An article today in the New York Times says that funding for hydrogen car research may be funded at the $100 million level for the next fiscal year. Committee proposals in both houses are actually higher than $100 million originally requested (but cut in May) by Energy Secretary Chu. Read the article here.
The question remains how hydrogen can be produced economically. Producing hydrogen from water is energy intensive, but there are proposals to use Ocean Thermal Electrical Conversion to produce hydrogen and oxygen gas from sea water in locations where thermal gradients exist in excess of 20 degrees Celsius within 1000 meters of the surface. See the World Energy Council 2007 Survey of Energy Resources here (page 568).
Other promising technology exists, as well. Nanoptek Corporation, a privately held start-up in Maynard, Ma (here), has a patented process for producing hyrdrogen from water and sunlight, using a titania catalyst. GE has a process that produces hydrogen gas with current electrical costs equivalent to $3 per gallon for gasoline (here). Researchers at Penn State University have demonstrated a process using organic waste and and waste water to produce hydrogen using a stainless steel catalytic electrode and small amounts of electricity at "an 80% cost reduction from conventional electrolysys" (here). Research has also demonstrated potentially cheap hydrogen production using nanotubes (here).
None of these technologies has been expanded to demonstrate commerical feasibility. If some of the government money can be used to establish commercial potential for one or more of these approaches, it would be money well spent.
Then we have to worry about how hydrogen will be distributed.