 2003) through December 31, 2008.

Cash Flow from Financing Activities

Cash flow from financing activities decreased approximately $3.4 million during the year ended December 31, 2008 compared to the year ended December 31, 2007. The decrease in net cash provided from financing activities related to the small amount of capital funds being raised from the SEDA as compared to the funds that were raised during our private placement of Series B preferred shares.

Cash from our financing activities from inception to date (May 19, 2003) came from various financing transactions:

During the year ended December 31, 2008, we obtained a line of credit from Iowa State Bank, Algona, Iowa, for $250,000, we also renewed a note with this same bank for $540,161. On December 27, 2008, we obtained short term financing from First Insurance Funding Group for $35,314. On March 19, 2009, we renewed our note with Farmers State Bank in the principal amount of $571,422. Also on March 19, 2009, we secured a new note with Farmers State Bank for $100,000.

During the year ended December 31, 2007, we renewed our note with Iowa State Bank, Algona, Iowa, in the principal amount of $561,304 and we renewed our note with Farmers State Bank in the principal amount of $591,956. In addition, on February 21, 2007, we obtained a line of credit with Bank of America in the amount of $250,000 and repaid the line on October 3, 2007 and on December 27, 2007, we obtained short term financing from First Insurance Funding Group for $33,374.

From inception (May 19, 2003) through December 31, 2006, we received proceeds from long-term debt in the amount of $400,000 in forgivable loans from the Iowa Department of Economic Development, $200,000 from the City of Algona revolving loan fund, and convertible loans in the amount of $572,052.

During the year ended December 31, 2008, we raised $32,661, net of expenses from the SEDA. During the year ended December 31, 2007, we raised $3,595,095, net of expenses from the sale of Series B preferred stock in a private placement. During the year ended December 31, 2006, we received $2,779,813 in proceeds, net of expenses from the private offering of our Series A Preferred Stock and we received $3,044,119 in proceeds, net of expenses from our Second Private Offering of common stock. During the year ended December 31, 2005, we received $3,594,889 in proceeds, net of expenses from the First Private Offering of our common stock.

At December 31, 2008, we had total assets of $3,839,812 and stockholders equity of $602,678 compared to total assets of $5,985,477 and stockholders’ equity of $3,381,158 in 2007. At December 31, 2006, we had total assets of $7,050,239 and stockholders equity of $4,045,170. At December 31, 2005, we had total assets of $4,822,022 and stockholders’ equity of $3,204,533 compared to total assets of $186,438 and total stockholders' deficit of $118,766 at December 31, 2004, and total assets of $128,934 and total stockholders' equity of $34,523 at December 31, 2003.

Plan of Operation

Since inception, we have incurred substantial operating losses and expect to incur additional operating losses in 2009. We have financed operations since inception primarily through equity and debt financings. We anticipate our expenses will increase significantly once we obtain sufficient capital to expand our operations.

We expect to continue our efforts to raise additional capital during 2009. We are currently exploring a variety of opportunities to obtain additional capital. There is no assurance that we will be able to raise the necessary capital or that the capital, if available, will be available on terms that will be acceptable to us. We anticipate that increased sales of our generator products could commence in late calendar year 2009. In addition, during March 2009, we secured an agreement to be involved in a hydrogen demonstration project scheduled to be completed by March 2011. Once the agreement has been accepted by all parties involved, we expect that numerous hydrogen usages will be tested as part of this project.

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

In the event that we are unable to obtain debt or equity financing or we are unable to obtain financing on terms and conditions that are acceptable to us, we may have to seek reorganization under Chapter 11 or file for protection under Chapter 7 of the bankruptcy code. These factors raise substantial doubt about our ability to continue as a going concern. So far, we have been able to raise the capital necessary to reach this stage of product development and have been able to obtain funding for operating requirements, but there can be no assurance that we will be able to continue to do so.

We believe future revenues will come from the sale of hydrogen systems to the wind energy industry. We intend to aggressively pursue sales of our 1 MW N+1TM hydrogen-powered generator sets. We believe that we are ideally positioned to take advantage of the tremendous growth projected for wind power use. Our systems can be used to stabilize the peaks and valleys in wind energy production and vastly extend the applicability and efficiency of wind-driven generators. Our generator systems not only serve as wind storage devices, but also as energy enablers to standalone wind-powered, generation facilities, delivering the initial excitation voltage that all wind generators need during startup and that, in the case of standalone generators, cannot be provided by the grid.

Our primary target market is on-the-grid and off-the-grid wind power facilities, where wind storage could contribute to substantially enhance the value proposition of wind energy. Wind power is capable of becoming a major contributor to America’s electricity supply over the next three decades, according to a report by the U.S. Department of Energy. New installation capital costs are projected to expand from $30.1 billion in 2007 to $83.4 billion in 2017. Last year’s global wind power installations reached a record 27,000 MW, equivalent to twenty-seven 1,000 MW conventional power plants.

We do not anticipate expanding our manufacturing facilities in 2009. We do not anticipate that we will have substantial capital expenditures in 2009.

Effective March 17, 2009, our founder, Theodore G. Hollinger, entered into an agreement with Steven C. Waldron, under which Mr. Hollinger granted Mr. Waldron the option to purchase all of his shares of common stock of the Company at a price of $0.02 per share. Under the terms of the agreement, Mr. Waldron has the right to conduct due diligence on the company over a period of 45 days before determining whether to exercise his option. If the option is exercised, Mr. Waldron will have purchased voting control of the company and will be able to control the business plans and direction of the company. Mr. Waldron is associated with Pinnacle Wind Energy, a company dedicated to the efficient development of wind power.

Grants and Government Programs

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

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

These awards were provided to assist us in the acquisition of machinery and equipment for our new 30,000 square foot manufacturing building. As a result, we agreed to make an investment of $1,543,316 in our Algona location and create 49 full-time equivalent positions by July 30, 2010. More information regarding these forgivable loans can be found in Note 7 to the Consolidated Financial Statements.

Our Enterprise Zone Agreement was amended September 28, 2006 to include both facilities on our production site and amends the job creation requirement under this program to 59 full-time equivalent positions by June 30, 2008. Under the Program, we were eligible for the following benefits provided we met certain Program requirements:

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

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

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

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

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

In order to receive these benefits and in addition to the job creation requirement, we must pay an average median wage for of $23.89 per hour and pay 80% of our employees’ medical and dental insurance. We were also required, within three years of the effective date of the agreement, to make a capital investment of at least $1,329,716 within the Enterprise Zone. As we did not meet these requirements, we may have to repay all or a portion of the incentives and assistance we have received.

On January 21, 2009, we received a “Notice of Default” from IDED. The notice stated that we had not met the job requirements required by the Enterprise Zone Agreement. At December 31, 2008, we had recorded a liability associated with the Notice of Default for $30,355. In a notice dated March 23, 2009, we were notified by the Iowa Department of Revenue that they had reviewed our default notice with the IDED and are requesting repayment of a sales tax refund in the amount of $30,355 plus accrued interest of $6,891 calculated through March 31, 2009.

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 December 31, 2008, HEC Iowa had 12 employees, all of whom were full time. During the first quarter of 2009, we began intermittently laying our employees off due to lack of work in these slow economic times. These steps were taken to reduce costs and preserve our available cash. As of December 31, 2008, HEC Canada had three employees, one full-time and two part-time. Beginning March 16, 2009, we laid off one full-time and one part-time employee of HEC Canada in order to conserve cash. Our employees are not members of any union, and they have not entered into any collective bargaining agreements. We believe that our relationship with our employees is good.

Net Operating Loss

We have accumulated approximately $11,490,000 of net operating loss and approximately $145,500 in research and development credit carryforwards as of December 31, 2008, which may be offset against taxable income and income taxes in future years. In addition, we have accumulated a foreign net operating loss carryforward of approximately $1,100,000. The use of these losses to reduce future income taxes will depend on the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. The carry-forwards will begin to expire in the year 2018. The amount and availability of the net operating loss carryforwards may be subject to annual limitations set forth by the Internal Revenue Code and foreign taxing authorities. Factors such as the number of shares ultimately issued within a three-year look-back period; whether there is deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the company all enter into the annual computation of allowable annual utilization of the carryforwards.

Inflation

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements begin on page 40.

HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES

(a corporation in the development stage)

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	41

Consolidated Balance Sheets as of December 31, 2008 and 2007	42

Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007 and the period from inception (May 19, 2003) through December 31, 2008	44

Consolidated Statements of Changes in Stockholder’s Equity (Deficit) and Comprehensive Loss for the period from inception (May 19, 2003) through December 31, 2008	45

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007 and the period from inception (May 19, 2003) through December 31, 2008	47

Notes to Consolidated Financial Statements	49

Report of Independent Registered Public Accounting Firm

The Board of Directors

Hydrogen Engine Center, Inc. and Subsidiaries

We have audited the accompanying balance sheets of Hydrogen Engine Center, Inc. and Subsidiaries (a corporation in the development stage) as of December 31, 2008 and 2007, and the related statements of operations, stockholder's equity (deficit) and comprehensive (loss), and cash flows for the years then ended and the period from May 19, 2003 (inception date) to December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hydrogen Engine Center, Inc. and Subsidiaries (a corporation in the development stage) as of December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended, and for the period from May 19, 2003 (inception date) to December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that Hydrogen Engine Center, Inc. and Subsidiaries (a corporation in the development stage) will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered significant losses from operations, has negative working capital, has defaulted on a capital lease and bank loans, does not have sufficient liquidity to meet current debt payments and is dependent on obtaining substantial additional capital. These factors create substantial doubt about the Company's ability to continue as a going concern. If the Company is unable to raise additional funds in the next thirty to sixty days, it may seek reorganization under Chapter 11 or file for protection under Chapter 7 of the bankruptcy code. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not contain any adjustments that might result from the outcome of these uncertainties.

/s/ LWBJ, LLP

LWBJ, LLP

West Des Moines, Iowa

March 31, 2009

HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES

(a corporation in the development stage)

Consolidated Balance Sheets

ASSETS	December 31, 2008		December 31, 2007

Current Assets
Cash and cash equivalents	$	36,482	$	713,289
Restricted cash		-		115,157
Accounts receivable		222,415		134,237
Inventories		493,742		1,655,359
Prepaid expenses		61,304		89,901
Total current assets		813,943		2,707,943


Property, Plant and Equipment
Building		2,271,209		2,271,209
Equipment		900,994		908,999
Land and improvements		472,504		472,504
		3,644,707		3,652,712
Less accumulated depreciation		618,838		375,178
Net property and equipment		3,025,869		3,277,534

Total Assets	$	3,839,812	$	5,985,477

See accompanying notes

HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES

(a corporation in the development stage)

Consolidated Balance Sheets

	December 31,			December 31,
LIABILITIES AND EQUITY	2008			2007

Current Liabilities
Notes payable, banks	$	575,475		$	594,677
Current portion long-term debt		292,737			30,350
Current installments of obligation under capital lease		58,465			45,247
Accounts payable		342,283			146,585
Accrued expenses		248,071			207,328
Accrued interest		179,457			129,965
Deferred compensation		119,108			-
Deferred revenue		87,306			-
Unearned grants		33,744			30,977
Total current liabilities		1,936,646			1,185,129

Long-term debt, net of current maturities		1,277,999			1,338,235
Obligation under capital lease, excluding current installments		22,489			80,955
		1,300,488			1,419,190
Total liabilities		3,237,134			2,604,319

Commitments and Contingencies

Stockholders' Equity
Preferred stock - Series B, $0.001 par value; 5,000,000 shares authorized, -0- and 1,932,846 shares issued and outstanding		-			1,933
Common stock, $0.001 par value; 100,000,000 shares authorized, 30,157,554 and 27,590,164 shares issued and outstanding		30,158			27,590
Additional paid-in capital		16,434,802			15,860,725
Accumulated other comprehensive income (loss) - foreign currency		1,651			(3,412	)
Deficit accumulated during the development stage		(15,863,933	)		(12,505,678	)
Total stockholders' equity		602,678			3,381,158

Total Liabilities and Stockholders’ Equity	$	3,839,812		$	5,985,477

See accompanying notes

HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES

(a corporation in the development stage)

Consolidated Statements of Operations

	Year Ended			Year Ended			From Inception
	December 31,			December 31,			(May 19, 2003) to
	2008			2007			December 31, 2008

Sales	$	1,358,647		$	740,799		$	2,421,350

Cost of Goods Sold
Material, labor, and overhead		1,282,985			644,517			2,204,769
Inventory markdown		261,464			533,876			1,223,487
		1,544,449			1,178,393			3,428,256

Gross Profit (Loss)		(185,802	)		(437,594	)		(1,006,906	)

Operating Expenses
Sales and marketing		183,724			219,875			1,384,760
General and administrative		2,031,325			2,790,255			8,502,734
Research and development		825,228			1,370,151			4,075,731
Vendor settlement		-			448,011			577,500

		3,040,277			4,828,292			14,540,725

Operating Loss		(3,226,079	)		(5,265,886	)		(15,547,631	)

Other Income (Expense)
Interest income		6,813			73,057			170,866
Interest expense		(138,989	)		(173,158	)		(480,434	)
Loss on disposals of assets		-			(6,734	)		(6,734	)
		(132,176	)		(106,835	)		(316,302	)

Net Loss	$	(3,358,255	)	$	(5,372,721	)	$	(15,863,933	)

Series A Preferred stock beneficial conversion feature accreted as a dividend		-			(1,889,063	)	$	(1,889,063	)

Net Loss Attributable To Common Stockholders	$	(3,358,255	)	$	(7,261,784	)	$	(17,752,996	)

Weighted-average shares outstanding		28,929,077			26,325,151

Basic and diluted net loss per share	$	(0.12	)	$	(0.28	)

See accompanying notes

HYDROGEN ENGINE CENTER, INC. AND SUBSIDIARIES

(a corporation in the development stage)

Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Loss

																							Deficit
																				Accumulated			Accumulated
	Preferred		Preferred		Preferred		Preferred		Common			Common		Additional			Unearned			Other			During the
	Stock A		Stock A		Stock B		Stock B		Stock			Stock		Paid - in			Stock-Based			Comprehensive			Development
	Shares		Amount		Shares		Amount		Shares			Amount		Capital			Compensation			Loss			Stage			Total

Issuance of common stock to founder in exchange for equipment and expenses incurred by founder		-	$	-		-	$	-		2,000,000		$	2,000	$	98,165		$	-		$	-		$	-		$	100,165

Net loss		-		-		-		-		-			-		-			-			-			(65,642	)		(65,642	)

Balance at December 31, 2003		-		-		-		-		2,000,000			2,000		98,165			-			-			(65,642	)		34,523

Company - related expenses paid by founder		-		-		-		-		-			-		39,187			-			-			-			39,187

Net loss		-		-		-		-		-			-		-			-			-			(192,476	)		(192,476	)

Balance at December 31, 2004		-		-		-		-		2,000,000			2,000		137,352			-			-			(258,118	)		(118,766	)

Company - related expenses paid by founder		-		-		-		-		-			-		12,135			-			-			-			12,135

Exchange of previous shares by sole shareholder of HEC Iowa		-		-		-		-		(2,000,000	)		-		-			-			-			-			-

Shares in Green Mt. Labs acquired in reverse merger		-		-		-		-		1,006,000			1,006		(1,006	)		-			-			-			-

Stock split of 3.8 to 1 prior to the merger		-		-		-		-		2,816,804			2,817		(2,817	)		-			-			-			-

Issuance of common stock to the sole shareholder of HEC Iowa		-		-		-		-		16,297,200			14,297		(14,297	)		-			-			-			-

Issuance of restricted common stock to employees and directors		-		-		-		-		426,000			426		425,574			(275,332	)		-			-			150,668

Issuance of common stock in connection with private placement, net of expenses		-		-		-		-		3,948,500			3,949		3,590,940			-			-			-			3,594,889

Issuance of common stock in connection with conversion of debt		-		-		-		-		663,401			663		556,388			-			-			-			557,051

Consultant compensation associated with stock options		-		-		-		-		-			-		133,333			-			-			-			133,333

																											4,329,310

Comprehensive Loss

Foreign currency translation		-		-		-		-		-			-		-			-			(2,207	)		-			(2,207	)
																											-
Net loss		-		-		-		-		-			-		-			-			-			(1,122,570	)		(1,122,570	)

Total comprehensive loss		-		-		-		-		-			-		-			-			-			-			(1,124,777	)

Balance at December 31, 2005		-	$	-		-	$	-		25,157,905		$	25,158	$	4,837,602		$	(275,332	)	$	(2,207	)	$	(1,380,688	)	$	3,204,533

Reclassification due to implementation of SFAS 123R		-	$	-		-	$	-		-		$	-	$	(275,332	)	$	275,332		$	-		$	-		$	-

Employee/Director compensation associated with stock options and restricted stock		-		-		-		-		-			-		724,209			-			-			-			724,209

Consultant compensation associated with stock options		-		-		-		-		-			-		43,777			-			-			-			43,777

Issuance of preferred stock in connection with private placement, net of expenses		930,000		930		-		-		-			-		2,778,883			-			-			-			2,779,813

Issuance of common stock in connection with private placements, net of expenses		-		-		-		-		978,009			978		3,043,141			-			-			-			3,044,119

Issuance of stock related to option exercises		-		-		-		-		8,000			8		7,992			-			-			-			8,000

																											9,804,451

Comprehensive Loss

Foreign currency translation		-		-		-		-		-			-		-			-			(7,012	)		-			(7,012	)
																											-
Net loss		-		-		-		-		-			-		-			-			-			(5,752,269	)		(5,752,269	)

Total comprehensive loss		-		-		-		-		-			-		-			-			-			-			(5,759,281	)

Balance at December 31, 2006		930,000	$	930		-	$	-		26,143,914		$	26,144	$	11,160,272		$	-		$	(9,219	)	$	(7,132,957	)	$	4,045,170

- Continued -

See accompanying notes

																											Deficit
																								Accumulated			Accumulated
	Preferred			Preferred			Preferred			Preferred			Common			Common			Additional			Unearned		Other			During the
	Stock A			Stock A			Stock B			Stock B			Stock			Stock			Paid - in			Stock-Based		Comprehensive			Development
	Shares			Amount			Shares			Amount			Shares			Amount			Capital			Compensation		Loss			Stage			Total

Employee/Director compensation associated with stock options and restricted stock		-			-			-			-			-			-			499,542			-		-			-			499,542

Forfeiture of restricted stock														(65,000	)		(65	)		65											-

Consultant compensation associated with stock options		-			-			-			-			-			-			9,700			-		-			-			9,700

Issuance of preferred stock in connection with private placement Series B, net of expenses		-			-			1,932,846			1,933			-			-			3,593,162			-		-			-			3,595,095

Issuance of warrants in vendor dispute																				577,500											577,500

Issuance of warrants for inventory		-			-			-			-			-			-			21,065			-		-			-			21,065

Conversion of Series A Preferred Stock to Common Stock		(930,000	)		(930	)		-			-			1,511,250			1,511			(581	)		-		-			-			- -

		-			-			-			-			-			-			-			-		-			-			-
																															8,748,072

Comprehensive Loss

Foreign currency translation		-			-			-			-			-			-			-			-		5,807			-			5,807
																															-
Net loss		-			-			-			-			-			-			-			-		-			(5,372,721	)		(5,372,721	)

Total comprehensive loss		-			-			-			-			-			-			-			-		-			-			(5,366,914	)

Balance at December 31, 2007		-			-			1,932,846			1,933			27,590,164		$	27,590		$	15,860,725		$	-	$	(3,412	)	$	(12,505,678	)	$	3,381,158

Employee/Director compensation associated with stock options and restricted stock		-			-			-			-			-			-			374,194			-		-			-			374,194

Forfeiture of restricted stock														-			-			-											-

Consultant compensation associated with stock options		-			-			-			-			-			-			7,857			-		-			-			7,857

Conversion of Series B Preferred Stock to Common Stock		-			-			(1,932,846	)		(1,933	)		1,932,846			1,933			-			-		-			-			-

HYDROGEN ENGINE CENTER, INC. 10-K