UNITED
STATES
 
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-KSB
 
 x Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 
 FOR THE
YEAR ENDED DECEMBER 31, 2004
 
 Commission
File Number 0-32129
 
 Energy
      and Engine Technology Corporation
 (Exact
name of registrant as specified in its charter)
 
 Nevada
    88-0471842(State
      or other jurisdiction of incorporation or organization)
    (I.R.S.
      Employer Identification No.)
 
 5308
      West Plano Parkway
      Plano,
      Texas 75093
 (Address
of principal executive offices) (Zip Code)
 
 (972)
      732-6360
 Registrant's
telephone number, including area code:
 
 Securities
registered pursuant to Section 12(b) of the Act: None
 
 Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
per share
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. YES: x NO: o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. x
 
 The
number of shares outstanding of the Registrant's common stock as of March 9,
2005 was 120,528,374.
 
 Registrant
had revenues for its year ended December 31, 2004 of $207,165.
 
 Registrant's
common stock is listed and trading on the OTCBB under the symbol “EENT”. The
aggregate market value of the voting stock held by non-affiliates of Registrant
as of March 9, 2005 was $12,117,145. This calculation does not reflect a
determination that persons are affiliates for any other purposes.
 
  
  DOCUMENTS
INCORPORATED BY REFERENCE
 
 None.
 
 Transitional
Small Business Disclosure Format (Check one): Yes o No x
 
 Forward-Looking
Statements
 
 In
addition to historical information, this Annual Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled Management's Discussion and Analysis of Financial Position and Results
of Operations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. Registrant undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Registrant
files from time to time with the Securities and Exchange Commission, including,
but not limited to, the Quarterly Reports on Form 10-QSB to be filed by the
Registrant in the year 2005.
 
 
 
   ***TABLE
OF CONTENTS***
 
 PagePART
      IITEM
      1.
    DESCRIPTION
      OF BUSINESS
    1ITEM
      2.
    DESCRIPTION
      OF PROPERTY
    11ITEM
      3.
    LEGAL
      PROCEEDINGS
    11ITEM
      4.
    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
    11PART
      IIITEM
      5.
    MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    12ITEM
      6.
    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
    14ITEM
      7.
    FINANCIAL
      STATEMENTS AND SELECTED FINANCIAL DATA
    19ITEM
      8.
    CHANGES
      IN AND DISAGREMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
    19ITEM
      8-A.
    CONTROLS
      AND PROCEDURES
    20PART
      IIIITEM
      9.
    DIRECTORS
      AND EXECUTIVE OFFICERS OF REGISTRANT
    21ITEM
      10.
    EXECUTIVE
      COMPENSATION
    22ITEM
      11.
    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    24ITEM
      12.
    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
    25ITEM
      13.
    REPORTS
      ON FORM 8-K
    25ITEM
      14.
    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
    26SIGNATURES
    27INDEPENDENT
      AUDITOR’S REPORT
    29CONSOLIDATED
      FINANCIAL STATEMENTS
    30
 
 
   
   ***PART
I***
 
 **ITEM
1.****DESCRIPTION
OF BUSINESS**
 
 Energy
& Engine Technology Corporation (“Registrant” or the “Company”) was formed
in the State of Nevada on November 16, 1999 under the name Bidder
Communications, Inc. On December 5, 2001, Registrant filed an Amendment to its
Articles of Incorporation, changing the name of the company to Energy &
Engine Technology Corporation.
 
 On
September 7, 2001, the Company acquired 100% of the membership interests in
Southern States Gas Gathering, LLC (“SSGG”) for $153,828 in cash and common
stock, which was recorded as an acquisition of assets. The assets acquired
consisted primarily of an inactive 65 mile gas gathering system located in the
Caddo Pine Island Field, Louisiana. The Gas Gathering operation was considered a
discontinued operation as of December 31. 2004 and was subsequently sold in
2005.
 
 On
December 5, 2002, Wind Dancer Aviation Services, Inc. (“Wind Dancer”), a wholly
owned subsidiary of Registrant, purchased certain hard assets and inventory and
fuel associated with the former Fixed Base Operator (“FBO”), at Stevens Field,
Archuleta County, Colorado from the Board of County Commissioners of Archuleta
County, Colorado. The total consideration paid was $103,375. The purchase price
funds were provided by Registrant in the form of an equity infusion into Wind
Dancer. The nature of the business in which the assets were used was an FBO, and
Wind Dancer continues to use the assets in an FBO. The FBO was considered a
discontinued operation in 2004 and was subsequently sold in 2005.
 
 CURRENT
BUSINESS
 
 The
Parent
 
 Registrant
is pursuing a strategy to establish a technological presence in providing
products to the long haul trucking industry in America. With the national quest
for a balanced energy policy that addresses consumption issues, it is seeking to
do its part to contribute to reductions in our dependence on foreign energy
sources which management believes is a national security issue. As of December
31, 2004 Registrant had one division which focuses on innovative ways to
conserve energy and/or make engine technology more efficient, less harmful to
the environment and effective including: its AXP 1000 auxiliary power generator
for long haul trucks and related standby power generation business. Its two
other divisions were considered discontinued operations in 2004. In early 2005,
Registrant sold its Fixed Base Operator for general aviation aircraft in Pagosa
Springs, Colorado and has sold or is selling its assets for related general
aviation STC development and marketing and has sold its Gas Gathering System,
located in the Caddo Pine Island Field, in Caddo Parrish, Louisiana. As
discussed below, Registrant has determined to redirect its focus on power supply
for the transportation industries, rather than on the energy gathering or
aviation facets of its businesses.
 
  1
  AXP 1000
AND RELATED RESEARCH AND DEVELOPMENT
 
 Overview
 
 Prior
Activity
 
 The AXP
1000 is a device designed for new installation and retrofit to semi truck
tractors which provides air conditioning and heating for long haul trucks and
power generation without running the truck engine to provide “creature comforts”
for the truck cab (i.e.: heating, cooling and operation of devices requiring
electrical power), while keeping the truck battery charged. Registrant has filed
a patent on its device which has been amended pursuant to a continuation in
part. On December 2, 2002, Registrant successfully installed its new Auxiliary
Power Generator - “AXP 1000” on a truck, and the unit functioned properly,
including providing power to the truck's cab HVAC unit. On January 2 and 3,
2003, an AXP 1000 unit was installed on a loaned truck, and road testing
completed.
 
 Registrant
spent most of 2003 testing and making improvements to its AXP 1000. In December
2003, Registrant commenced commercial sales of the AXP 1000 and has recently
transitioned from a research and development stage to a marketing and sales and
production stage.
 
 Long
Haul Trucking Industry and Current Activity
 
 The
trucking industry is a $255.5 billion industry in the U.S. with 1,900,000
tractor trailers (Source: TruckInfo.net as of
March 13, 2005). The average truck driver in the United States makes 30.3 cents
per mile and an average of $32,000 per year, leading to the assumption that the
drivers travel an average of over 90,000 miles per year. The trucking industry
accounts for 12.8% of all the fuel purchased in the U.S., with the average 2005
per gallon price of diesel estimated at over $2.00 per gallon (up from $1.26 in
2002).
 
 The
Argonne National Laboratory Report entitled “Analysis of Technology Options to
Reduce the Fuel Consumption of Idling Trucks” by F. Stodolsky, L. Guines and A.
Vyus, dated June 1, 2000 (“Argonne Report”) contains various calculations of
savings by utilization of technology options to idling, including auxiliary
power generators, which show the potential for massive reductions in fuel
consumption. In conclusion, the Argonne Report states: “[any] of the listed
alternatives has significant potential to reduce all impacts compared to idling
overnight.... Auxiliary power units [may] reduce energy and petroleum use and
CO 2 emissions by more than 80% for the entire year” (using assumption of 458,000
trucks with 85 days of heating at 10 hours per day and 218 days with average
cooling at 4.5 hours per day).
 
 Furthermore,
according to an article on the Transportation Technology and R&D Center
website (www.transportation.anl.gov), called “Truckers: Don't Let Your Profits
Go Up In Smoke,” “assuming 1,830 hours of idling a year, a single truck emits
about 22 tons of carbon dioxide;...390 pounds of carbon monoxide; and 1,024
pounds of nitrous oxides.” The article, in a parenthetical, states there are
approximately 480,000 Class 7 and 8 trucks.
 
  2
  Effective
as of midnight, January 4, 2004 new federal regulations were implemented which
significantly curtail long haul truck driver time, thus increasing the length of
rest intervals, and the need for idling alternatives such as EENT's AXP 1000
device. In summary, the regulations permit truck drivers to drive for 11 hours,
only after having spent 10 consecutive hours off duty and limit the number of
hours a driver may be on duty in any consecutive 7 day period to 60. The Federal
Motor Carrier Safety Administration (“FMCSA”) stated in a December 30, 2003
press release that federal and state regulators plan to spend the first 60 days
after implementation in “an aggressive education campaign and enforcing
egregious violations” in the first regulations in this area enacted in over 60
years. In fact, the FMCSA website (www.fmcsa.dot.gov) states that 47 of 50
states plan to immediately cite violations of regulations.
 
 These new
regulations are touted to greatly improve safety for the 2.6 million long haul
trucks in the U.S., according to the above cited press release, and are
projected to save 75 lives and prevent over 1300 driver fatigue related injuries
and 6900 property casualty crashes each year, with over $628 million in cost
savings to the American economy. However, the American economy's gain is the
trucking industry's loss. According to a January 2, 2004 article on the
Sun-Sentinel's website, the cost to trucking companies could rise so
significantly that manufacturer shipping costs could rise 2 percent to 19
percent in the near future.
 
 According
to the January 3, 2005 issue of Transport
Topics , in
“Freight Haulers Expand Fleet” by Daniel P. Bearth, there were an estimated
3,147,088 Class 8 trucks in operation in the U.S. in the third quarter of 2004,
compared to 3,066,551 in the third quarter of 2003, which is a 2.6% increase in
usage. Given these estimates, utilizing an estimated average cost of $7,000 per
unit, the auxiliary power unit industry has the potential to be a $22 billion
industry (although this potential industry size should not be taken as a
projection as to actual industry growth or actual average per unit cost). The
same issue indicates that investment in trucking has markedly increased in
recent years, with $1.8 billion being invested (from the sale of stock) since
2002, with only $39.4 million invested in 2000 and 2001 (from the sale of stock)
(Source: “Investors Open to Trucking” by Daniel P. Bearth, Transport
Topics, January
3, 2005). Given that trucking overall is a $676 billion industry, according to
the American Trucking Association, there seems to be significant opportunity for
companies involved in the trucking sector.
 
 As far as
the cost of fuel is concerned, truckers paid approximately $62 billion for
diesel fuel in 2004, representing a $10 billion increase from 2003 (source: Truckline , January
18, 2005), an even more compelling reason for fleets and independent owner
operators to buy an AXP product in 2005.
 
 Additionally,
many states limit the amount of idling time to 3 - 5 minutes per hour. Fines can
range from as little as $100 to as much as $50,000. Active enforcement has
begun. On the
idling regulation front, violations of New Jersey’s three minute idling
regulation can lead to very large fines, with the maximum permitted under law of
$50,000 for third and subsequent offenses (See N.J.A.C. 7:27-14 and 7:27A -
3.10, although current limits for civil administrative penalty purposes are
capped at $3,000 for third and subsequent offenses). From August 9, 2004 -
January 4, 2005, New Jersey’s compliance sweep led to 122 vehicle violations.
Several jurisdictions, including Utah and Denver, Colorado now have jail time as
a possible penalty for repeat violations of idling regulations.
 
 Detailed
Information on the AXP 1000 Product
 
 The AXP
1000 is a device designed for new installation and retrofit to semi truck
tractors which provides `air conditioning and heating for long haul trucks and
power generation without running the truck engine to provide “creature comforts”
for the truck cab (i.e.: heating, cooling and operation of devices requiring
electrical power), while keeping the truck battery charged. The Company recently
had filed four provisional patent applications on the device, which was
converted to a traditional patent pending in 2003, and has recently filed a
continuation in part to include further unique features.
  3
  Recent
federal and state laws and regulations collectively limit both the number of
hours per day that long haul truckers may drive and the number of non-driving
hours they may allow their trucks to idle. Trucks burn a considerable amount of
diesel fuel when idling and release harmful emissions into the atmosphere.
According to the U.S. Department of Energy's Transportation Technology R&D
Center's website, with a 1000 RPM engine and truck accessories with a 10 brake
horsepower, the total yearly savings for fuel costs, preventative maintenance
and overhauls would be approximately $5,280, even with diesel at a modest $1.35
per gallon and with diesel now averaging more than $2.00 per gallon, more than
$8,000 per year. The AXP 1000 reduces fuel consumption and release of noxious
emissions, as well as lowering the truck maintenance burden. Reduced engine
running time lengthens the intervals between scheduled maintenance on the
truck's engine.
 
 These
claims are borne out by industry research. According to the Argonne Report,
“long-haul trucks idling overnight consume more than 838 million gallons of fuel
annually” The report continues on to indicate that various technology solutions,
which reduce idling time, can also be effective methods of saving fuel, reducing
maintenance costs and lowering emissions. One such solution is the AXP
1000.
 
 The AXP
1000 also has the potential to be a significant money saver. The device now
retails for $6,500 (with the new split unit air conditioner), so it may pay for
itself in less than one year, based upon the cost savings estimates above. Given
that the average truck is rotated every three years or 1,000,000 miles by large
companies, and the device pays for itself in less than one year on average, the
device is destined to be a priority for all long haul truck fleets interested in
cost savings.
 
 While
there are several other direct competitors in this market, Registrant believes
that its device occupies a unique niche as it is one of the lightest devices on
the market, has a low maintenance burden and is one of the least expensive
auxiliary products (“APUs”) available. According to the Argonne Report, other
technology options to reduce idling (such as direct-fired heaters, which raise
safety concerns, in addition to high retrofitting costs and unknown reliability,
thermal storage systems, which is a relatively new technology without any active
manufacturer, and truck stop electrification (there are almost no truck stops
currently offering plug-ins in the U.S.)) are not currently viable.
 
 Trade
Show Participation and Media Exposure
 
 Registrant
has had much feedback from its launch of the product at the March 2003 Mid
America Truck Show in Louisville, Kentucky. At that truck show, several major
American retail and/or trucking fleet giants expressed interest about including
the product in testing programs. In addition, the Registrant approached several
small fleets about initial orders, to be supplemented with larger orders over a
one to two year period.
 
 Further
trade show exposure continued with participation in the Great American Truck
Show, in Dallas, which occurred in late September 2003. The Show had an
estimated attendance of 30,000 people from the trucking industry. With its
location at the America Trucking On the Road Magazine booth, EENT experienced
high volume potential customer exposure for the AXP 1000 and made contact with
several new potential distributors and installation facilities. The grand prize
for the On the Road drawing was a free AXP 1000 unit, and several hundred people
were present for the drawing. EENT has also advertised the AXP 1000 in On the
Road, which according to its staff, has a circulation in excess of 80,000. EENT
again teamed up with On the Road at the Mid America Truck Show in March 2004 in
Louisville, KY, which is touted to be the largest truck show in North America,
with projected attendance of over 80,000 people.
  4
  EENT was
also featured in Fleet Owner Magazine's September 2003 special industry report
on anti-idling called “Turn Idle Time into Cash”. This bi-annual report should
reach much of Fleet Owner's estimated 103,000 circulation.
 
 Further
trade show participation ensued at the American Trucking Association show in
October 2003, which focuses on management level exposure to the trucking
industry. The ATA show provided exposure for future contact with decision makers
at the larger players in the long haul trucking industry.
 
 In March
2004, EENT again had a booth at the Louisville Mid America Trucking Show with
emphasis on taking orders for units, setting up new installation facilities and
expanding its dealer network.
 
 Again in
October 2004, EENT attended the ATA Management Conference in Las Vegas, Nevada
at which its prototype technology, the AXP InfiniGen, was announced. In February
2005, EENT attended the ATA Technical Maintenance Conference in Orlando,
Florida. At both shows fleet and dealer exposure to the product were the main
goals. EENT also attended the 2005 Mid American Truck show in Louisville,
Kentucky, its third straight year of participation.
 
 Early
Installations
 
 On
December 2, 2002, the Company successfully installed its new Auxiliary Power
Generator - “AXP 1000” on a truck, and the unit functioned properly, including
providing power to the truck's cab HVAC unit. The Company has successfully
completed its second test of its Auxiliary Power Generator - “AXP 1000”, on
January 3, 2003. The unit was mounted on a truck and connected to the batteries
and HVAC unit, and a dedicated start mechanism was installed. The unit generated
electricity in excess of that needed to charge the truck batteries and run the
HVAC system and other electronics inside the truck cab. The unit was installed
in the unique mounting location sought, tied into the stack and installation
brackets were designed and utilized which allow for truck vibration
dampening.
 
 Product
Supply and Current Installations
 
 In Summer
2003, EENT also received its 150 prepaid-for Lombardini engines at its sole
contract manufacturing facility, BMZ Generators, in Pompano Beach, FL, in
preparation for commencement of regular production. The engines are EPA approved
and CARB (California Air Resource Board) certified. Registrant had also prepaid
for 180 generators, but reallocated the prepayment for 124 generators with the
balance of the funds being used to purchase the generator tooling.
 
 The 2003
installation schedule had been slower than anticipated due to holiday hiatus of
various AXP 1000 parts suppliers and difficulty in scheduling driver
availability over the holidays to have trucks in Oklahoma City and Dallas for
installations. However, as the holiday season abated, EENT looked forward to
increased production and installation in the first quarter of 2004. During the
balance of 2004, EENT encountered several challenges and delays. As further set
forth in its Management’s Discussion and Analysis, the unreliability of its air
conditioner caused production to be put on hiatus in June and the balance of
2004 was spent moving into its new production facility and developing it new
HVAC system “Over the Road Comfort System”.
 
  5
  EENT is
encouraged by its proven uniqueness as compared to other products in the market.
One major way in which it shows its uniqueness is the versatility in its ability
to be installed in nonstandard locations. In one of the installations in
Oklahoma City, the unit was installed between the frame rails directly below a
previously installed “headache rack” (safety barrier between the back of the
truck cab and trailer). To accommodate the rack which sits above the rails in
the usual AXP 1000 mounting position, EENT's unit was mounted further down
between the rails, as made possible due to its compact size. Additionally, the
between the rail mounting position maintains balanced weight distribution and
preserves side rail space needed for installation of additional items such as
larger fuel tanks and toolboxes.
 
 Sources
of Supply and Assembly Information
 
 The
source of supplies used to assemble the AXP 1000 are off the shelf products
which are readily available. Major items include Lombardini USA for the motor,
BMZ Generators & Welders, Inc. (“BMZ”) for the generators and Anchor
Manufacturing for the HVAC unit. There is no need for government approval of
principal products and services, and the BMZ generator meets standards for US
military applications. Research and development expense incurred during the year
ended December 31, 2004 was approximately $169,271 (product development) as
discussed below, the Company acquired the assets of BMZ on July 1,
2004.
 
 In
November 2003, the Company engaged Decimal Engineering of Pompano Beach, Florida
to manufacture the enclosures for its AXP 1000 device. Decimal Engineering, Inc.
is a full service precision sheet metal fabricator and machine shop specializing
in the electronics, telecommunications, medical, computer, automotive and marine
related industries, which has been operating since 1968 in South Florida.
Currently, Decimal is fully automated and employs more than 80 people, working 2
shifts, and its sales have grown on an average of 15% per year for the last
several years. Because of its extensive facility, Decimal has the current
ability to keep up with enclosure manufacturing demand as the Company's AXP 1000
order flow increases.
 
 Acquisitions
 
 On May
19, 2004, the Company entered into a definitive purchase agreement with BMZ and
Freddy Pereira, the owner of BMZ, pursuant to which the Company was to purchase
all of BMZ's assets and related intellectual property, owned by Pereira for
$2,000,000, $500,000 in cash at closing and $500,000 in Company Common Stock
upon presentation of written documentation for the intellectual property with
the last $1,000,000 being paid out over five years based on certain earn out
criteria from the ongoing business of the subsidiary which purchased the assets.
EENT hired Pereira to run the business arising from the purchased assets as of
July 1, 2004. The transaction closed effective as of July 1, 2004, with BMZ
Generators Technology, Inc., a wholly owned subsidiary of the Company, as the
purchaser. Although the parties negotiated the stock value at $500,000, it is
being recorded for accounting purposes at $700,280 based on the closing price of
2,801,120 shares of the Company's Common Stock, as of May 19, 2004, the date of
the definitive agreement. The Company also issued these shares on June 4, 2004
in advance of the presentation of written documentation for the intellectual
property as outlined in the definitive purchase agreement.
 
 BMZ is a
Pompano Beach, FL manufacturing concern which has over 30 years of experience
providing customers with equipment and service in the areas of power generators
and custom designed/built power equipment for various industrial, military, and
trucking applications. BMZ assembles, packages and ships units.
  6
  In the
acquisition of BMZ, the Company acquired the assembly facility for the AXP 1000
product (not including the underlying real estate), other assets of BMZ, and
related intellectual property. The Company leases the 10,000 square foot Pompano
Beach facility owned by BMZ's owner, Freddy Pereira, who is now an employee of
Registrant.
 
 On
February 8, 2005, EENT entered into a binding letter of intent with Anchor
Tampa, Inc. to purchase assets of its marine air conditioning business for
$950,000. The letter of intent calls for a $37,500 non-refundable deposit
payable by EENT, with closing set to occur on or before April 30, 2005. The
balance of the purchase price is: $712,500 in cash and $200,000 in restricted
common stock.
 
 EENT has
designed its split unit air conditioner for its AXP 1000 and AXP InfiniGen
products, with the first 20 units produced by Anchor and delivered in January
2005. The letter of intent calls for a closing by April 30, 2005. This latest
acquisition will bring inhouse to BMZ Generators Technology, EENT’s wholly owned
subsidiary, control of a key component of its truck power generation units, and
past design challenge. EENT will also gain access to Anchor’s ongoing marine air
conditioning business, which will dovetail with BMZ’s marine generator
business.
 
 Anchor’s
marine air conditioners, which range from 7000 btu to 24000 btu, are designed to
meet the requirements of both pleasure and other marine craft, and its superior
air conditioners are the product of its state of the art assembly, testing and
quality control procedures. Anchor has an extensive sales network with
approximately 16 manufacturer’s representatives covering 29 states and 5
countries, with 90 retail locations and distributors. There is good synergy with
EENT’s existing BMZ marine division as the Anchor acquisition will provide an
additional distribution channel for BMZ’s marine generator products. Anchor’s
philosophy is to provide quality product at a fair price, with superior customer
service to ensure repeat business, in addition to an expanded customer base due
to its excellent reputation. Anchor Manufacturing is a division of Anchor Tampa,
Inc., which has been in the construction, marine and refrigeration/air
conditioning business for 24 years, and currently employs 150 persons in the
Tampa area.
 
 Market
and Marketing Plan
 
 The
potential market for the AXP 1000 is 2,200,000 existing Class 8 trucks and
200,000 new trucks manufactured annually.
 
 EENT
envisions a five step marketing plan for the AXP 1000 Program.
 
 1.
    Independent
      Owner/Operators (1 - 5 trucks per customer)
 
 a.
    Focused
      Trade Showsi.
    Mid
      America Truck Show in Louisville, KYii.
    Great
      American Truck Show in Dallas, TX
 
 b.
    Trucker
      Referral Programi.
    Cash
      referral fee for trucks who recommend customers which buy an AXP
      1000
 
 c.
    Target
      Publicationsi.
    Fleet
      Owner Magazineii.
    On
      the Road Magazine
  7
  
 2.
    Small
      Fleets (6 - 250 trucks)
 
 a.
    Focused
      Trade Showsi.
    Mid
      America Truck Show in Louisville, KYii.
    Great
      American Truck Show in Dallas, TX
 
 b.
    Target
      Publicationsi.
    Fleet
      Owner Magazineii.
    On
      the Road Magazine
 
 
 c.
    Buying
      Clubsi.
    Mercer
      Transportationii.
    Jones
      Motor Transport
 
 d.
    Implementation
      of Multi - tier Volume Discounts
 
 3.
    Large
      Fleets (Over 250 trucks)
 
 a.
    Focused
      Trade Showsi.
    Mid
      America Truck Show in Louisville, KYii.
    Great
      American Truck Show in Dallas, TXiii.
    ATA
      Truck Show in San Antonio, TX
 
 b.
    Target
      Publicationsi.
    Fleet
      Owner Magazineii.
    On
      the Road Magazine
 
 c.
    Buying
      Clubi.
    Landstar
 
 d.
    Implementation
      of Multi - tier Volume Discounts
 
 e.
    Implementation
      of Test Programs
 
 4.
    Truck
      Stops (i.e.: Travel Centers of America, Flying
J)
 
 a.
    AXP
      1000 is the only unit which could practically be marketed through truck
      stops due to short installation time
 
 b.
    Minimal
      Inventory Investment (Offer of Net Period
Terms)
 
 c.
    Fixed
      return (installation revenue) but ability to market other services for
      trucks stopping for AXP 1000 installation
 
 d.
    Implementation
      of Multi - tier Volume Discounts
 
  8
  
 5.
    Independent
      Installation Facilities
 
 a.
    Focused
      Trade Showsi.
    Mid
      America Truck Show in Louisville, KYii.
    ATA
      Truck Shows
 
 b.
    Target
      Publicationsi.
    Fleet
      Owner Magazineii.
    On
      the Road Magazine
 
 c.
    Incentives
      for facilities to generate leads or EENT to provide geographic appropriate
      leads
 
 d.
    Implementation
      of Multi - tier Volume Discounts
 
 e.
    Fixed
      return (installation revenue) but ability to market other services for
      truck at dealer for AXP 1000 installation
 
 The AXP
1000 marketing effort is spearheaded by the National Sales Manager hired in
January 2005, and his team of manufacturer’s representatives, which currently
cover 36 states for fleet and dealer sales. Other sales, such as direct to owner
operators, are handled at multiple levels within the Company.
 
 Competition
 
 The AXP
1000 faces significant competition from other auxiliary power units and
stationary idle eliminating technologies.
 
 Major
auxiliary power units include Rig Master, Pony Pack, Pro Heat, Truck Gen and
Idle Eliminator. Generally, these units are more expensive and heavier in weight
than the AXP 1000. Also, some are belt driven versus direct drive and/or water
cooled instead of air cooled, which generates the likelihood of increased
maintenance instances over the AXP 1000. Also, the AXP 1000 exhibits versatility
of installation location as it can be mounted between the rails instead of on
the side rails, permitting use of the side railing for installation of other
accessories (i.e.: tool boxes).
 
 Fixed
location alternatives to an APU include truck electrification and Idle Aire
Truck electrification consists of shorepower Truck Stop Electrification systems
that provide grid electricity to stationary, long-haul trucks for the operation
of onboard HVAC units, block heaters, and in-cab convenience appliances. Idle
Aire consists of an umbilical duct, connected through the truck cab's passenger
side window, which delivers heat, air conditioning and power to the cab. These
alternatives carry obvious disadvantages in that a large capital outlay is
required by the truck stop, thereby limiting the locations where the
technologies are available. The AXP1000 can be utilized anywhere a truck is
stopped.
 
 
  9
  DISCONTINUED
OPERATIONS
 
 **Wind
Dancer Aviation Services, Inc.**
 
 Overview
 
 Until
February 2005, Registrant owned the fixed base operator (“FBO”; equivalent of a
service station for aircraft), at Stevens Field, Pagosa Springs, Colorado, and
it planed to provide aircraft engine enhancements and installation activities
there. The FBO provided fuel, oxygen, aircraft parking, flight training and
catering, ground transportation, supplies, pilots' lounge, and rental cars, in
addition to becoming a major center for aircraft repair, maintenance and
upgrades. The intent was to build the business by offering unique products and
services while developing a service organization to provide major overhaul and
enhancements.
 
 The FBO
business did not break even in late 2004 and in the opinion of Company
management no longer constituted a solid base upon which to build. EENT's plan
was to systematically add business services while airport improvements are in
process with the goal of becoming a successful provider of new products at a
“new” airport, in a very favorable destination. But this did not come to
fruition due to the slow progress since commencement of construction of the
runway. Due to this fact and that EENT had spent $500,000 in development since
inception without showing any consistent increase in revenue, it decided to seek
a buyer for its FBO during 2004, and in February 2005, sold it to Avjet
Corporation for $262,500 in cash. The FBO was deemed a discontinued operation as
of December 2004.
 
 Turbocharger
Power Systems and Aircraft Enhancements
 
 Due to
the sale of the assets of Wind Dancer, management determined that there was no
practical way to stay in the STC business and it has resold its Mr. RPM STCs and
related inventory to the original owner and has agreed with Avjet to sell its
Kelly Aerospace inventory and STCs with the first $30,000 in proceeds being paid
to Kelly and the balance to EENT, if, as and when sold.
 
 **Gas
Gathering Enterprises, LLC**
 
 In 2002,
Registrant had significant challenges in operation of its Gas Gathering System.
Its original gas purchaser, Prism, was shut down approximately six weeks during
the first three quarters of 2002. Registrant then attempted to sell its gas to
Koch/Gulf South through an intermediary, Metro Energy, which is located in the
Caddo Pine Island Field, but Metro lacked sufficient equipment to process the
gas. Unfortunately, Registrant was not able to sell directly to Koch due to the
amount of capital required to be able to install and run the necessary
equipment.
 
 Therefore,
Registrant determined on February 18, 2003 that its best course of action is to
attempt to sell the Gas Gathering System. During the first quarter of 2003,
Registrant approached in excess of six different parties to locate a purchaser.
It only identified one interested party (American West Resources, Inc. of Fort
Worth, TX (“American West”)) with which it had a letter of intent to sell the
System (100% of the membership interest in Gas Gathering Enterprises, LLC,
Registrant's wholly owned subsidiary, which owns the system) for a purchase
price of $500,000.
 
 In
December 2004, EENT entered into an agreement to sell the system to a third
party for $150,000. Gas Gathering was deemed a discontinued operation in
December 2004. The purchase closed on March 14, 2005.
  10
  Other
 
 There
have been no bankruptcy, receiverships, or similar proceedings by or against
Registrant.
 
 As of
December 31, 2004, Registrant and its subsidiaries had eight full time employees
other than their officers and directors. For 2004, each of Registrant's CEO, CFO
and General Counsel received a salary of $210,000, $195,000 and $180,000,
respectively. No one is represented by a collective bargaining
agreement.
 
 **ITEM
2.****DESCRIPTION
OF PROPERTY**
 
 Registrant's
executive offices are located at 5308 West Plano Parkway, Plano, Texas, which it
leases on a monthly basis, at competitive market rates. Registrant believes that
its facilities are adequate for its current needs and that suitable additional
or substitute space will be obtained as and when needed. There are leased
offices and warehouse space for BMZ Generators Technology, Inc. in Pompano
Beach, FL. The warehouse space is leased from Fernando Pereira, a related
party.
 
 **ITEM
3.****LEGAL
PROCEEDINGS**
 
 On
October 28, 2003, the Company was served with a complaint by 600 Racing, Inc.
The complaint alleges that EENT is liable on a $150,000 judgment issued against
Millennium Fuels USA, LLC (“MFUSA”), an unrelated entity, of which Will McAndrew
and Roger Wurtele, the Company's CEO and CFO, respectively, were the Managers.
The complaint alleges that the Company engaged in a joint enterprise with MFUSA
and integrated resources with MFUSA and is thus liable on an “alter ego” theory.
 
 The case
continues to be prosecuted but EENT expects to be able to effect the Company's
dismissal from the suit for a minimal nuisance value settlement. In October
2004, the case was removed to the U.S. Bankruptcy Court for the Northern
District of Texas, as part of the pending bankruptcy of MFUSA. The debtor has
proposed a Plan of Reorganization supported by the U.S. Trustee, for settlement
by EENT of the litigation for $15,000.
 
 Other
than as stated above, Registrant is not a party to any legal
proceedings.
 
 **ITEM
4.****SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 There
were matters submitted to a vote of security holders during the fourth quarter
of the fiscal year ended December 31, 2004.
 
 On or
about March 5, 2005, Registrant submitted the following to a vote of security
holders, through a Written Consent of Shareholders in Lieu of an Annual
Meeting:
 
 1.
    To
      elect directors to serve for the ensuing year and until their successors
      are elected; and
 
 2.
    Ratification
      of Marcum & Kliegman, LLP as the Company's independent registered
      public accounting firm for 2004; and
 
 3.
    To
      amend the Corporation's Articles of Incorporation to increase authorized
      shares to 280,000,000; and
 
  11
  
 4.
    To
      add an Article XIII to the Corporation’s Articles of Incorporation to opt
      in to NRS Section 78.3792; and
 
 5.
    To
      amend the Corporation’s Bylaws to provide for calling of special meetings
      of shareholders; and
 
 6.
    To
      amend the Corporation’s Bylaws to require notice by shareholders bringing
      certain matters before meetings of shareholders;
and
 
 7.
    To
      amend the Corporation’s Bylaws to only permit removal of Directors with
      cause.
 
 The
number of shares voted in favor of items 1 (including each director in item 1) -
2,66,645,169, against were 0 and abstaining were 0. The number of shares voted
in favor of item 3 (the authorized preferred stock) 62,040,260, against were
4,604,909 and abstaining were 0. The number of shares voted in favor of items 4
- 7, 63,220,260, against were 3,424,909 and abstaining were
280,000.
 
 For
further information on the foregoing items 1 - 7, please refer to the
Registrant's Definitive Proxy Statement on Schedule 14A filed with the
Commission, on February 14, 2005.
 
 ***PART
II***
 
 **ITEM
5.****MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER****MATTERS**
 
 Registrant's
Common Stock is traded on the OTCBB under the symbol EENT and has been traded on
the OTCBB since the Registrant's initial public offering (under Rule 504) in
2000. According to records of the Registrant's stock transfer agent, Registrant
had 836 stockholders of record as of December 31, 2004. The following table sets
forth the low and high bid price of the Company's Common Stock, based on the
last bid price, in each of the Company's last eight quarters:
 
 Quarter
      Ended
    Low
      Bid Price
    High
      Bid PriceDecember
      31, 2004
    0.13
    0.31September
      31, 2004
    0.29
    0.41June
      30, 2004
    0.20
    0.44March
      31, 2004
    0.12
    0.88December
      31, 2003
    0.06
    0.21September
      30, 2003
    0.09
    0.20June
      30, 2003
    0.05
    0.15March
      31, 2003
    0.05
    0.15
 
 The
reported high and low bid prices of our common stock are above for each quarter
during the last two complete fiscal years. The high and low bid price for the
periods in 2003 and 2004 shown above are quotations from the OTCBB. The
quotations reflect inter-dealer prices and do not include retail mark-ups,
mark-downs or commissions. The prices do not necessarily reflect actual
transactions.
 
 No
assurance can be given that any established market for the Company's common
stock will develop or be maintained. For any market that develops for the common
stock, the sale of “restricted securities” pursuant to Rule 144 promulgated
under the Securities Act of 1933 by members of management and others or any
other person to whom any such securities may be issued in the future may have a
substantial adverse impact on any such public market.
  12
  Information
about the date when current holders' holding period of “restricted securities”
commenced can be found below under the heading “Recent Sales of Unregistered
Securities” of this Item. A minimum holding period of one year is required for
resales under Rule 144, along with other pertinent provisions, including
publicly available information concerning our Company (this requirement will be
satisfied by the filing of this Annual Report and the continued timely filing by
us of all future reports required to be filed by us with the Securities and
Exchange Commission; limitations on the volume of “restricted securities” which
can be sold in any 90 day period; the requirement of unsolicited broker's
transactions; and the filing of a notice of Sale on Form 144).
 
 As of the
date of filing this Annual Report, there has been trading in the common stock;
the current bid/ask prices are roughly in the range of $0.09 -
$0.11.
 
 Registrant
has adopted the policy to reinvest earnings to fund future growth. Accordingly,
Registrant has not paid dividends and does not anticipate declaring dividends on
its Common Stock in the foreseeable future.
 
 Recent
Common Stock Transactions
 
 During
the year ended December 31, 2004, the Company issued an aggregate 184,000 shares
of common stock valued at $38,190 to consultants for services to be
provided.
 
 During
the year ended December 31, 2004, the Company issued an aggregate 4,010,690
shares of common stock valued at $1,709,416 to officers and employees of the
Company for services performed.
 
 During
the year ended December 31, 2004, in connection with private placements, the
Company sold an aggregate 17,140,000 shares of common stock to investors valued
at $1,827,000.
 
 During
the year ended December 31, 2004, in connection with an anti-dilution agreement,
the Company issued an aggregate 6,090,141 shares of common stock to an investor.
The anti-dilution agreement expires February 15, 2006.
 
 During
the year ended December 31, 2004, in connection with conversion of debt, the
Company issued an aggregate 10,445,229 shares of common stock to investors
valued at 1,312,042.
 
 During
the year ended December 31, 2004, in connection with acquisition, the Company
issued an aggregate 2,801,120 shares of common stock valued at
$700,280.
 
 During
the year ended December 31, 2004, a shareholder exercised 1,000,000 warrants to
purchase 1,000,000 shares of the Company’s common stock for proceeds of
$144,000. The proceeds were used to reduce the shareholder’s outstanding balance
by $112,000.
 
 During
the year ended December 31, 2004, two shareholders exercised warrants to
purchase 300,000 shares of the Company’s common stock for proceeds of
$27,000.
 
 Management
believes that each of the foregoing persons or entities was either an
“accredited investor,” or “sophisticated investor” as defined in Rule 506 of
Regulation D promulgated under the Securities Act of 1933. Each had access to
all material information about the Company prior to the offer, sale or issuance
of these “restricted securities.” We believe these shares were exempt from the
registration requirements of the Securities Act, pursuant to Section 4(2)
thereof.
 The
valuation of these shares was based on trading volume and
prices.
  13
  **ITEM
6.****MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**
 
 Background
and Overview
 
 The
Company operates businesses which provide products to various aspects of the
transportation industry (long haul trucking) which supply innovative products to
promote efficiency of operation of motor vehicles, reduce fuel consumption and
assist in reducing pollutive emissions from operation of motor vehicles.
 
 EENT’s
gas gathering operation and fixed base operator businesses were considered
discontinued operations in 2004 and subsequently sold in the first quarter of
2005 for $150,000 and $262,500 respectively.
 
 Long Haul
Trucking Industry and the AXP 1000 (according to statistics gleaned from
Truckinfo.net in late March 2004):
 
 «
    The
      overall U.S. trucking industry employs over 9 million individuals, with an
      estimated 15.5 million trucks overall, of these.1.9 million are tractor
      trailers.
 
 «
    There
      are an estimated 3.3 million truck drivers, with 10% being independent
      truckers mostly owner operators).
 
 «
    There
      are also over 360,000 trucking companies with 96% operating 28 or fewer
      trucks.
 
 «
    Total
      revenue estimates are $255 billion per
year.
 
 «
    However,
      profit margins are very small ($.048 per dollar of revenue), and the
      average trucker earns under $40,000 per year, with 12.8% of all fuel
      purchased belonging to truckers.
 
 «
    The
      U.S. Department of Labor estimates that the demand for employment of truck
      drivers may triple by 2020 from current
levels.
 
 Given
these small profit margins and the January 2004 federal mandates requiring 10
hours of rest for every 11 hours driven (combined with the state and local anti
idling laws), there is a need for solutions which can achieve the combined goals
of: utilizing all means possible to take measures to increase profit margin and
compliance with the increased and more enforced federal and state legislation
affecting long haul trucks. Solutions to be used must combine these two goals.
Hence, the increasing popularity of auxiliary power units (“APUs”) other
alternatives, such as truck stop electrification, exist, but require large
capital expenditures and are thus less likely to become prevalent.
 
 The
Company's experience is that although APUs have been around for several years,
the recent increase in diesel prices, combined with stricter enforcement, has
placed a spotlight on this cottage industry (with industry estimates that it
could become a $2.5 billion dollar per year industry), which heretofore had been
filled with small niche players with minimal followings. Such newfound industry
is evident from the formation of a trade association for APU manufacturers (Idle
Eliminators Manufacturing Association) and various conferences (such as the May
2004 Anti Idling Conference in Albany, New York and the December 2004 conference
in Austin, Texas). Additionally, EENT has participated in several trucking
industry trade shows over the past 13 months, with increased interest in the AXP
1000 at each show.
  14
  Given the
size of the market, EENT believes that there is ample room for itself and its
competitors. With estimates significantly upwards of 500,000 or more long haul
trucks on the road today, even if EENT were to only capture a 1% market share,
with an average sales price of $5,000 per unit, this represents gross revenues
of $25,000,000. EENT believes it can sell 1000 units in the next 12 months,
which would yield $5,000,000 in sales.
 
 The AXP
1000 has also been successful in distinguishing itself from its competitors in
several areas, including:
 
 «
    Lower
      cost.
 
 «
    Lighter
      weight.
 
 «
    Only
      unit to sit between the rails.
 
 «
    Low
      maintenance burden.
 
 The
biggest overall challenge is coordinating production/supply chain and sales.
EENT has purchased BMZ Generators, its contract assembly facility, which in its
current space can assemble 30 - 50 generators per month. BMZ's owner, Freddy
Pereira (a related party), has purchased a large facility in Pompano Beach,
Florida, which has been built out and the Certificate of Occupancy issued as of
the first week of August 2004. EENT moved into its space and was able to receive
power and communications during the fourth quarter of 2004. EENT is leasing
space from Pereira and expects initial assembly volume to be close to 100 units
per month at some point during the fourth quarter of 2005. By purchasing BMZ,
EENT will also have direct access to its generator manufacturer, thus
controlling supply.
 
 The BMZ
purchase gives EENT the opportunity to expand into other stand alone and
portable generator markets in the future, such as the marine, aviation and
military industries, thus giving it flexibility in expansion of revenue base
should the APU market become saturated. Also, the facility will become, under
the aegis of Freddy Pereira, ISO 9001 certified, allowing it to be an industry
accepted testing facility for its products.
 
 On the
supply chain issue, in March 2004, Registrant's CEO and CFO traveled with BMZ
owner, Freddy Pereira, to meet with the manufacturer of the custom made
generator used in the AXP 1000. The meetings proved successful in allowing
Registrant to conduct sufficient due diligence to be comfortable that the
manufacturer will be able to meet Registrant's increasing product need. Also,
EENT looked to replace its unreliable third party air conditioners which had a
30% - 40% failure rate and in mid-2004 put out bids to three companies to supply
a replacement specified to EENT’s design. Anchor Manufacturing’s design
won.
 
 Registrant
is exploring opportunities in the private sector to take advantage of quieter
technologies; however, sound reduction is proving to be a more difficult task
than originally anticipated. It is significant to note that, although noise
reduction is an ongoing process, the sound level from the AXP 1000 is still
significantly lower than from a truck's main engine or the generator used for
cooling by reefers (refrigerated truck trailers).
 
 General
Aviation/Wind Dancer:
 
 EENT was
unable to justify expenditures continuing at Wind Dancer for the runway
expansion to be completed, so in February 2005 it sold the FBO to Avjet
Corporation of Burbank, California for $262,500. The FBO was deemed a
discontinued operation in 2004.
  15
  Additional
2005 Goals:
 
 Management
has, in addition to product specific goals, undertaken to use its reasonable
best efforts to accomplish the following in 2005:
 
 «
    Preparation
      for listing on a U.S. regulated exchange and effectuating that listing,
      depending on ability to meet listing criteria, in late 2005 or early
      2006.
 
 «
    Implementation
      of further internal controls and policies and procedures to continue to
      self manage the growth of Registrant's business and personnel as the
      business expands.
 
 «
    Shift
      from reliance of use of outside consultants for support services (such as
      investor relations) to self-reliance for such services through the use of
      internal resources and personnel.
 
 «
    Further
      development of new products such as the AXP InfiniGen, still in prototype
      stage.
 
 «
    Identification
      of new markets for products and long range business planning for all
      business units.
 
 RESULTS
OF OPERATIONS
 
 As of
December 31, 2004, the Company had net sales of $207,165. The delays in
production of the AXP 1000 product continued as EENT moved into the new facility
being leased from Fernando A. Pereira in Pompano Beach, Florida. Production
continued to be sluggish until the new facility was complete and EENT was able
to move assembly operations there, which occurred late in the fourth quarter of
2004, with most BMZ sales deriving from non AXP business. AXP business commenced
in early 2005. Revenue of $326,548 from operations of its Wind Dancer Aviation
Services, Inc. subsidiary and $244 from its Gas Gathering subsidiary have been
excluded from net sales and recorded as discontinued operations for the year
ended December 31, 2004.
 
 The
Company had a net loss from continuing operations of $4,776,469 for the year
ended December 31, 2003 and of $5,577,630 for the year ended December 31, 2004
resulting in a net loss per share of $0.118 and $0.053 respectively. The Company
had a net loss of $265,188 for discontinued operations for the year ended
December 31, 2003 and of $271,736 for the year ended December 31, 2004 resulting
in a net loss per share of $0.006 and $0.003 respectively. The marked increase
in net loss is based primarily on financing costs but also on increased overhead
costs as the Company prepares for production and increases staff and equipment
in order to become production ready.
 
 Selling,
general and administrative expenses for the year ended December 31, 2003 and
December 31, 2004 were $1,080,824 and $1,969,982 respectively. The
increase in selling, general and administrative expenses is based primarily upon
increases in overhead costs due to increases in staff and equipment as the
Company commences production of its products.
 
 As of
December 31, 2003, Registrant had net sales from continued operations of $4,341.
As of December 31, 2004, Registrant had net sales from continued operations of
$207,165. The sole source of sales from continued operations during the year
ended December 31, 2004 was from BMZ related sales, which commenced July 1, 2004
and should continue to strengthen in 2005. Sales and installations of AXP 1000
units were minimal. As AXP 1000 sales increase, the revenue generated from that
business segment are expected to increase dramatically.
  16
  Operating
expenses for the year ended December 31, 2004 were $3,852,548, as opposed to
$4,436,542 for the year ended December 31, 2003. The reason for the decrease in
expenses was that Registrant increased operations but hired less outside
consultants on a stock compensation basis. Of the $3,852,548, $1,969,982 (up
about $890,000 from 2003) was due to selling, general and administrative
expenses, with $169,271 in product development, and $573,750 in officer
salaries.
 
 The AXP
1000/BMZ business lost significant amounts of money in 2004 as it was still in a
research and development stage and thus required cash outlays without
corresponding returns. As Registrant continues through its transition from
product and business development to business operation and production, cash flow
should increase significantly.
 
 A review
of cash flows from operating activities shows net cash used in 2004 of
$2,604,105 opposed to $843,845 in 2003. A review of cash flows used in
discontinued operations shows net cash used in 2004 of $189,145 opposed to
$301,758 in 2003. The net cash used in 2004 in operating activities resulted
from operating expenses, less amounts mainly for stock based compensation,
accounts payable and accrued expenses, and accrued expenses, officers. A review
of cash flows from investing activities shows cash used of $713,941 in 2004 as
opposed to $1,670 in 2003. The main categories in 2004 consisted mainly of
investment by Registrant of funds in BMZ for purchase of property and equipment,
intangible assets and acquisition. A review of cash flows from financing
activities shows cash provided of $3,546,505 in 2004, as opposed to $1,126,480
in 2003. In 2004 financing activities consisted of $8,095 of payments from notes
payable, $1,700,000 in proceeds from convertible debentures, $27,000 from
warrant exercise and 1,827,600 in proceeds from the issuance of common stock.
Items 5 and 12 detail this financing activity.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As of
December 31, 2004, Registrant's primary sources of liquidity included cash and
cash equivalents in the amount of $46,338, which was the balance of proceeds
raised in several private Section 4(2) stock sales and note payable
agreements.
 
 Registrant
believes that its existing cash balance and future operating cash flows may not
be sufficient for near term operating needs unless it is able to quickly and
consistently expand its operations, and it is exploring various opportunities to
raise additional capital. The extent to which such sources will be sufficient to
meet Registrant's anticipated cash requirements is subject to a number of
uncertainties, the most important of which is Registrant's ability to generate
sufficient cash flow to support its business operations.
 
 Our
independent auditors have noted in their report on our 2004 financial statements
that there are existing uncertain conditions including the net loss the Company
incurred in the amount of $5,849,366 during the year ended December 31, 2004 and
the working capital deficiency of $247,533 that existed at the balance sheet
date. These conditions raise substantial doubt as to our ability to continue as
a going concern.
 
  17
  With
regard to known trends and events reasonably expected to have a material impact
on net sales and revenues, Registrant strongly believes that the heightened
interest in idling alternatives should provide a stronger demand for the AXP
1000 device. Uncertainties include whether there can be sufficient noise
reduction in the AXP 1000 to overcome objections from some long haul truckers
(the AXP 1000 is air cooled rather than water cooled, so it has a somewhat
elevated noise level when compared with liquid cooled devices). EENT is
currently working on alternatives to lower the noise level and is making steady
progress. Also, Registrant does not believe it will be faced with the same
delays it experienced in 2004, which were largely caused by the BMZ acquisition
and moving into its new Pompano Beach, Florida facility.
 
 The other
major uncertainty is the extent to whether new technology will appear that will
make the small generator/engine genset used by EENT obsolete. Given the
potential development of other power generator technologies, there may be a
limited window of 5 - 10 years for EENT's technology as currently configured.
Therefore, EENT, in addition to gearing up for current production, is looking
into commencing a research and development project for its next generation
products, which is envisioned to be a part of the AXP 1000 business unit, with
project specific funding, to be determined in the future as the details of such
research and development products come to fruition. Registrant is also in the
process of developing its next generation engine driven genset, to replace the
currently used engine, the AXP InfiniGen. This is an intermediate step to be
taken before putting an alternative fuel generation source into commercial
production.
 
 Another
guard against obsolescence is looking for new markets for BMZ generators.
Therefore, Registrant will commence exploration of marketing and sales for the
generator products in other likely industries, most notably marine, aviation and
military.
 
 Of
course, EENT's business is subject to customary and usual business risks, not
necessarily subject to its control, including, but not limited, to:
 
 «
    Ordinary
      operating risks (product, labor and capital cost
    increases).
 
 «
    General
      economic conditions.
 
 «
    Changes
      in laws and regulations.
 
 «
    Competition.
 
 «
    Stock
      and product market volatility.
 
 «
    “Acts
      of God”.
 
 Critical
Accounting Policies
 
 Revenue
Recognition
 
 AXP
1000 Power Generators
 
 Revenue
is recognized at the time that the generator is delivered to the customer or
dealer.
 
  18
  Inventory
 
 Inventory
consists of aviation fuel, parts, materials and engines and is valued at the
lower of cost or market, cost being determined using the first-in/first-out
basis.
 
 Research
and Development
 
 Research
and development costs are expensed as incurred. Research and development costs
for the years ended December 31, 2004 and 2003 were $169,271 and $126,785,
respectively and are included in selling, general and administrative expenses.
 
 Stock-Based
Compensation
 
 In
October 1995, SFAS No. 123, “Accounting for Stock-Based Compensation” was
issued. SFAS 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and
related interpretations with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the new fair value
method. The Company intends to continue to account for its stock based
compensation plans in accordance with the provisions of APB 25.
 
 The
Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure.” This
statement amended SFAS No. 123, “Accounting for Stock-Based Compensation.” As
permitted under SFAS No. 123, the Company continues to apply the Accounting
Principles Board Opinion No.25, “Accounting for Stock Issued to Employees.” As
required under SFAS No. 148, the fair value-based method had been applied to all
awards.
 
 Changes
in Financial Condition
 
 The
Company has not experienced a change in financial condition and continues to
operate at a deficit as stated above.
 
 **ITEM
7.****FINANCIAL
STATEMENTS AND SELECTED FINANCIAL DATA**
 
 Registrant's
financial statements for the years ended December 31, 2003 and December 31, 2004
audited by Marcum & Kliegman, LLP, are included herein in full.
 ****
 **ITEM
8.****CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.**
 
 None
 
  19
  **ITEM
8-A.****CONTROLS
AND PROCEDURES.**
 
 Disclosures
Controls and Procedures
 
 The
Company maintains controls and procedures designed to ensure that it is able to
collect the information that is required to be disclosed in the reports it files
with the SEC, and to process, summarize and disclose this information within the
time period specified in the rules of the SEC. The Company's Chief Executive and
Chief Financial Officers are responsible for establishing, maintaining and
enhancing these procedures. They are also responsible, as required by the rules
established by the SEC, for the evaluation of the effectiveness of these
procedures.
 
 Based on
their evaluation of the Company's disclosure controls and procedures which took
place as of the date of filing of this report, the Chief Executive Officer and
the Chief Financial Officer believe that these procedures are effective to
ensure that the Company is able to collect, process and disclose the information
it is required to disclose in the reports it files with the SEC within the
required time period.
 
 Internal
Financials Controls
 
 The
Company maintains a system of internal controls designed to provide reasonable
assurance that transactions are executed in accordance with management's general
or specific authorization; transactions are recorded as necessary to (1) permit
preparation of financial statements in conformity with accepted accounting
principles generally accepted in the United States of America, and (2) maintain
accountability for assets. Access to assets is permitted only in accordance with
management's general or specific authorization.
 
 Since the
date of the most recent evaluation of the Company's internal controls by the
Chief Executive and Chief Financial Officers, there have been no significant
changes in such controls or in other factors that could have significantly
affected those controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
 
 Internal
Control over Financial Reporting
 
 It is the
responsibility of the Company’s management to establish and maintain adequate
internal control over financial reporting. However, due to its small size and
limited financial resources the Company’s chief financial officer, a member of
management, has been the only employee with part time assistance from two staff
people, principally involved in accounting and financial reporting. The Board of
Directors has recognized that as a result, there is no segregation of duties
within the accounting function, leaving all aspects of financial reporting and
physical control of cash and equivalents in the hands of the CFO. Based on the
integrity and trustworthiness of the Company's chief financial officer, the
Board of Directors has had confidence that there have been no irregularities in
the Company’s financial reporting or in the protection of its
assets.
 
  20
  Our
independent auditors have reported to our Board of Directors certain matters
involving internal controls that our independent auditors considered to be a
reportable conditions and a material weakness, under standards established by
the American Institute of Certified Public Accountants. The reportable
conditions and material weaknesses relates to the December 31, 2004 financial
close process and absence of appropriate reviews and approvals of transactions
and accounting entries. Certain adjustments were identified in the annual audit
process, related to the recording of stock-based compensation, exercise of
warrants, asset acquisition, inventory, deferred debt and beneficial conversion
feature on convertible debentures, amortization of deferred debt and beneficial
conversion features, conversion of convertible debentures and discontinued
operations. The adjustments related to these matters were made by the Company in
connection with the preparation of the audited financial statements for the year
ended December 31, 2004.
 
 Given
these reportable conditions and material weaknesses, management devoted
additional resources to resolving questions that arose during our year-end
audit. As a result, we are confident that our financial statements for the year
ended December 31, 2004 fairly present, in all material respects, our financial
condition and results of operations.
 ******
 ***PART
III***
 
 **ITEM
9.****DIRECTORS
AND EXECUTIVE OFFICERS OF REGISTRANT.**
 
 Each of
Registrant's directors is elected by the stockholders to a term of one year and
serves until his or her successor is elected and qualified. Each of the officers
is elected by the Board of Directors to a term of one year and serves until his
or her successor is duly elected and qualified, or until he or she is removed
from office. The Board of Directors has no nominating, auditing or compensation
committees.
 
 The
names, addresses, ages and positions of the current officers and directors is
set forth below:
 
 Name
      and Address
    Age
    Position(s)Willard
      G. McAndrew III
    50
    Chairman,
      President, Chief Executive Officer and DirectorRoger
      Wurtele
    58
    Vice
      President, Chief Financial Officer and DirectorJolie
      Kahn
    40
    General
      Counsel and SecretaryRobert
      Farris
    78
    Director
 
 Background
of Officers and Directors
 
 Willard
G. McAndrew, III. Since December 2001, Mr. McAndrew has served as Chairman,
President, Chief Executive Officer and a Director of Energy & Engine
Technology Corporation. From 1998 through 2002 Mr. McAndrew was the President
and Manager of Millennium Fuels USA, LLC, an affiliate of Millennium Fuels
Corporation. Mr. McAndrew was also the President and the Chairman of the Board
of Directors of Millennium Fuels Corporation from 1998 to 2002. Millennium was a
developer and producer of both fuels and alternative fuels, domiciled in Plano,
Texas. From 1996 until 1998, he served as president and a director of McAndrew
Management II, Inc., a developer and operator of oil and gas production projects
located in Richardson, Texas. Mr. McAndrew devotes his time as required to the
business of Energy & Engine Technology Corporation.
 
  21
  Roger
Wurtele. Since December 2001, Mr. Wurtele has served as vice president and chief
financial officer and as a director of Energy & Engine Technology
Corporation. From 1998 through December 2001, he served as the Manager and
Principal Financial Officer of Millennium Fuels, USA, LLC. Millennium Fuels,
USA, LLC was a developer of products in both the fuels and alternative fuels
industries. From 1995 until 1998, Mr. Wurtele was the President and a director
of Controllership Services, Inc., a provider of financial consulting services
located in Shreveport, Louisiana. Mr. Wurtele holds a Bachelors Degree in
Business Administration from the University of Nebraska and is admitted as a
Certified Public Accountant in the states of Colorado and Louisiana. He devotes
his time as required to the business of Energy & Engine Technology
Corporation.
 
 Jolie
Kahn. Ms. Kahn received her Bachelor of Arts degree in Government from Cornell
University in Ithaca, New York and graduated magna cum laude from the Benjamin
Cardozo School of Law in New York, New York in 1989, where she was a member of
its Law Review and an Alexander Fellow. Since that time, she has represented
both private and public companies in varied aspects of general corporate,
securities, corporate finance and mergers and acquisitions law and transactions.
In addition, Ms. Kahn has counseled clients in areas related to their general
day-to-day business affairs, such as employment and taxation issues. Ms. Kahn's
career began at Weil, Gotshal & Manges, LLP in New York City, and most
recently, she had acted as an in-house counsel to a “high tech” company in Boca
Raton, Florida. Ms. Kahn has been with the Company since March 2002, and was
Counsel to Seisint, Inc. in Boca Raton, FL, from March 2001 to March 2002. From
January 2000 through October 2002, she was Of Counsel to Braverman, Kaskey &
Caprara in Philadelphia, PA, and from October 1998 through January 2000, she was
Of Counsel to Meyer, Suozzi, English & Klein, of Mineola, NY.
 
 Robert
Farris. Mr. Farris serves as a Director of EENT. After three years in the U.S.
Army in Korea, Mr. Farris became the Safety Director for Valley Transit Company
in 1955. In 1963, he became President, a position he holds to the present day.
Mr. Farris has also served as Director for Texas State Bank, Harlingen, Texas,
Texas Regional Bancshares, McAllen, Texas, National Bus Traffic Association,
Texas Motor Transportation Association, Texas Tourist Council and Arxa
International Energy Corporation. Mr. Farris' civic activities include Board of
Trustees Marine Military Academy, President of Harlingen Chamber of Commerce,
Harlingen Industrial foundation, Inc., Lower Rio Grande Valley Chamber of
Commerce, Algodon Club, Crusade Chairman for the American Cancer Society, Vice
President Rio Grande Council of Boy Scouts of America, Board Member for the
First United Methodist Church of Harlingen and Member of Phi Gamma Delta. Mr.
Farris has been recognized for his accomplishments by Who's Who in America and
Who's Who in Finance and Industry.
 
 To the
best of Registrant's knowledge, all Section 16 reporting requirements were
timely met by all of Registrant's officers, directors and control
persons.
 
 **ITEM
10.****EXECUTIVE
COMPENSATION**
 
 As of
December 31, 2004, the CEO had received annual compensation of $210,000 and
1,100,000 (1,000,000 shares of restricted stock and 100,000 shares of “S-8”
stock) shares of stock for his services, the CFO had received annual
compensation of $195,000 and 1,100,000 (1,000,000 shares of restricted stock and
100,000 shares of “S-8” stock) shares of stock for his services and the General
Counsel had received annual compensation of $180,000 and 1,100,000 (1,000,000
restricted shares and 100,000 shares of “S-8” stock) shares of stock for her
services.
 
 
   22
   SUMMARY
COMPENSATION TABLE
 
 ANNUAL
      COMPENSATION
    LONG
      TERM COMPENSATION
 
 Awards
    Payouts
 
 **Name
      and Principal Position**
    **Year**
    **Salary**
    **Year**
    **Salary**
    **Bonus**
    **Other
      annual compensation**
    **Restricted
      Stock Awards**
    **S8
      Stock Awards**
    **Securities
      underlying Options/SARs**
    **LTIP
      Payouts**
    **All
      other compensation**CEO
      Willard
      G. McAndrew
    2003
    $180,000
    2004
    $210,000
    
    
    1,000,000
      sh.
    100,000
      sh.CFO
      Roger
      Wurtele
    2003
    $180,000
    2004
    $195,000
    
    
    1,000,000
      sh
    100,000
      shGeneral
      Counsel Jolie Kahn
    2003
    $180,000
    2004
    $180,000
    
    
    1,000,000
      sh.
    100,000
      sh.
 
 
   23
   On
November 21, 2003 registrant's Board of Directors adopted registrant's 2003-2004
Consulting Services Plan (the “Consulting Plan”) in order to advance the
interests of the registrant by rewarding, encouraging and enabling the
acquisition of larger personal proprietary interests in the registrant by
employees, directors and former directors of, and contractors and consultants
to, the registrant, and its Subsidiaries who have: 1) served without salaries or
other compensation during time periods for which stock is awarded ; and 2)
assisted the registrant with support services for its business development. The
Consulting Plan provides for an aggregate of 1,000,000 shares of the
registrant's $.001 par value common stock, currently valued at $.095 per share
(but subject to change on market fluctuation) that may be awarded from time to
time at the sole discretion of the Board of Directors. The Plan was filed as an
Exhibit to Registrant's Form 8-K, filed with the U.S. Securities and Exchange
Commission on November 24, 2003. Approximately 990,000 shares have been issued
under this Plan as of the date of filing this Annual Report.
 
 On
December 22, 2003, Registrant's Board of Directors voted unanimously to
implement salary increases as follows:
 
 CEO:
Salary to increase to $210,000 per year on the first day of the first month in
which the Corporation ships 30 AXP 1000 units; salary to increase to $240,000
per year on the first day of the first month in which the Corporation ships 1000
AXP 1000 units; and salary to increase to $260,000 per year on the earlier of
(i) January 1, 2005 and (iii) the first day of the first month in which the
Corporation ships 250,000 AXP 1000 units.
 
 CFO:
Salary to increase to $195,000 per year on the first day of the first month in
which the Corporation ships 30 AXP 1000 units; salary to increase to $210,000
per year on the first day of the first month in which the Corporation ships 1000
AXP 1000 units; and salary to increase to $230,000 per year on the earlier of
(i) January 1, 2005 and (iii) the first day of the first month in which the
Corporation ships 250,000 AXP 1000 units.
 
 General
Counsel: Salary to increase to $200,000 per year on the earlier of (i) January
1, 2005 and (ii) the first day of the first month in which the Corporation ships
250 AXP 1000 units.
 
 In
addition, the CEO is authorized, in his discretion to issue up to an additional
25% of cash compensation per officer in each calendar year for incentive bonuses
and discretionary raises.
 
 As of
April 8, 2005, the Company entered into five year employment contracts with each
of the CEO, CFO, and General Counsel with salaries of $260,000, $230,000 and
$200,000 (effective as of January 1, 2005), with each entitled to receive 25,000
warrants per month, with conversion prices at market price on the date of
issuance. Each is entitled to certain benefits, such as severance pay, upon a
not for cause termination. Each of these executives has agreed to not receive
payment of salary increases until business conditions permit, with the increases
accruing until cash flow permits payment thereof.
 ****
 **ITEM
11.****SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**
 
 The
following table sets forth the total number of shares owned beneficially by each
of Registrant's directors, officers and key employees, individually as of
December 31, 2004 and as a group, and the present owners of 5% or more of total
outstanding shares. The stockholders listed below have direct ownership of their
shares and possess sole voting and dispositive power with respect to the
shares.
  24
  
 Title
      of Class
    Name
      and Address of Beneficial Owner
    Amount
      and Nature of Beneficial Ownership
    Percent
      of ClassCommon
      Stock
    Willard
      G. McAndrew III, 5308 W. Plano Parkway, Plano, Texas 75093
    11,257,997(D)*
    09.28%Common
      Stock
    Roger
      N. Wurtele,
      5308
      W. Plano Parkway Plano, Texas 75093
    11,207,997(D)*
    09.24%Common
      Stock
    Jolie
      G. Kahn,
      5308
      W. Plano Parkway, Plano, Texas 75093
    7,218,518(D)*
    05.95%All
      Officers and Directors as a Group
    
    29,684,512(D)*
    24.48%Common
      Stock
    Kevin
      W. Smyth
    21,759,654(D)*
    17.94%
 
 *(D) =
Direct Beneficial Ownership
 
 **ITEM
12.****CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 The
Company leases its manufacturing facility from Freddy Pereira, an officer of its
subsidiary, BMZ Generators Technology, Inc.
 
 **ITEM
13.****REPORTS
ON FORM 8-K**
 
 (a)
    Registrant's
      financial statements for the years ended December 31, 2004 and December
      31, 2003 are included herein.(b)
    Registrant's
      Form 8-K, filed on July 17, 2004 is incorporated by reference herein in
      its entirety.(c)
    Registrant's
      Form 8-K, filed on August 10, 2004 is incorporated by reference herein in
      its entirety.(d)
    Registrant's
      Form 8-K/A, filed on September 23, 2004 is incorporated by reference
      herein in its entirety.(e)
    Registrant's
      Form 8-K, filed on October 21, 2004 is incorporated by reference herein in
      its entirety.(f)
    Registrant's
      Form 8-K, filed on November 3, 2004 is incorporated by reference herein in
      its entirety.(g)
    Registrant's
      Form 8-K, filed on November 5, 2004 is incorporated by reference herein in
      its entirety.(h)
    Registrant's
      Form 8-K, filed on December 14, 2004 is incorporated by reference herein
      in its entirety.
 
  25
  **ITEM
14.****PRINCIPAL
ACCOUNTANT FEES AND SERVICES**
 
 Audit
Fees
 
 For the
audit of the Registrant's annual financial statements for 2003 and 2004, and for
reviews of the financial statements included in Registrant's Forms 10-QSB for
the fiscal quarters ended March 31, 2004, June 30, 2004 and September 30, 2004,
Registrant has been billed and expects to be billed the following amounts by
Marcum & Kliegman, LLP:
  FYE
      2003 audit:
    $45,964.001st
      3 Quarters 10-QSB 2004:
    $24,862.00FYE
      2004 audit:
    $60,000.00
      (est)
 
 Tax
Fees
 
 None.
 
 All
Other Fees
 
 For the
most recent fiscal year, the aggregate fees billed for services rendered by
Marcum & Kliegman, LLP, other than services covered in Exchange Act Rule
14a-101 Item 9(e)(1) and (2), is $19,225 and was for services in connection with
review of the Company’s SB-2. Furthermore, the Company was billed $66,283 in
connection with auditing services rendered for the acquisition of assets of BMZ
Generators, Inc.
 
 The Board
of Directors has not considered whether the services covered in “All Other Fees”
is compatible with maintaining the principal accountant's
independence.
 
 Registrant
does not have an audit committee, so sub - item (5) is
inapplicable.
 
 The
following exhibits are included herein, except for the exhibits marked with an
asterisk, which are incorporated herein by reference and can be found in
Registrant's previously filed Reports and Forms with the SEC.
 
 **Exhibit
      Number**
    **Description**
    **Page**3(i)*
    Articles
      of Incorporation3(i)*
    Amendment
      to Articles of Inc.3(i)*
    Amendment
      to Articles of Inc.3(i)
    Amendment
      to Articles of Inc.
    533(ii)*
    Bylaws3(ii)*
    Amendment
      to Bylaws4*
    Reaffirmation
      Agreement10*
    Promissory
      Note and Security Agreement10*
    Fixed
      Base Operator Agreement and Lease31.1
    302
      Consent
    5431.2
    302
      Consent
    5532.1
    906
      Consent
    5632.2
    906
      Consent
    5799(i)*
    Consulting
      Plan99(ii)*
    Purchase
      and Sale Agreement99(iii)*
    Consulting
      Plan99(iv)*
    Consulting
      Plan 2003- 200499.13
    Form
      of Employment Contract
    58
   26
  **SIGNATURES**
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 Energy
& Engine Technology Corporation
 
 Dated:
    April
      15, 2005
    By:
    /s/
      Willard G. McAndrew IIIPresident,
      CEO and Chairman of the Board
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Registrant and in the
capacities and on the dates indicated:
 
 
 By:
    /s/
      Willard G. McAndrew IIIPresident,
      Chief Executive Officer and Chairman of the BoardDated:
    April
      15, 2005
 
 By:
    /s/
      Roger WurteleVice
      President, Secretary, Chief Financial Officer and
  DirectorDated:
    April
      15, 2005
 
 
  27
  ENERGY
& ENGINE TECHNOLOGY CORPORATION
 AND
SUBSIDIARIES
 
 CONTENTS
 
 Page
 REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    29CONSOLIDATED
      FINANCIAL STATEMENTSBalance
      Sheet
    30Statements
      of Operations
    31Statements
      of Stockholders' (Deficiency) Equity
    32Statements
      of Cash Flows
    34NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
    36
 
  28
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 
 
 To the
Board of Directors and Stockholders of
 Energy
& Engine Technology Corporation
 
 We have
audited the accompanying consolidated balance sheet of Energy & Engine
Technology Corporation and Subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, stockholders’ (deficiency) equity, and
cash flows for each of the years ended December 31, 2004 and 2003. 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. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Energy & Engine
Technology Corporation and Subsidiaries as of December 31, 2004, and the results
of their operations and their cash flows for the years ended December 31, 2004
and 2003, in conformity with U.S. generally accepted accounting principles.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continued as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred a net loss of $5,849,366
and has working capital deficit of $247,533. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
plans regarding those matters also are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
 
 
 /s/
Marcum & Kliegman LLP
 
 New York,
New York
 March 8,
2005 (except for Note 16(D) as to which the date is March 10, 2005, Note 16(E)
and Note (F) as to which the dates are March 16, 2005, Note 16(G) as to which
the date is April 13, 2005, Note 16(H) as to which the date is March 31, 2005,
and Note 16(L) as to which the date is April 8, 2005).
 
  29
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEET
 December
31, 2004
 
 ASSETS
 
 CURRENT
      ASSETSCash
      and cash equivalents
    
    $
    46,338Accounts
      receivable
    
    
    4,366Inventories
    
    
    557,689Prepaid
      expenses and other current assets
    
    
    173,900Assets
      of discontinued operations
    
    
    311,687Total
      Current Assets
    
    
    1,093,980PROPERTY
      AND EQUIPMENT,
      Net
    
    
    261,054OTHER
      ASSETSIntangible
      assets, net
    
    
    776,287Goodwill
    
    
    146,518Total
      Other Assets
    
    
    922,805TOTAL
      ASSETS
    
    $
    2,277,839
 
 LIABILITIES
AND STOCKHOLDERS' EQUITY
 
 CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
    
    $
    384,559Accrued
      expenses officers
    
    
    358,917Convertible
      debenture payable net of discount of $282,475
    
    
    166,525Notes
      payable, stockholders, net of deferred debt discount of
      $39,403
    
    
    329,501Liabilities
      of discontinued operations
    
    
    102,011TOTAL
      LIABILITIES
    
    
    1,341,513STOCKHOLDERS'
      EQUITYCommon
      stock, $.001 par value, 180,000,000 shares authorized,
      120,528,374
      shares
      issued and outstanding
    
    
    120,529Additional
      paid-in capital
    
    
    13,646,469Accumulated
      deficit
    
    
    (12,830,672
    )TOTAL
      STOCKHOLDERS' EQUITY
    
    
    936,326TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
    
    $
    2,277,839
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  30
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For the
Years Ended December 31, 2004 and 2003
 
 2004
    
    
    2003NET SALES
    
    $
    207,165
    
    $
    4,341COST
      OF SALES
    
    
    242,942
    
    
    7,417GROSS
      PROFIT
    
    
    (35,777
    )
    
    (3,076
    )OPERATING
      EXPENSESSelling
      general and administrative expenses
    
    
    1,969,982
    
    
    1,080,824Stock
      based compensation
    
    
    1,882,566
    
    
    3,355,718TOTAL
      OPERATING EXPENSES
    
    
    3,852,548
    
    
    4,436,542OPERATING
      LOSS
    
    
    (3,888,325
    )
    
    (4,439,618
    )OTHER
      EXPENSEInterest
      expense
    
    
    1,689,305
    
    
    206,851Terminated
      offering costs
    
    
    --
    
    
    130,000TOTAL
      OTHER EXPENSE
    
    
    1,689,305
    
    
    336,851LOSS
      FROM CONTINUING OPERATIONS
    
    
    (5,577,630
    )
    
    (4,776,469
    )LOSS
      FROM DISCONTINUED OPERATIONS
      (See
      Note 15)
    
    
    (271,736
    )
    
    (265,188
    )NET
      LOSS
    
    $
    (5,849,366
    )
    $
    (5,041,657
    )BASIC
      AND DILUTED NET LOSS PER COMMON SHARE:Net
      loss per common share from continuing operations
    
    $
    (0.05
    )
    $
    (0.12
    )Net
      loss per common share from discontinued operations
    
    $
    (0.00
    )
    $
    (0.01
    )Net
      loss per common share
    
    $
    (0.06
    )
    $
    (0.13
    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
    
    
    104,731,738
    
    
    40,340,934
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
   31
   ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
 For the
Years Ended December 31, 2004 and 2003
 
 CommonShares
    Amount
    Additional
      Paid-in Capital
    Subscriptions
      Receivable
    Accumulated
      Deficit
    Deferred
      Compensation
    TotalBALANCE- January 1, 2003
    23,000,349
    $23,001
    $1,404,405
    $--
    $(1,939,649)
    $--
    $(512,243)Issuance
      of common stock to consultants
    3,959,000
    3,959
    539,762
    --
    --
    --
    543,721Issuance
      of common stock to officers and employees
    22,648,685
    22,649
    2,896,099
    --
    --
    --
    2,918,748Issuance
      of common stock in connection with note payable
    868,058
    868
    61,495
    --
    --
    --
    62,363Issuance
      of warrants
    --
    --
    162,744
    --
    --
    --
    162,744Issuance
      of common stock in connection with private placements
    21,872,213
    21,872
    580,157
    (15,000)
    --
    --
    587,029Issuance
      of common stock in connection with conversion of notes
    payable
    3,716,667
    3,717
    240,950
    --
    --
    --
    244,667Issuance
      of common stock in connection with convertible debenture relating to
      terminated offering
    722,222
    722
    136,500
    --
    --
    --
    137,222Issuance
      of common stock in connection with exercise of warrant
    570,000
    570
    --
    --
    --
    --
    570Issuance
      of common stock in connection with assets purchase
    agreements
    1,200,000
    1,200
    172,800
    --
    --
    --
    174,000Deferred
      compensation
    --
    --
    --
    --
    --
    (106,750)
    (106,750)Net
      loss
    --
    --
    --
    --
    (5,041,657)
    --
    (5,041,657)BALANCE
      - December 31, 2003
    78,557,194
    $78,558
    $6,194,912
    $(15,000)
    $(6,981,306)
    $(106,750)
    $(829,586)
 The
accompanying notes are an integral part of these consolidated financial
statements.
   32
   ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
 For the
Years Ended December 31, 2004 and 2003
 
 CommonShares
    Amount
    Additional
      Paid-in Capital
    Subscriptions
      Receivable
    Accumulated
      Deficit
    Deferred
      Compensation
    TotalBALANCE
      - December 31, 2003
    78,557,194
    $78,558
    $6,194,912
    $(15,000)
    $(6,981,306)
    $(106,750)
    $(829,586)Issuance
      of common stock to consultants
    184,000
    184
    38,006
    
    
    
    38,190Issuance
      of common stock to officers and employees
    4,010,690
    4,011
    1,705,405
    
    
    
    1,709,416Issuance
      of common stock in connection with private placements, net of $85,000 of
      offering costs
    17,140,000
    17,140
    1,795,460
    15,000
    
    
    1,827,600Issuance
      of common stock in connection with anti-dilution agreement
    6,090,141
    6,090
    (6,090)
    
    
    
    --Issuance
      of common stock in connection with conversion of debt
    10,445,229
    10,445
    1,301,597
    
    
    
    1,312,042Beneficial
      Conversion Feature on convertible debenture
    
    
    920,833
    
    
    
    920,833Issuance
      of common stock in connection with acquisition
    2,801,120
    2,801
    697,479
    
    
    
    700,280Issuance
      of warrants
    
    
    829,167
    
    
    
    829,167Exercise
      of warrants
    1,300,000
    1,300
    169,700
    
    
    
    171,000Amortization
      of deferred compensation
    
    
    
    
    
    106,750
    106,750Net
      loss
    
    
    
    
    (5,849,366)
    
    (5,849,366)BALANCE
      - December 31, 2004
    120,528,374
    $120,529
    $13,646,469
    $--
    $(12,830,672)
    $--
    $936,326
 The
accompanying notes are an integral part of these consolidated financial
statements.
   33
   ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For the
Years Ended December 31, 2004 and 2003
 
 2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet
      loss from continuing operations
    
    $
    (5,577,630
    )
    $
    (4,776,469
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
    
    
    143,535
    
    
    1,202Stock-based
      compensation
    
    
    1,882,566
    
    
    3,355,718Amortization
      of debt discount
    
    
    1,496,507
    
    
    143,572Terminated
      offering costs
    
    
    0
    
    
    130,000Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    894
    
    
    197,365Inventory
    
    
    (314,022
    )
    
    (151,621
    )Prepaid
      expenses and other current assets
    
    
    (50,137
    )
    
    (122,526
    )Accounts
      payables and accrued expenses
    
    
    42,995
    
    
    197,365Accrued
      expenses officer
    
    
    (228,813
    )
    
    181,549TOTAL
      ADJUSTMENTS
    
    
    2,973,525
    
    
    3,932,624NET
      CASH USED IN OPERATING ACTIVITIES
    
    
    (2,604,105
    )
    
    (843,845
    )CASH
      FLOWS FROM DISCONTINUED OPERATIONSNet
      loss from discontinued operations
    
    
    (271,736
    )
    
    (265,188
    )Changes
      in:Discontinued
      assets
    
    
    167,038
    
    
    (73,222
    )Discontinued
      liabilities
    
    
    (84,447
    )
    
    36,652NET
      CASH USED IN DISCONTINUED OPERATIONS
    
    
    (189,145
    )
    
    (301,758
    )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
    
    
    (148,941
    )
    
    (1,670
    )Cash
      paid for intangible assets
    
    
    (65,000
    )
    
    0Cash
      paid for acquisition
    
    
    (500,000
    )
    
    0NET
      CASH USED IN INVESTING ACTIVITIES
    
    
    (713,941
    )
    
    (1,670
    )CASH
      FLOWS FROM FINANCING ACTIVITIESPayment
      of proceeds from notes payable, stockholders, net
    
    
    (8,095
    )
    
    514,749Proceeds
      from convertible debenture
    
    
    1,700,000
    
    
    0Proceeds
      from notes payable, net
    
    
    0
    
    
    24,131Repayment
      of notes payable
    
    
    0
    
    
    0Proceeds
      from the issuance of common stock, net of offering costs
    
    
    1,827,600
    
    
    587,600Proceeds
      from exercise of warrants
    
    
    27,000
    
    
    0NET
      CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    3,546,505
    
    
    1,126,480NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    39,314
    
    
    (20,793
    )CASH
      AND CASH EQUIVALENTS - Beginning
    
    
    7,024
    
    $
    27,817CASH
      AND CASH EQUIVALENTS - Ending
    
    $
    46,338
    
    $
    7,024SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for:Interest
    
    $
    42,193
    
    $
    10,022
 The
accompanying notes are an integral part of these consolidated financial
statements.
   34
   ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For the
Years Ended December 31, 2004 and 2003
 
 Non-cash
investing and financing activities:
 
 During
the year ended December 31, 2003, the Company issued warrants to purchase
1,220,000 shares of common stock in connection with certain notes payable,
stockholders. The fair market value of the warrants granted using the
Black-Scholes pricing model was $162,744 and was recorded as deferred debt
discount.
 
 During
the year ended December 31, 2003, the Company issued 868,058 shares of the
Company's common stock in connection with notes payable, stockholders. The fair
market value of the common stock at issuance date was $62,362 and was recorded
as deferred debt discount.
 
 During
the year ended December 31, 2003, certain stockholders converted their notes
payable and accrued interest into 3,716,667 shares of the Company's common stock
valued at $244,667.
 
 In
connection with two asset purchase agreements, the Company issued an aggregate
of 1,200,000 shares of the Company's common stock and a $30,000 promissory note.
The fair market value of the common stock issued at the date of the agreements
was $174,000 and the assets acquired were inventory, property and equipment and
intangible assets.
 
 During
the year ended December 31, 2004, several stockholders converted their notes
payable and accrued interest into 510,424 shares of the Company's common stock
valued at $61,874.
 
 During
the year ended December 31, 2004, the Company issued warrants for consulting
services. The fair market value of the warrants granted using the Black-Scholes
pricing model was $50,000.
 
 During
the year ended December 31, 2004, the Company issued 2,801,120 shares of Common
Stock valued at $700,280 relating to the asset acquisition of BMZ Generators
(See Note 14).
 
 During
the year ended December 31, 2004, in connection with the convertible debentures
the Company issued warrants with a fair market value of $779,167, which gave
rise to a beneficial conversion feature of $920,833.
 
 During
the year ended December 31, 2004, a stockholder exercised 1,000,000 warrants to
purchase the Company’s stock for $144,000. The proceeds were used to reduce the
shareholders outstanding loan balance.
 
 During
the year ended December 31, 2004, several investors converted their convertible
debenture into 9,934,805 of the Company’s common stock valued at
$1,251,000.
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  35
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 -Description
of Business, Going Concern and Management's Plans
 
 Organization
and Principal Business Activity
 
 Energy
& Engine Technology Corporation (“EENT” or the “Company”) was incorporated
under the name Bidder Communications, Inc. in Nevada on November 16, 1999. It
changed its name from Bidder Communications, Inc. (“Bidder”) to Energy &
Engine Technology Corporation on December 5, 2001.
 
 The
consolidated financial statements include the accounts of EENT and its wholly
owned subsidiaries, Gas Gathering Enterprises, LLC (“Gas Gathering”)
(previously, Southern States Gas Gathering, LLC), Wind Dancer Aviation Services,
Inc. (“Wind Dancer”) and BMZ Generators Technology, Inc. (“BMZ”) collectively
referred to as the “Company.” In December 2004, both Gas Gathering and Wind
Dancer were deemed to be discontinued operations (see Note 15).
 
 EENT is
the developer and marketer of AXP 1000 auxiliary power generator for long haul
trucks. During the fourth quarter 2003 the Company began manufacturing
operations and had sales of the AXP 1000 power generators as well as third and
fourth quarter operation of its BMZ Generators business.
 
 Going
Concern and Management Liquidity Plans
 
 Our
independent registered public accounting firm has noted in their report on our
2004 financial statements that there are certain conditions including the net
loss the Company incurred in the amount of $5,849,366 during the year ended
December 31, 2004 and the working capital deficiency of $247,533 that existed at
the balance sheet date that raise substantial doubt as to our ability to
continue as a going concern. These consolidated financial statements do not
include any adjustments relating to the recovery of the recorded assets or the
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
 
 Registrant
believes that its existing cash balance and future operating cash flows may not
be sufficient for near term operating needs unless it is able to quickly and
consistently expand its operations and is exploring various opportunities to
raise additional capital. The extent to which such sources will be sufficient to
meet Registrant's anticipated cash requirements is subject to a number of
uncertainties, the most important of which is Registrant's ability to generate
sufficient cash flow to support its business operations.
 
 Consolidation
 
 The
consolidated financial statements include the accounts of EENT and its wholly
owned subsidiaries. All significant inter-company transactions and balances have
been eliminated in consolidation.
 
 Revenue
Recognition
 
 *BMZ/AXP
1000 Power Generators*
 Revenue
is recognized at the time that the generator is delivered to the dealer or
customer.
  36
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 - Description
of Business, Going Concern and Management's Plans ,
continued
 
 Cash
and Cash Equivalents
 
 The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less and money market accounts to be cash
equivalents.
 
 NOTE 2 - Summary
of Significant Accounting Policies
 
 Inventories
 
 Inventory
consists of aviation fuel, parts, materials and engines and is valued at the
lower of cost or market, cost being determined using the first in/first-out
basis.
 
 Property
and Equipment
 
 Property
and Equipment are stated at cost. Maintenance and repairs are charged to expense
as incurred; costs of major additions and betterments are capitalized. When
property and equipment are sold or otherwise disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and resulting gain or
loss is reflected in the statement of operations.
 
 Impairment
of Long-Lived Assets
 
 The
Company evaluates its property and equipment and intangible assets subject to
amortization for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
 
 Goodwill
 
 Goodwill
is tested for impairment at least on an annual basis or more frequently if
events or changes in circumstances indicate that the asset might be impaired. We
determined that there was no impairment to goodwill as of December 31,
2004
 
 Research
and Development
 
 Research
and development costs are expensed as incurred. Research and development costs
for the years ended December 31, 2004 and 2003 were $169,271 and $126,785,
respectively and are included in selling, general and administrative
expenses.
 
 
  37
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 2 - Summary
of Significant Accounting Policies ,
continued
 
 Income
Taxes
 
 The
Company accounts for income taxes using the liability method, which requires the
determination of deferred tax assets and liabilities based on the differences
between the financial and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which differences are expected to reverse.
Deferred tax assets are adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
 
 Depreciation
and Amortization
 
 Depreciation
of machinery and equipment, furniture, fixtures and gas gathering equipment is
computed on the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives. The cost of leasehold
improvements is amortized over the lesser of the estimated useful life of the
assets or the length of the lease.
 
 Advertising
Costs
 
 Advertising
costs are expensed as incurred. For the years ended December 31, 2004 and 2003,
advertising costs were $69,165 and $61,128, respectively.
 
 Net
Loss Per Share
 
 Basic
earnings or loss per share (“EPS”) is computed by dividing income or loss
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is based on the weighted- average number
of shares of common stock and common stock equivalents outstanding at year-end.
Common stock equivalents have been excluded from the weighted-average shares for
2004 and 2003, as inclusion is anti-dilutive. Potentially dilutive securities
(warrants) of 18,398,974 and 1,355,000 are outstanding at December 31, 2004 and
2003, respectively.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  38
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 2 - Summary
of Significant Accounting Policies ,
continued
 
 Stock-Based
Compensation
 
 In
October 1995, Statement of Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation” (“SFAS 123”) was issued. SFAS 123 prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options, restricted stock, employee stock purchase
plans and stock appreciation rights. SFAS 123 requires compensation expense to
be recorded (i) using the new fair value method or (ii) using the existing
accounting rules prescribed by Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) and related
interpretations with pro forma disclosure of what net income and earnings per
share would have been had the Company adopted the new fair value method. The
Company intends to continue to account for its stock based compensation plans in
accordance with the provisions of APB 25.
 
 The
Company adopted SFAS No. 148 “Accounting for Stock-Based Compensation -
Transition and Disclosure.” (“SFAS 148”). This statement amended SFAS 123,
“Accounting for Stock-Based Compensation.” As permitted under SFAS 123, the
Company continues to apply APB 25. As required under SFAS 148, the following
table presents pro forma net loss attributable to common stockholders for basic
and diluted net loss per share as if the fair value-based method had been
applied to all awards.
 
 YEARS
      ENDEDDECEMBER
      31, 2004
    
    
    DECEMBER
      31, 2003Net
      loss attributable to common stockholders - as reported
    
    $
    (5,849,366
    )
    $
    (5,041,657
    )Stock-based
      employee compensation cost determined under fair value method, net of tax
      effects
    
    
    (2,794,350
    )
    
    --Net
      loss attributable to common stockholders - pro forma
    
    
    (8,643,716
    )
    
    (5,041,657
    )Loss
      per shareBasic
      and diluted loss per share: net loss attributable to common stockholders -
      as reported
    
    
    (0.06
    )
    
    (0.13
    )Net
      loss attributable to common stockholders - pro forma
    
    
    (0.08
    )
    
    (0.13
    )
 
 The
Black-Scholes option valuation model was used to estimate the fair value of the
warrants granted during the year ended December 31, 2004. There were no options
granted to employees during the year ended December 31, 2004. There were no
stock options or warrants granted to employees during the year ended December
31, 2003. The model includes subjective input assumptions that can materially
affect the fair value estimates. The model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and that are
fully transferable. For example, the expected volatility is estimated based on
the most recent historical period of time equal to the weighted average life of
the options granted. Options issued under the Company's option plans have
characteristics that differ from traded options. In the Company's opinion, this
valuation model does not necessarily provide a reliable single measure of the
fair value of its employee stock options. Principal assumptions used in applying
the Black-Scholes model along with the results from the model were as
follows:
  39
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 2 - Summary
of Significant Accounting Policies ,
continued
 
 Assumptions:Risk-free
      interest rate
    3.01
      to 3.96%Dividend
    0.00%Expected
      life in years
    2.0
      to 5.0Expected
      volatility
    124
      to 155%
 
 New
Accounting Pronouncements
 
 In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123
(revised 2004) (“SFAS 123R”), “Share-Based Payment” which revised SFAS 123,
“Accounting for Stock-Based Compensation”. This statement supersedes APB 25. The
revised statement addresses the accounting for share-based payment transactions
with employees and other third parties, eliminates the ability to account for
share-based compensation transactions using APB 25 and requires that the
compensation costs relating to such transactions be recognized in the
consolidated statement of operations. The revised statement is effective as of
the first interim period beginning after June 15, 2005. The Company is currently
evaluating the provisions of SFAS 123R and will adopt it on December 15, 2005 as
required.
 
 In
November 2004, the FASB ratified the consensus reached by the Emerging Issues
Task Force (“EITF”), on Issue No. 03-13, “Applying the Conditions in Paragraph
42 of FASB Statement No. 144 in Determining Whether to Report Discontinued
Operations”. The Issue provides a model to assist in evaluating (a) which cash
flows should be considered in the determination of whether cash flows of the
disposal component have been or will be eliminated from the ongoing operations
of the entity and (b) the types of continuing involvement that constitute
significant continuing involvement in the operations of the disposal component.
Should significant continuing ongoing involvement exist, then the disposal
component shall be reported in the results of continuing operations on the
consolidated statements of operations and cash flows. The Company is currently
evaluating EITF No. 03-13 and will adopt it as required.
 
 In
November 2004, the FASB issued SFAS No. 151 “Inventory Costs” (“SFAS 151”) which
amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material. This Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal.” In addition, this Statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The Company is currently evaluating the
provisions of SFAS 151 and will adopt it on November 1, 2005, as
required.
  40
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 3 - Property
and Equipment
 
 Property
and equipment at December 31, 2004 consist of the following:
 
 Amount
    Estimated
      Useful LivesMachinery
      and Equipment
    $235,197
    5
      yearsFurniture
      and Fixtures
    45,293
    5
      yearsLeasehold
      Improvements
    6,558
    Life
      of lease$287,048Less:
      Accumulated depreciation
    (25,994)Property
      and Equipment, Net
    $261,054
 
 Depreciation
expense for the years ended December 31, 2004 and 2003 was $24,542 and $1,202,
respectively.
 
 NOTE 4 - Intangible
Assets
 
 Intangible
assets at December 31, 2004 consists of the following:
 
 Amount
    Estimated
      Useful LivesIntellectual
      Property
    $65,000
    4
      yearsIntellectual
      Property
    700,280
    4
      yearsTrade
      Name
    60,000
    4
      yearsTrade
      Secrets
    20,000
    3
      yearsNon-compete
    50,000
    2
      years$895,280Less:
      accumulated amortization
    (118,993)Intangible
      Assets, Net
    $776,287Goodwill
    146,518
    N/A
 
 Amortization
expense for the years ended December 31, 2004 and 2003 was $118,993 and $0,
respectively.
 
 Future
amortization expense for the above intangible assets as of December 31, 2004 is
as follows:
 
 For
      the year ending December 31,
    
    
    Amount2005
    
    $
    237,9872006
    
    
    225,4872007
    
    
    209,6532008
    
    
    103,160Total
    
    $
    776,287
  41
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 5 - Notes
Payable Stockholders
 
 On
January 21, 2003, as part of a private placement an investor purchased one unit
for $25,000. This unit consists of a $25,000 note payable which accrues interest
at 10% and was due on January 7, 2004 as well as 25,000 shares of the Company's
restricted common stock plus 25,000 warrants to purchase the Company's common
stock at an exercise price of $0.10 per warrant exercisable through January 7,
2004 plus 25,000 warrants to purchase the Company's common stock at an exercise
price of $0.25 per warrant exercisable through January 7, 2005. The repayment
date has been informally extended until January 7, 2006 on the same
terms.
 
 During
the second quarter of 2003 as part of a private placement offering investors
purchased 10 units for an aggregate of $100,000. Each unit consists of a $10,000
note payable, which accrues interest at 20% and is due in twelve months as well
as 2,000 shares or an aggregate of 20,000 shares of the Company's restricted
common stock. During the fourth quarter of 2003 the Company entered into
termination agreements with two of these stockholders whereby the Company issued
an aggregate of 216,667 shares of the Company's restricted common stock with an
average value of $.08 per share or $17,167. The issuance of stock was in
satisfaction of $15,000 of the principal balance and accrued interest of $2,167.
The balance outstanding under these notes payable at December 31, 2004 was
$80,904. As an incentive to certain investors an additional 6,000 shares were
issued in connection with this offering. These notes, with the exception of one,
have been informally extended to May 2006.
 
 As of
December 31, 2004, the Company is in default of the terms on an outstanding note
payable with one of its stockholders. The note was due on June 10, 2004 with
principal balance due of $20,000 and accrued interest of $6,220.
 
 On June
26, 2003, in connection with an asset purchase agreement, the Company issued a
note payable in the amount of $30,000 due in three equal installments of $10,000
beginning every thirtieth day after the date of agreement plus 300,000 shares of
the Company's restricted common stock valued at $39,000. This note was settled
in full on October 21, 2004 in exchange for 100,000 shares of its Common
Stock.
 
 On July
15, 2003, the Company entered into a promissory note agreement, which was
subsequently amended on August 1, 2003 to increase the principal amount from
$20,000 to $40,000. The note was also amended to accrue interest at 5% per annum
and due on February 1, 2004. In connection with this note agreement and amended
note agreement the Company issued 200,000 shares of the Company's restricted
common stock. This note was converted on February 1, 2004 in exchange for
410,424 shares of the Company’s Common Stock valued at $41,042.
 
  42
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 5 - Notes
Payable Stockholders ,
continued
 
 On August
18, 2003, the Company entered into a note payable agreement with a stockholder
for $250,000. The Company also previously entered into three note payable
agreements with the same stockholder in the amount of $125,000 (for an aggregate
of $375,000). In connection with this note, the Company issued the stockholder
500,000 warrants, which when added to 50,000 and 300,000 warrants issued during
the years ended December 31, 2003 and 2002, respectively, in connection with a
common stock offering and 150,000 warrants issued during the year ended December
31, 2003 in connection with the notes payable, which were thereby amended and
restated, are now set to expire on August 15, 2007. The new exercise prices for
the aggregate of 1,000,000 warrants are as follows: 200,000 at $0.01, 200,000 at
$0.05, 200,000 at $0.10, 200,000 at $0.15 and 200,000 at $0.25. In connection
with one of these notes payable with the stockholder the Company also issued
617,058 shares of the Company's restricted common stock. The warrants were all
exercised in 2004 and the proceeds were used to reduced the outstanding balance
by $112,000 and the remaining outstanding balance on the loan is $263,000 which
will be paid $10,000 per month until paid in full.
 
 On
October 19, 2004, a shareholder converted its outstanding loan balance of
$20,000 into 100,000 shares of the Company’s common stock valued at
$20,000.
 
 NOTE 6 - Note
Payable and Convertible Debenture
 
 On April
17, 2003, the Company entered a note payable agreement with a distributor for
$34,000. The note accrues interest at 7% and is payable in monthly installments
of $673, principal and interest, beginning May 1, 2003 through April 1, 2008.
The balance outstanding under this note payable at December 31, 2004 was
$24,131. This note was paid off in full in connection with the sale of Wind
Dancer Aviation Services, Inc., (See Note 15).
 
 In July
2004, the Company completed a private placement to certain institutional
investors of $1,700,000 million in principal amount for a one year 7%
Convertible Debentures (the “Debentures”) and 4,358,974 Warrants due July 2007,
at an exercise price of $0.39 per share (the “Warrants”). The Registration
Statement was originally filed on August 25, 2004. The Registration Statement,
as amended from time to time, was declared effective by the Securities and
Exchange Commission on October 14, 2004. The holders of the Debentures can
convert their debt into shares of the Company's common stock at 85% of market
price per share with a floor of $0.10 and a ceiling of $0.39, subject to certain
anti-dilution adjustments.
 
 Accrued
interest under the Debentures may be paid in cash or Common Stock. In the event
of an uncured default, as defined, or a non-permitted sale of securities, the
holders of the Debentures may convert at 75% of Market Price.
 
  43
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 6 - Note
Payable and Convertible Debenture ,
continued
 
 The gross
proceeds of the $1,700,000 in July of 2004 were allocated 54% or $920,833 to the
debentures and 46% or $779,167 to the Warrants. As a result of such allocation
and conversion terms of the aforementioned debt, the Company recorded an
aggregate debt discount and beneficial conversion feature for the total amount
of the debt principal of $1,700,000. Interest expense for the year ended
December 31, 2004 includes amortization expense of $1,417,525 of the deferred
debt discount and the beneficial conversion feature on the convertible notes and
the warrants as required by EITF 98-05 and 00-27. In connection with this
private placement, the Company incurred loan costs of $180,000, which is
included in other current assets. The loan cost is amortized over the life of
the loan and amortization expense of $75,000 for the year ended December 31,
2004 is included in interest expense. During 2004, $1,251,000 of the $1,700,000
principal amount of the debentures was converted into 9,934,804 shares of the
Company’s common stock valued at $1,251,000.
 
 NOTE 7 - Accrued
Expenses, Officers
 
 Accrued
expenses officers represents unpaid payroll and bonuses to three (3) officers of
the Company. Theses amounts are non-interest bearing and have no definite
repayment terms. As of December 31, 2004 the outstanding balance in accrued
expenses officers was $358,917.
 
 NOTE 8 - Commitments
and Contingencies
 
 Operating
Leases
 
 The
Company rents office space for its corporate headquarters in Plano, Texas. This
rent is on a month-to-month basis without a formal lease agreement with a
monthly rent expense of $2,500.
 
 On July
1, 2004, the Company entered into a lease agreement for office and warehouse
facilities expiring July 31, 2014. The lessor is Freddy Pereira, a related
party.
 
 The terms
of the lessor show a fixed monthly rate of $7,514 plus other cost and expenses,
which consist of property taxes and condominium fees. Future minimum annual
lease payments at December 31, 2004 are as follows:
 
 **For
      the Years Ending December**
    
    
    **Amount**2005
    
    $
    90,1682006
    
    
    90,1682007
    
    
    90,1682008
    
    
    90,1682009
    
    
    90,168Thereafter
    
    
    450,840Total
    
    $
    901,680
 
 Rent
expense for the years ended December 31, 2004 and 2003 amounted to $113,021 and
$28,000, respectively.
 
  44
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 8 - Commitments
and Contingencies
 
 Legal
Proceedings
 
 On
October 28, 2003, the Company was served with a complaint by 600 Racing, Inc.
The complaint alleges that EENT is liable on a $150,000 judgment issued against
Millennium Fuels USA, LLC (“MFUSA”), an unrelated entity, of which Will McAndrew
and Roger Wurtele, the Company's CEO and CFO, respectively, were the Managers.
The complaint alleges that the Company engaged in a joint enterprise with MFUSA
and integrated resources with MFUSA and is thus liable on an “alter ego” theory.
 In
October 2004, the case was removed to the U.S. Bankruptcy Court for the Northern
District of Texas, as part of the pending bankruptcy of MFUSA. The debtor has
proposed a Plan of Reorganization supported by the U.S. Trustee, for settlement
by EENT of the litigation for $15,000.
 
 Other
than as stated above, Registrant is not a party to any legal
proceedings.
 
 NOTE 9 - Common
Stock
 
 During
the year ended December 31, 2003, the Company issued an aggregate 3,959,000
shares of common stock valued at $543,721 to consultants for services to be
provided.
 
 During
the year ended December 31, 2003, the Company issued an aggregate 22,648,685
shares of common stock valued at $2,918,748 to officers and employees of the
Company for services performed.
 
 During
the year ended December 31, 2003, in connection with notes payable, the Company
issued an aggregate 868,058 shares of common stock to investors valued at
$62,363.
 
 During
the year ended December 31, 2003, in connection with private placements, the
Company sold an aggregate 21,872,213 shares of common stock to investors valued
at $587,029.
 
 During
the year ended December 31, 2003, in connection with conversion of notes
payable, the Company issued an aggregate 3,716,667 shares of common stock valued
$244,667.
 
 During
the year ended December 31, 2003, in connection with convertible debenture
relating to terminated offering, the Company issued an aggregate of 722,222
shares of common stock valued at $137,222.
 
 During
the year ended December 31, 2003, in connection with exercise of warrants, the
Company issued an aggregate of 570,000 shares of common stock valued at
$570.
 
 During
the year ended December 31, 2003, in connection with asset purchase agreements,
the Company issued an aggregate of 1,200,000 shares of common stock valued at
$174,000.
 
 During
the year ended December 31, 2004, the Company issued an aggregate 184,000 shares
of common stock valued at $38,190 to consultants for services to be
provided.
 
 
  45
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 9 - Common
Stock ,
continued
 
 During
the year ended December 31, 2004, the Company issued an aggregate 4,010,690
shares of common stock valued at $1,709,416 to officers and employees of the
Company for services performed.
 
 During
the year ended December 31, 2004, in connection with private placements, the
Company sold an aggregate 17,140,000 shares of common stock to investors valued
at $1,827,600, net of offering costs of $85,000.
 
 During
the year ended December 31, 2004, in connection with an anti-dilution agreement,
the Company issued an aggregate 6,090,141 shares of common stock.
 
 During
the year ended December 31, 2004, in connection with the conversion of debt, the
Company issued an aggregate of 10,445,229 shares of common stock to investors
valued at $1,312,042.
 
 During
the year ended December 31, 2004, in connection with BMZ acquisition, the
Company issued an aggregate 2,801,120 shares of common stock valued at
$700,280.
 
 NOTE 10 - Income
Taxes
 
 The
Company recognized deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. In addition, the Company also recognizes deferred tax assets for future
tax benefits, such as net operating loss (“NOL”) carryforwards, to the extent
that realization of such benefits is more likely than not.
 
 The
components of the net deferred tax assets as of December 31, 2004 is as
follows:
 
 2004Accrued
      expenses
    
    $
    16,320Impairment
      loss from discontinued operations
    
    
    36,720NOL
      carryforwards
    
    
    3,799,500Total
      deferred tax asset
    
    
    3,852,540Valuation
      allowance
    
    
    3,852,540Net
      Deferred Tax Asset
    
    $
    --
 
 The
valuation allowance increased $1,477,540 for the year ended December 31,
2004.
 
 At
December 31, 2004, the Company had available NOL carryforwards for income tax
purposes of approximately $11,175,000, which expires at various dates through
2024. The Company will be able to utilize net operating losses of Southern
States Gas Gathering which occurred prior to its acquisition pursuant to the
limitations described in Section 382 on the Internal Revenue Service
Code.
 
  46
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 10 - Income
Taxes ,
continued
 
 A
reconciliation of the expected statutory tax rate and the effective rate is as
follows:
 
 2004
    2003Expected
      statutory rate
    34.0%
    34.0%NOL
      without tax benefit
    (34.0)
    (34.0)Total
      income taxes
    --%
    --%
 
 NOTE 11 - Consulting
Services Plan
 
 Effective
as of January 10, 2002 the Company adopted a 2002 Consulting Service Plan (“2002
Plan”) whereby 1,000,000 shares of the Company's common stock may be subject to
stock awards. Effective as of December 2, 2002 the Company adopted a 2002-2003
Consulting Service Plan (“2002-2003 Plan”) whereby an additional 1,000,000
shares of the Company's common stock may be subject to stock awards. The purpose
of the 2002 Plan and the 2002-2003 Plan is to advance interests of the Company
by rewarding employees, directors, former directors, contractors and consultants
to the Company On November 21, 2003 registrant's Board of Directors adopted
registrant's 2003-2004 Consulting Services Plan (the “Consulting Plan”) in order
to advance the interests of the registrant by rewarding, encouraging and
enabling the acquisition of larger personal proprietary interests in the
registrant by employees, directors and former directors of, and contractors and
consultants to, the registrant, and its Subsidiaries who have: 1) served without
salaries or other compensation; and 2) assisted the registrant with support
services for its business development. The Consulting Plan provides for an
aggregate of 1,000,000 shares of the registrant's $.001 par value common stock,
currently valued at $.095 per share (but subject to change on market
fluctuation) that may be awarded from time to time at the sole discretion of the
Board of Directors. As of December 31, 2004 990,000 (approximate) shares of the
Company's common stock have been issued under the 2003-2004 Plan.
 
 NOTE 12 - Warrants
 
 On
December 30, 2004, an investor exercised warrants to purchase 1,000,000 shares
of the Company's common stock at $0.14 per share or $144,000.
 
 On
December 30, 2004, an investor exercised warrants to purchase 100,000 shares of
the Company's common stock at $0.25 per share or $25,000.
 
 On
December 30, 2004, an investor exercised warrants to purchase 200,000 shares of
the Company's common stock at $0.01 per share or $2,000.
 
 During
the year ended, the Company issued 12,300,000 warrants to officers and employees
to purchase common stock with a fair value of $2,794,530.
 
 During
the year ended, the Company issued 1,215,000 warrants relating to investing
activities.
 
 During
the year ended, the Company issued 500,000 warrants to consultants with a fair
value of $50,000.
 
  47
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 12 - Warrants ,
continued
 
 Transactions
involving warrants are summarized as follows:
 
 Number
      of Warrants
    Weighted
      Average Exercise PriceBalance
      - January 1, 2003
    460,000
    $0.23Warrants
      issued during the year
    1,470,000
    $0.05Warrants
      exercised during the year
    (570,000)
    $0.001Warrants
      expired during the year
    (5,000)
    $0.10Balance
      - December 31, 2003
    1,355,000
    $0.13Warrants
      issued during the year
    18,373,974
    $0.27Warrants
      exercised during the year
    (1,300,000)
    $0.13Warrants
      expired during the year
    (30,000)
    $0.21Balance
      - December 31, 2004
    18,398,974
    $0.27
 
 There
were 18,398,974 and 1,355,000 warrants exercisable at December 31, 2004 and
2003, respectively.
 
 NOTE 13 - Related
party and other items
 
 The
Company leases its manufacturing facility from Freddy Pereira, an officer of its
subsidiary, BMZ Generators Technology, Inc. (See note 8).
 
 NOTE 14 - Acquisition
 
 On July
1, 2004, EENT, through its wholly owned subsidiary BMZ Generators Technology,
Inc., purchased certain assets of BMZ Generators, Inc., (“BMZ”) a Pompano Beach,
Florida-based company that is in the power generator manufacturing, assembly and
sales business and intellectual property from its owner, Freddy Pereira. The
assets were acquired for total consideration of $2,000,000, $500,000 in cash at
closing paid to BMZ for the sale of BMZ's assets and $500,000 in EENT Common
Stock issued to Pereira personally upon presentation of written documentation
for the intellectual property, with a potential additional $1,000,000 being paid
out to Mr. Pereira over five years based on certain earn out criteria from the
ongoing business of EENT arising from the purchased assets. EENT hired Mr.
Pereira to manage the business arising from the purchased assets for a five year
period beginning July 1, 2004. Although the parties negotiated the value of the
stock issued to Pereira personally at $500,000, it was recorded for accounting
purposes on the books of EENT at $700,280 based on the closing price of
2,801,120 shares of EENT's Common Stock, as of May 19, 2004, the date of the
definitive purchase agreement. EENT issued these shares on June 4, 2004 in
advance of the presentation of written documentation for the intellectual
property as outlined in the definitive purchase agreement.
 
  48
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 14 - Acquisition ,
continued
 
 Total
      ConsiderationCash
    500,000Restricted
      common stock (issued to Pereira personally)
    700,280Contingent
      earnout
    1,000,000Total
      consideration
    2,200,280Allocation:BMZ
      AssetsInventory,
      net
    56,286Prepaid
      expenses and other current assets
    35,760Furniture,
      fixtures & equipment
    131,436Tradename
    60,000Trade
      Secrets
    20,000Non-compete
    50,000Goodwill
    146,518500,000Freddy
      Pereira - Intellectual Property
    700,280Contingent
      earnout
    1,000,000Total
      Consideration
    2,200,280
 
 The
following table of unaudited proforma information gives effect to the
acquisitions of the assets from BMZ and Mr. Pereira as if such acquisition had
occurred at the beginning of the year shown.
 
 TWELVE
      MONTHS ENDEDDecember
      31, 2004
    
    
    December
      31, 2003Revenues
    
    $
    351,165
    
    $
    430,348Net
      loss
    
    
    (5,640,500
    )
    
    (4,763,812
    )Net
      loss per share
    
    
    (0.05
    )
    
    (0.12
    )
 
 On August
17, 2004, EENT purchased the rights to all of the technology, including all
patent rights, produced and to be produced by C.A.P.S., LLC, a Tennessee limited
liability company. C.A.P.S. and its principals, Nathan Brown and Dan Killian,
are the inventors of power generation technology. The terms of the purchase
consisted of an initial purchase price of $40,000 in cash (which is in addition
to a $25,000 payment to C.A.P.S. in June 2004 for an exclusive period to review
certain C.A.P.S. technology) or aggregate consideration of $65,000. Upon
delivery of specified working models of the two initial technologies, EENT is to
pay C.A.P.S. $20,000 a month, indefinitely, less any royalty payments made,
until royalty payments reach $20,000 per month. Royalty payments for the initial
technology are to be $125 per unit sold and for the next technology shall be 10%
of the net invoice price for units sold. In addition, for units sold at certain
benchmark levels, restricted shares of EENT Common Stock shall be issued as
follows:
  49
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 14 - Acquisition ,
continued
 
 Units
      Sold
    Shares
      of Stock to be Issued100
    100,000250
    200,000500
    500,000750
    1,000,0001,000
    1,500,000
 
 The last
three issuances are expressly contingent on a unit failure rate not to exceed
5%.
 
 NOTE 15 - Discontinued
Operations
 
 On
February 22, 2005, EENT completed the sale of substantially all of the assets of
the Wind Dancer Aviation Services, Inc, division for $262,500 in
cash.
 
 During
December 2004, the Company classified the Wind Dancer Aviation Services, Inc.
assets as held for sale. The operations of Wind Dancer Aviation Services, Inc.
are reported as discontinued operations for all periods presented in the
consolidated financial statements. At December 31, 2004, the discontinued assets
and liabilities of Wind Dancer are:
 
 **Wind
      Dancer Aviation Services, Inc.**Assets:Accounts
      receivable
    13,525Inventory
    58,670Prepaid
      expenses
    1,391Intangible
      assets
    17,882Fixed
      Assets
    70,219TOTAL
      ASSETS
    161,687Liabilities:Accounts
      payable and accrued expenses
    19,633Note
      payable
    18,063TOTAL
      LIABILITIES
    37,696
 
  50
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 15 - Discontinued
Operations ,
continued
 
 The
results of discontinued operations for the year ended December 31, 2004 and 2003
are:
 
 **2004**
    **2003**Net
      revenue
    326,547
    377,676Costs
      of revenues
    158,856
    210,155Operating
      expense
    282,053
    357,202Net
      Loss
    220,556
    192,214
 
 On March
14, 2005, EENT completed the sale of all of the assets of the Gas Gathering
Enterprises, Inc., division for $150,000 in cash.
 
 During
December 2004, the Company classified the Gas Gathering Enterprises, Inc. assets
as held for sale. The operations of Gas Gathering Enterprises, Inc. are reported
as discontinued operations for all periods presented in the consolidated
financial statements. At December 31, 2004, the discontinued assets and
liabilities of Gas Gathering are:
 
 **Gas
      Gathering Enterprises, Inc.**Assets:Fixed
      Assets
    150,000LiabilitiesAccounts
      payable and accrued expenses
    64,315
 
 The
results of discontinued operations for the year ended December 31, 2004 and 2003
are:
 
 **2004**
    **2003**Net
      revenue
    244
    1,245Costs
      of revenues
    -
    -Operating
      expense
    24,163
    23,474Net
      Loss
    51,180
    72,974
 
 Impairment
losses from the right down of assets held for sale in connection with the Wind
Dancer and Gas Gathering sales were $108,065 and are included in loss from
discontinued operations for the year ended December 31, 2004.
 
 NOTE 16 - Subsequent
Events
 
 Equity
Transactions
 
 A)
    On
      January 20, 2005, in connection with a private offering, the Company sold
      25,000 shares of common stock to an investor at $0.10 per share or
      $2,500.
 
 B)
    On
      February 3, 2005, in connection with a private offering, the Company sold
      50,000 shares of common stock to an investor at $0.10 per share or
      $5,000.
  51
  ENERGY
& ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 16 - Subsequent
Events ,
continued
 
 C)
    On
      February 23, 2005, in connection with a private offering, the Company sold
      15,000 shares of common stock to an investor at $0.10 per share or
      $1,500.
 
 D)
    On
      March 10, 2005, in connection with a private offering, the Company sold
      300,000 shares of common stock to an investor at $0.05 per share or
      $15,000.
 
 E)
    On
      March 16, 2005, the Company issued 25,000 shares of common stock to an
      employee valued at $3,000 for services
provided
 
 F)
    On
      March 16, 2005, the Company issued 172,500 shares to an investor in
      regards to an anti-dilution agreement.
 
 G)
    On
      April 13, 2005, the Company issued a convertible note in the amount of
      $50,000 to an investor. The note is convertible in Common Stock at $0.05
      per share.
 
 Authorized
Shares
 
 H)
    On
      March 31, 2005, the Company amended its Article of Incorporation to
      increase its authorized share of common stock from 180,000,000 to
      280,000,000.
 
 Other
Transactions
 
 I)
    On
      February 8, 2005, EENT entered into a binding letter of intent with Anchor
      Tampa, Inc. to purchase assets of its marine air conditioning business for
      $950,000. The letter of intent called for a $37,500 non-refundable deposit
      payable by EENT, with closing set to occur on or before April 30, 2005.
      The balance of the purchase price is: $712,500 in cash and $200,000 in
      restricted common stock.
 
 J)
    On
      February 10, 2005, the Company entered into a Consulting Agreement with an
      independent contractor. The terms of the agreement is for one year with
      the Company making monthly payments of $5,500. Based on the agreement, the
      Company is also required to issue 275,000 shares of common stock quarterly
      during the terms of the agreement. On March 23, 2005, in connection with
      this agreement, the Company issued 275,000 shares of common stock valued
      at $27,500.
 
 K)
    Pursuant
      to a letter agreement effective as of February 21, 2005, EENT has agreed
      to resell the STCs and related inventory purchased in September 2003 to
      Mr. RPM, LLC and RPM Management, LLC for a return of 600,000 shares of
      EENT stock previously issued to Mr. RPM, LLC and RPM Management, LLC. The
      transfer will occur when the shares of stock are returned to
      EENT.
 
 L)
    As
      of April 8, 2005, the Company entered into five year employment contracts
      with each of the CEO, CFO, and General Counsel with salaries of $260,000,
      $230,000 and $200,000, with each entitled to receive 25,000 warrants per
      month, with conversion prices at market price on the date of issuance.
      Each is entitled to certain benefits, such as severance pay, upon a not
      for cause termination.
 
  52