**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **FORM
10-QSB**
 
 (Mark
One)
 
 x  QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarterly period ended **September
30, 2005**
 
 o  TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period
from ___________ to ___________
 
 Commission
file number 0-32129
 
 **Energy
      & Engine Technology Corporation**(Exact
      name of small business issuer as specified in its
  charter)
 
 **Nevada**
    **88-0471842**(State
      or other jurisdiction of incorporation or organization)
    (IRS
      Employer Identification No.
 
 **5308
      West Plano Parkway, Plano, Texas 75093**(Address
      of principal executive offices)
 
 **(972)
      732-6360**(Issuer's
      telephone number)
 
 (Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Check
whether the issuer (1) filed all reports to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o
 
 APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
 PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
 
 Check
whether the Company filed all documents and reports required to be filed by
Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes o No o
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 135,630,972 (as of November 11,
2005).
 
 Transitional
Small Business Disclosure Format (Check one): Yes o No x
  
  ***Table
of Contents***
 
 
 PART I -
FINANCIAL INFORMATION
 PageItem
      1. Financial StatementsCONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheet
    1Condensed Consolidated Statements of
      Operations
    2Condensed Consolidated Statements of Cash
      Flows
    3NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)
    5Item 2. Management's Discussion and Analysis or Plan of
      Operation
    21Item 3. Controls and Procedures
    25
 
 PART II -
OTHER INFORMATION
 Item 1. Legal Proceedings
    26Item 2. Changes in Securities
    26Item 3. Defaults upon Senior
    Securities
    27Item 4. Submission of Matters to a Vote of Security
      Holders
    27Item 5. Other Information
    27Item 6. Exhibits and Reports on Form 8-K and
      8-K/A
    27Signatures
    28
 
 
   
   
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEET(UNAUDITED)September
      30, 2005
 
 ASSETS
 
 CURRENT
      ASSETSCash
      and cash equivalents
    
    $
    19,018Accounts
      receivable
    
    
    164,290Inventories
    
    
    1,057,330Prepaid
      expenses and other current assets
    
    
    381,838Total
      Current Assets
    
    
    1,622,476PROPERTY
      AND EQUIPMENT, Net
    
    
    274,781OTHER
      ASSETSIntangible
      assets, net
    
    
    849,700Goodwill
    
    
    376,586Total
      Other Assets
    
    
    1,226,286TOTAL
      ASSETS
    
    $
    3,123,543
 
 LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
 
 CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
    
    $
    1,254,287Accrued
      expenses, officers
    
    
    296,311Notes
      payable - officer
    
    
    250,000Notes
      payable, stockholders, net of discount of $28,125
    
    
    334,875Purchase
      money note payable
    
    
    137,500Total
      Current Liabilities
    
    
    2,272,973OTHER
      LIABILITIESConvertible
      debenture payable, net of discount of $1,537,399
    
    
    799,999Notes
      payable - officer, net of current portion
    
    
    250,000Convertible
      debenture, stockholders, net of discount of $79,332
    
    
    20,668Total
      Other Liabilities
    
    
    1,070,667TOTAL
      LIABILITIES
    
    
    3,343,640STOCKHOLDERS'
      DEFICIENCYCommon
      stock, $.001 par value, 280,000,000 shares authorized, 135,260,783 shares
      issued and outstanding
    
    
    135,260Treasury
      Stock
    
    
    (78,000
    )Additional
      paid-in capital
    
    
    16,762,418Accumulated
      Deficit
    
    
    (17,039,775
    )TOTAL
      STOCKHOLDERS’ DEFICIENCY
    
    
    (220,097
    )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
    
    $
    3,123,543
 
 See
Accompanying Notes to the Condensed Consolidated Financial
Statements.
  1
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)For
      the Three and Nine Months Ended September 30, 2005 and
  2004
 
 THREE MONTHS ENDED
    
    NINE
      MONTHS ENDEDSEPTEMBER
      30, 2005
    
    SEPTEMBER
      30, 2004
    
    SEPTEMBER
      30, 2005
    
    SEPTEMBER
      30, 2004NET
      SALES
    
    $
    438,896
    
    $
    129,129
    
    $
    797,150
    
    $
    169,137COST
      OF SALES
    
    
    535,026
    
    
    112,408
    
    
    907,282
    
    
    156,397GROSS
      (LOSS) PROFIT
    
    
    (96,130
    )
    
    16,721
    
    
    (110,132
    )
    
    12,740OPERATING
      EXPENSESSelling,
      general and administrative expenses (including stock based compensation of
      $18,750 and $63,725 for the three months ended September 30, 2005 and
      2004, respectively, and $66,010 and $1,839,665 for the nine months ended
      September 30, 2005 and 2004, respectively).
    
    
    1,310,169
    
    
    710,126
    
    
    3,037,275
    
    
    3,058,091TOTAL
      OPERATING EXPENSES
    
    
    1,310,169
    
    
    710,126
    
    
    3,037,275
    
    
    3,058,091OPERATING
      LOSS
    
    
    (1,406,299
    )
    
    (693,405
    )
    
    (3,147,407
    )
    
    (3,045,351
    )OTHER
      (INCOME) EXPENSEInterest
      income
    
    
    --
    
    
    (1,531
    )
    
    --
    
    
    (2,491
    )Interest
      expense
    
    
    608,829
    
    
    363,359
    
    
    1,141,131
    
    
    415,516Loss
      from disposal of assets
    
    
    --
    
    
    --
    
    
    69,533
    
    
    --TOTAL
      OTHER EXPENSE
    
    
    608,829
    
    
    361,828
    
    
    1,210,664
    
    
    413,025Loss
      from continuing operations
    
    
    (2,015,128
    )
    
    (1,055,233
    )
    
    (4,358,071
    )
    
    (3,458,376
    )Income
      (Loss) from discontinued operations
    
    
    --
    
    
    (30,413
    )
    
    148,967
    
    
    (132,546
    )NET
      LOSS
    
    $
    (2,015,128
    )
    $
    (1,085,646
    )
    $
    (4,209,104
    )
    $
    (3,590,922
    )BASIC
      AND DILUTED NET LOSS PER COMMON SHARENet
      loss per common share from continuing operations
    
    $
    (0.02
    )
    $
    (0.01
    )
    $
    (0.03
    )
    $
    (0.03
    )Net
      income (loss) per common share from discontinued
operations
    
    
    --
    
    
    --
    
    
    --
    
    
    --NET
      LOSS PER COMMON SHARE:
    
    $
    (0.02
    )
    $
    (0.01
    )
    $
    (0.03
    )
    $
    (0.03
    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
    
    
    129,625,361
    
    
    109,340,099
    
    
    125,259,042
    
    
    100,939,543
  See
Accompanying Notes to the Condensed Consolidated Financial
Statements.
  2
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)For
      the Nine Months Ended September 30, 2005 and
2004
 
 2005
    
    2004CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss from continuing operations
    
    $
    (4,358,071
    )
    $
    (3,458,376
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
    
    
    259,905
    
    
    72,512Stock-based
      compensation
    
    
    66,010
    
    
    1,839,665Amortization
      of debt discount
    
    
    773,244
    
    
    316,841Non
      cash interest expense
    
    
    68,640
    
    
    --Loss
      from disposal of assets
    
    
    69,533
    
    
    --Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    (137,334
    )
    
    (12,813
    )Inventories
    
    
    (184,645
    )
    
    (338,862
    )Prepaid
      expenses and other current assets
    
    
    178,317
    
    
    (39,067
    )Accounts
      payable and accrued expenses
    
    
    803,146
    
    
    (22,426
    )Accrued
      expenses, officers
    
    
    (62,606
    )
    
    (234,126
    )TOTAL
      ADJUSTMENTS
    
    
    1,834,210
    
    
    1,581,724NET
      CASH USED IN OPERATING ACTIVITIES
    
    
    (2,523,861
    )
    
    (1,876,652
    )CASH
      FLOW FROM DISCONTINUED OPERATIONSNet
      income (loss) from discontinued operations
    
    
    148,967
    
    
    (132,546
    )Proceeds
      from sale of assets
    
    
    387,500
    
    
    --Gain
      on sale of assets
    
    
    (176,403
    )
    
    --Changes
      in:Discontinued
      assets
    
    
    --
    
    
    47,095Discontinued
      liabilities
    
    
    --
    
    
    (69,363
    )NET
      CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS
    
    
    360,064
    
    
    (154,814
    )CASH
      FLOWS USED IN INVESTING ACTIVITIESCash
      paid for acquisition
    
    
    (587,500
    )
    
    (500,000
    )Purchases
      of property and equipment
    
    
    (59,435
    )
    
    (65,336
    )Cash
      paid for intangible assets
    
    
    --
    
    
    (65,000
    )NET
      CASH USED IN INVESTING ACTIVITIES
    
    
    (646,935
    )
    
    (630,336
    )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from convertible debentures, stockholders
    
    
    100,000
    
    
    --Repayment
      of notes payable, stockholders
    
    
    --
    
    
    (8,095
    )Net
      proceeds from convertible debentures
    
    
    1,839,412
    
    
    1,700,000Net
      proceeds from notes payable - officers
      Proceeds
      from the issuance of common stock, net of offering costs
    
    
    485,000
      359,000
    
    
    --
      1,770,800NET
      CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    2,783,412
    
    
    3,462,705NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (27,320
    )
    
    800,903CASH
      AND CASH EQUIVALENTS-Beginning
    
    
    46,338
    
    
    7,024CASH
      AND CASH EQUIVALENTS-Ending
    
    $
    19,018
    
    $
    807,927SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the period for:Interest
    
    $
    68,844
    
    $
    30,229
 
 See
Accompanying Notes to the Condensed Consolidated Financial
Statements.
  3
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)For
      the Nine Months Ended September 30, 2005 and
2004
 
 Non-cash
investing and financing activities:
 
 During
the nine months ended September 30, 2005, in connection with the issuance of
certain convertible debentures, the Company issued warrants with a fair market
value of $1,154,049 and a beneficial conversion feature of
$945,951.
 
 During
the nine months ended September 30, 2005, the Company resold Supplemental Type
Certificates and related inventories purchased in September 2003 for a return of
600,000 shares of the Company’s common stock valued at $78,000.
 
 During
the nine months ended September 30, 2005, the Company issued 2,702,703 shares of
Common Stock valued at $200,000 and a purchase money note in the principal
amount of $137,500 in connection with the acquisition of Anchor (see note
10).
 
 During
the nine months ended September 30, 2005, in connection with the payment of fees
to the brokers involved with the issuance of certain convertible debentures,
notes and common stock the Company issued warrants with a fair market value of
$148,796 and 176,000 shares of common stock valued at $14,080.
 
 During
the nine months ended September 30, 2005, several investors converted a portion
of the principal amount of their convertible debentures and accrued interest due
into 3,401,284 of the Company’s common stock valued at $174,216.
 
 During
the nine months ended September 30, 2005, the Company issued 1,333,333 warrants
valued at $68,640 to several investors as the amendment to Form 8-K with the
audited financial statements for the Anchor acquisition was filed on July 15,
2005 instead of July 6, 2005 per agreement (see Note 12).
 
 See
Accompanying Notes to the Condensed Consolidated Financial
Statements.
 
  4
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
 
 NOTE 1- Description
of Business, Going Concern, Management Plans and Basis of
Presentation
 
 Financial
Statements
 
 The
condensed consolidated balance sheet of Energy & Engine Technology
Corporation ("EENT" or the "Company") as of September 30, 2005, the related
condensed consolidated statements of operations for the three and nine months
ended September 30, 2005 and 2004, and the related condensed consolidated
statements of cash flows for the nine months ended September 30, 2005 and 2004
included in Item 1 have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC" or
"Commission"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the accompanying
condensed consolidated financial statements include all adjustments (consisting
of normal, recurring adjustments) necessary in order to make the financial
statements not misleading. The results of operations for the three and nine
months ended September 30, 2005 are not necessarily indicative of the results of
operations for the full year or any other interim period. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2004 and filed with
the Commission.
 
 Going
Concern and Management Plans
 
 As shown
in the accompanying consolidated financial statements, the Company incurred a
net loss of $4,209,104 during the nine months ended September 30, 2005,
resulting in an accumulated deficit of $17,039,775. As of September 30, 2005,
the Company also had a working capital deficit of $650,497. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans include the raising of cash through the issuance of debt or
equity and increasing revenues. In the second quarter of 2005, the Company
closed on $2.1 million in convertible debt financing. Proceeds were used for
working capital purposes (See Note 12). In the third quarter, the Company closed
on a financing in the aggregate of $500,000 with an officer of the Company. The
financing consisted of: (i) issuance of 4,166,667 shares of common stock valued
at $250,000, and ( ii) issuance of a $250,000 principal amount two year note
(see Note 4 and 8). The Company also borrowed $250,000 from its Chief Executive
Officer, which was repaid on October 14, 2005 (see Note 8). The accompanying
condensed consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. These condensed consolidated
financial statements do not include any adjustments relating to the recovery of
the recorded assets or the classification of the liabilities that might be
necessary should the Company be unable to continue as a going
concern.
 
 Organization
and Principal Business Activity
 
 EENT 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.
 
  5
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
 
 NOTE 1 - Description
of Business, Going Concern, Management Plans and Basis of
Presentation ,
continued
 
 The
consolidated financial statements include the accounts of EENT and its wholly
owned subsidiaries, BMZ Generators Technology, Inc. (“BMZ”) and Anchor
Manufacturing, Inc. (“Anchor”) collectively referred to as the “Company.” During
the year ended December 2004, the Company’s subsidiaries, Gas Gathering
Enterprises, LLC and Wind Dancer Aviation Services, Inc., were deemed to be
discontinued operations and both were sold during the three months ended March
31, 2005.
 
 EENT is
the developer and marketer of the AXP 1000 auxiliary power generator and Over
the Road Comfort System (proprietary split unit HVAC system) for long haul
trucks. It also assembles and sells power generators and air conditioners for
marine applications.
 
 Consolidation
 
 The
consolidated financial statements include the accounts of EENT and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
 
 NOTE 2 - Summary
of Significant Accounting Polices
 
 Revenue
Recognition
 
 BMZ
Generators Technology, Inc./AXP 1000 Power Generators/Anchor Manufacturing,
Inc.
 
 Revenue
is recognized at the time the generator or air conditioner is delivered to the
dealer or customer. There are no obligations to install the product.
 
 Return
and Warranty Policies
 
 Return
Policy - AXP 1000
 
 To date,
EENT has not yet developed a return policy for the AXP 1000 as it is in the
initial stages of commercialization, and revenues from AXP 1000 sales have been
minimal. Returns have been considered on a case-by-case basis and have been
minimal.
 
 Return
Policy - Anchor Manufacturing, Inc. (Marine Comfort Systems)
 
 To date,
Anchor Manufacturing, Inc. does not have a return policy for the Marine Comfort
Systems. Returns have been considered on a case-by-case basis and have been
minimal.
 
 Warranty
Policy - AXP 1000/ Anchor Manufacturing, Inc. (Marine Comfort
Systems)
 
 First to
occur of two years from date of retail sale or 5,000 hours of use, subject to
limitations set forth in the policy.
  6
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
 NOTE 2 - Summary
of Significant Accounting Polices ,
continued
 
 Cash
and Cash Equivalents
 
 The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
 
 Inventories
 
 Inventories
consist of parts and materials and engines/generators/air conditioners and are
valued at the lower of cost or market, cost is being determined using the first
in/first out basis.
 
 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.
 
 Research
and Development
 
 Research
and development costs are expensed as incurred. Research and development costs
for the nine months ended September 30, 2005 and 2004 were $449,759 and $98,877
respectively, and are included in selling, general and administrative
expenses.
 
 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
and amortization of furniture, fixtures and equipment is computed on the
straight-line method at rates adequate to allocate the cost of applicable assets
over their expected useful lives.
 
  7
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
 NOTE 2 - Summary
of Significant Accounting Polices ,
continued
 
 Net
Loss per Share
 
 Basic
earnings per share (“EPS”) is computed by dividing income (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 for the period. Common
stock equivalents have been excluded from the weighted average shares for the
nine months ended September 30, 2005 and 2004, as inclusion is anti-dilutive.
Potentially dilutive securities (warrants) of 77,860,139 and 16,153,974 are
outstanding at September 30, 2005 and 2004, respectively.
 
 Use of
Estimates in the Financial Statements
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
 NOTE 3 - Note
Payable Stockholders
 
 As of
September 30, 2005, the Company is in default of the terms on an outstanding
note payable with one of its stockholders with principal balance due of $20,000
and accrued interest of $9,221. The note was due on January 7, 2004.
 
 NOTE 4 - Common
Stock
 
 During
the three months ended March 31, 2005, the Company issued an aggregate of
390,000 shares of common stock valued at $24,000 to four investors in connection
with a private placement.
 
 During
the three months ended March 31, 2005, the Company issued an aggregate of 25,000
shares of common stock valued at $3,000 to an employee for services
provided.
 
 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. The
contract was terminated in April 2005.
 
 During
the three months ended March 31, 2005, the Company issued 172,500 shares of
common stock to an investor pursuant to an anti-dilution agreement. The Company
also granted warrants to purchase 3,000,000 shares of the Company’s common stock
with a term of five years and an exercise price of $0.25 per share.
 
 During
the three months ended June 30, 2005, the Company issued an aggregate of
2,000,000 shares of common stock valued at $100,000 to one investor in
connection with a private placement.
  8
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
 NOTE 4 - Common
Stock ,
continued
 
 During
the three months ended June 30, 2005, the Company issued an aggregate of 118,000
shares of common stock valued at $4,760 to employees for services
provided.
 
 During
the three months ended June 30, 2005, the Company issued an aggregate of 276,000
shares of common stock valued at $6,080 to consultants for services
provided.
 
 During
the three months ended June 30, 2005, the Company issued 581,500 shares of
common stock to an investor pursuant to an anti-dilution agreement.
 
 During
the three months ended June 30, 2005, the Company issued 2,702,703 shares of
common stock valued at $200,000 for the acquisition of assets of Anchor
Manufacturing, Inc. (See Note 10).
 
 During
the three months ended September 30, 2005, the Company issued an aggregate of
4,166,667 shares of common stock for net proceeds of $235,000 to one of its
officers in connection with a private placement.
 
 During
the three months ended September 30, 2005, the Company issued an aggregate of
250,000 shares of common stock valued at $18,750 to employees for services
provided.
 
 During
the three months ended September 30, 2005, the Company issued 373,588 shares of
common stock to an investor pursuant to an anti-dilution agreement.
 
 During
the three months ended September 30, 2005, the Company issued 3,401,284 shares
of common stock valued at $174,216 in connection with the partial conversion of
principal and interest of certain convertible debentures (see Note
12).
 
 NOTE 5 - Warrants
 
 Transactions
involving warrants are summarized as follows:
 
 Number
      of Warrants
    Weighted
      AverageExercise
      PriceBalance
      - January 1, 2005
    18,398,974
    $0.27Warrants
      issued during the period
    60,796,165
    $0.13Warrants
      expired during the period
    (1,335,000)
    ($0.14)Warrants
      exercised during the period
    --
    -Balance
      - September 30, 2005 (all exercisable)
    77,860,139
    $0.16
 
  9
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATIONAND
      SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 
 NOTE 6 - 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 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. There were 800,000 stock
warrants issued to employees and directors during the nine months ended
September 30, 2005 and 9,000,000 issued to employees during the nine months
ended September 30, 2004.
 
 The
following table summarizes the pro forma operating results of the Company had
compensation expense for the stock options granted to employees been determined
in accordance with the fair market value based method prescribed by
SFAS 123. The Company has presented the following disclosures in accordance
with SFAS 148.
 
 Three
      Months Ended
    
    Nine
      Months EndedSeptember
      30, 2005
    
    September
      30, 2004
    
    September
      30, 2005
    
    September
      30, 2004Net
      loss - as reported
    
    $
    (2,015,128
    )
    $
    (1,085,646
    )
    $
    (4,209,104
    )
    $
    (3,590,922
    )Stock-based
      employee compensation cost determined under fair value method, net of tax
      effects
    
    
    (23,000
    )
    
    --
    
    
    (34,652
    )
    
    (2,250,000
    )Net
      loss - pro forma
    
    $
    (2,038,128
    )
    $
    (1,085,646
    )
    $
    (4,243,756
    )
    $
    (5,840,922
    )Loss
      per share:Basic
      and diluted loss per share: Net loss - as reported
    
    $
    (0.02
    )
    $
    (0.01
    )
    $
    (0.03
    )
    $
    (0.03
    )Net
      loss - pro forma
    
    $
    (0.02
    )
    $
    (0.01
    )
    $
    (0.03
    )
    $
    (0.06
    )
 
  10
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATIONAND
      SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 
 NOTE 6 - Stock-Based
Compensation ,
continued
 
 The
Black-Scholes option valuation model was used to estimate the fair value of the
warrants granted during the nine months ended September 30, 2005 and 2004. 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:
 
 2005
Assumptions:
 
 Assumptions:
      Risk-free interest rate
    3.71%
      - 4.51%Dividend
    0.00%Expected
      life in years
    5.0Expected
      volatility
    59.26%
 
 2004
Assumptions:
 
 Assumptions:
      Risk-free interest rate
    3.96%Dividend
    0.00%Expected
      life in years
    5.0Expected
      volatility
    124%
 
 NOTE 7 - Segment
Reporting
 
 Summarized
financial information concerning the Company's reportable segments are shown in
the following tables.
  11
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATIONAND
      SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 
 NOTE 7 - Segment
Reporting ,
continued
 
 BMZ/AXP
      1000
    
    Anchor
    
    General
      Corporation
    
    Total**For
      the Nine Months Ended September 30, 2005**:Revenue
    
    $
    458,681
    
    $
    338,469
    
    
    --
    
    $
    797,150Operating
      Loss
    
    $
    (823,117
    )
    $
    (248,566
    )
    $
    (2,075,724
    )
    $
    (3,147,407
    )Net
      Loss from Continuing Operations
    
    $
    (893,404
    )
    $
    (248,853
    )
    $
    (3,215,814
    )
    $
    (4,358,071
    )Capital
      Expenditures
    
    $
    24,165
    
    
    --
    
    $
    35,270
    
    $
    59,435Total
      identifiable assets
    
    $
    652,728
    
    $
    1,159,821
    
    $
    1,310,994
    
    $
    3,123,543
 
 BMZ/AXP
      1000
    
    Anchor
    
    General
      Corporation
    
    Total**For
      the Nine Months Ended September 30, 2004**:Revenue
    
    $
    169,137
    
    
    --
    
    
    --
    
    $
    169,137Operating
      Loss
    
    $
    (366,662
    )
    
    --
    
    $
    (2,678,689
    )
    $
    (3,045,351
    )Net
      Loss from Continuing Operations
    
    $
    (366,662
    )
    
    --
    
    $
    (3,091,714
    )
    $
    (3,458,376
    )Capital
      Expenditures
    
    $
    26,713
    
    
    --
    
    $
    38,623
    
    $
    65,336Total
      Identifiable Assets
    
    $
    1,053,377
    
    
    --
    
    $
    1,710,070
    
    $
    2,763,447
 
  12
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATIONAND
      SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 
 NOTE 7 - Segment
Reporting ,
continued
 
 BMZ/AXP
      1000
    
    Anchor
    
    General
      Corporation
    
    Total**For
      the Three Months Ended September 30, 2005**Revenue
    
    $
    230,807
    
    $
    208,089
    
    
    --
    
    $
    438,896Operating
      Loss
    
    $
    (236,364
    )
    $
    (173,387
    )
    $
    (996,548
    )
    $
    (1,406,299
    )Net
      Loss from Continuing Operations
    
    $
    (306,213
    )
    $
    (172,741
    )
    $
    (1,536,174
    )
    $
    (2,015,128
    )Capital
      Expenditures
    
    $
    8,601
    
    
    --
    
    $
    24,817
    
    $
    33,418
 
 BMZ/AXP
      1000
    
    Anchor
    
    General
      Corporation
    
    Total**For
      the Three Months Ended September 30, 2004**Revenue
    
    $
    129,129
    
    
    --
    
    
    --
    
    $
    129,129Operating
      Loss
    
    $
    (287,706
    )
    
    --
    
    $
    (405,699
    )
    $
    (693,405
    )Net
      Loss from Continuing Operations
    
    $
    (287,706
    )
    
    --
    
    $
    (767,527
    )
    $
    (1,055,233
    )Capital
      Expenditures
    
    $
    26,713
    
    
    --
    
    $
    4,449
    
    $
    31,162
 
 Note that
the Segment Reporting does not include information for business segments which
are deemed “Discontinued Operations” (see Note 9 to these Financial Statements)
pursuant to the pronouncements set forth in Financial Accounting Standards Board
No. 131.
 
 NOTE 8 - Other
Items
 
 Related
Party Transactions
 
 The
Company leases its Pompano Beach, Florida manufacturing facility from Freddy
Pereira, a former employee of its subsidiary, BMZ Generators Technology, Inc.,
who is no longer with the Company. Rent expense relating to this lease for the
nine months ended September 30, 2005 and 2004 was $83,775 and $47,070,
respectively. Rent expense for the three months ended September 30, 2005 and
2004 was $24,319 and $47,070 , respectively.
 
  13
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATIONAND
      SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 
 NOTE 8 - Other
Items ,
continued
 
 The
Company leases its Tampa, Florida facility from Anchor Tampa, Inc. One of the
principals of Anchor Tampa, Inc., is also an employee of Anchor Manufacturing,
Inc., a subsidiary of EENT. Rent expense relating to this lease for the nine
months ended September 30, 2005 was $25,415. Rent expense relating to this lease
for the three months ended September 30, 2005 was $10,204.
 
 On August
11, 2005, the Company’s Chief Executive Officer, Will McAndrew, borrowed
$250,000 from two Longview Funds and subsequently loaned it to the Company. The
Loan was for 60 days and bore interest at an annual rate of 15%. The Company
guaranteed repayment of the loan, and three of the Company’s officers each
pledged 2,381,000 shares of their personal stock to secure the loan. On October
14, 2005, the Company paid off the loan through the closing on a $1,000,000
financing with Longview and other investors (see Note 13).
 
 On
September 1, 2005, the Company sold 4,166,667 shares of common stock for
$250,000 and issued a $250,000 two-year term note to George Fulton Collins IV
Trust of which Fulton Collins, an officer of the Company, is trustee of the
trust. The loan bears interest of 12% per annum. In connection with obtaining
the loan, the Company paid $15,000 to a consultant which is being amortized over
the life of the loan.
 
 On
September 6, 2005, George Fulton Collins IV joined EENT as Chief Operating
Officer. Mr. Collins has a verbal employment agreement with the Company giving
at a salary of $180,000 per year and a grant of 25,000 market priced warrants
per month for so long as Fulton is employed by the Company. For the month of
September, the Company granted warrants to purchase 25,000 shares of the
Company’s common stock with an exercise price of $0.102 per share.
 
 Authorized
Shares
 
 On March
31, 2005, the Company filed a Certificate of Amendment to its Articles of
Incorporation to increase their authorized shares of common stock to
280,000,000. On October 12, 2005, the Company amended its Articles of
Incorporation to increase its authorized shares of common stock from 280,000,000
to 500,000,000.
 
 Other
Events
 
 During
the three months ended March 31, 2005, the Company resold Supplemental Type
Certificates and related inventories purchased in September 2003 for a return of
600,000 shares of the Company’s common stock valued at $78,000.
 
  14
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATIONAND
      SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 NOTE 8 - Other
Items ,
continued
 
 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, which is accrued for and
included in accrued expenses as of September 30, 2005. On August 31, 2005, the
case was converted to a Chapter 7 proceeding, but no further definitive action
has occurred.
 
 NOTE 9 - 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.
 
 The
results of discontinued operations for the nine months ended September 30, 2005
and 2004 are:
 
 **9/30/05**
    
    **9/30/04**Net
      revenue
    
    $
    22,397
    
    $
    269,488Costs
      of revenues
    
    $
    (10,964
    )
    $
    (129,277
    )Operating
      expense
    
    $
    (38,869
    )
    $
    (252,938
    )Other
      Income
    
    
    --
    
    $
    192Gain
      on Sale of Assets
    
    $
    176,403
    
    
    --Income
      (Loss)
    
    $
    148,967
    
    $
    (112,535
    )
 
 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 of which $25,000 was advanced
to the Company during the year ended December 31, 2004.
 
 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.
 
  15
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATIONAND
      SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 
 NOTE 9 - Discontinued
Operations ,
continued
 
 The
results of discontinued operations for the nine months ended September 30, 2005
and 2004 are:
 
 **9/30/05**
    
    **9/30/04**Net
      revenue
    
    
    -
    
    $
    244Costs
      of revenues
    
    
    -
    
    
    -Operating
      expense
    
    
    -
    
    $
    (20,255
    )Other
      (expense)
    
    
    -
    
    
    -Net
      Loss
    
    
    -
    
    $
    (20,011
    )
 
 NOTE 10 - Acquisition
 
 On May 3,
2005, effective as of May 1, 2005, EENT closed on its acquisition of the assets
of Anchor Tampa, Inc.’s Anchor Manufacturing business. The $950,000 purchase
price was paid as follows: $200,000 in Common Stock (2,702,703 shares), $587,500
in cash, $25,000 in price reduction for assumption of warranty claims and
$137,500 in a purchase money note due on the earlier of (i) 5 business days
after the receipt by EENT of proceeds from the second tranche of financing to be
received from Longview Equity Fund after effectiveness of a registration
statement to be filed in conjunction with EENT’s April 27, 2005 financing, and
(ii) July 31, 2006, which, on October 28, 2005, was extended to July 31,
2006.
 
 Total
      Consideration:Cash
    
    $
    587,500Restricted
      Common Stock (2,702,703 shares)
    
    
    200,000Assumption
      of Warranty Claims
    
    
    25,000Purchase
      Money Note
    
    
    137,500Total
      Consideration
    
    $
    950,000
 
 The
      purchase price was allocated as follows:Anchor
      Assets:Inventory,
      net
    
    $
    315,000Property
      and Equipment
    
    
    123,737Customer
      List
    
    
    255,632Trade
      name
    
    
    25,563Goodwill
    
    
    230,068Total
      Consideration
    
    $
    950,000
 
 The value
of the customer list and trade name have been estimated based on relevant
information available to management and is subject to change based on the
Company obtaining an outside appraisal and valuation. Management estimates the
useful life of these assets to be four years.
  16
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 
 NOTE 10 - Acquisition ,
continued
 
 The
following table of pro forma unaudited information gives effect to the
acquisitions of the assets from Anchor as if such acquisition had occurred at
the beginning of the periods shown.
 
 THREE
      MONTHS ENDED
    
    NINE
      MONTHS ENDEDSept.
      30, 2005
    
    Sept.
      30, 2004
    
    Sept.
      30, 2005
    
    Sept.30,
      2004Revenues
    
    $
    438,896
    
    $
    345,547
    
    $
    1,009,915
    
    $
    847,719Net
      Loss
    
    $
    (2,015,128
    )
    $
    (1,082,106
    )
    $
    (4,238,234
    )
    $
    (3,423,516
    )Net
      Loss Per Share
    
    $
    (0.02
    )
    $
    (0.01
    )
    $
    (0.03
    )
    $
    (0.03
    )
 
 NOTE 11 - Employment
and Director Compensation Agreements
 
 Employment
Agreements
 
 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, respectively, with each entitled to receive 25,000 warrants per month
over the life of the agreement, with exercise prices at market price on the date
of issuance. Each executive is entitled to certain benefits, such as severance
pay, upon a “not for cause termination”. Pursuant to the Employment Agreements,
each executive was granted 75,000 warrants for the three months ended September
30, 2005 (with an exercise price of $0.112 for the July warrants, $0.082 for the
August warrants and $0.102 for the September warrants.)
 
 Director
Compensation Agreement
 
 As of May
12, 2005, Stanley A. Hirschman was installed as an Independent Director. Mr.
Hirschman is paid $2,000 per month for his service, and received a warrant to
purchase 300,000 shares of stock at $.076 per share, with 25,000 warrants
vesting for each month of service for the first year.
 
  17
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS(UNAUDITED)
 
 NOTE 12 - Note
Financings
 
 Convertible
Debentures Payable
 
 On April
27, 2005, the Company entered into Convertible Note Financing with Longview
Fund, L.P., Longview Equity Fund, L.P. and Longview International Equity Fund,
L.P. pursuant to which the investors were to invest a total of $1,500,000 in the
Company: $1,000,000 at closing (April 27, 2005, received gross of commissions)
and $500,000 within 5 days after effectiveness of the registration statement to
be filed by the Company in connection therewith.  The security is a
convertible note bearing interest at the higher of 8% or Prime plus 4%. 
The notes bear an effective interest rate of 108% currently due to 100% deferred
debt discount. The notes have a two year term with principal and accrued
interest due at maturity and are convertible, at the holder’s discretion, at a
30% discount to the average of the five lowest closing bid prices for the
20 trading days preceding the conversion date, with a $0.05 per share minimum
conversion price. The Company issued to the investors 19,201,229 Class A
warrants exercisable at $0.12 per share with a five-year term plus 5,000,000
Class B warrants exercisable at $0.20 per share with a five-year term. The notes
are secured by a first lien on the assets of the Company and its subsidiaries.
On May 10, 2005 and May 12, 2005, the Company raised an additional $500,000 from
third parties on identical terms (investment to be made pro rata 2/3 at initial
closing and 1/3 upon Registration Statement effectiveness). Of the $500,000
investment (investment to be made pro rata 2/3 at initial closing and 1/3 upon
Registration Statement effectiveness), the Company received $334,667 (less
commissions), and issued 6,426,017 Class A warrants plus 1,666,667 Class B
warrants.
 
 On June
20 and June 22, 2005, the remaining balance of the $665,333 (less commissions)
was received; and 12,775,211 Class A warrants and 3,326,668 Class B warrants
were issued in connection therewith. An additional 1,333,333 Class C warrants
were issued to the investors as the Amendment to Form 8-K, with the audited
financials for the Anchor Acquisition was filed on July 15, 2005, instead of on
July 6, 2005, per agreement (See Note 5).
 
 Accrued
interest under the Debentures may be paid in cash or Common Stock. In the event
of an uncured default, as defined within time periods prescribed in the
Debentures, or a non-permitted sale of securities, the holders of the Debentures
may convert at 65% of the then current Market Price.
 
 The gross
proceeds of the $2,000,000 were allocated 45% or $900,907 to the debentures/note
and 55% or $1,099,093 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 $2,000,000. Interest expense for the three and nine months ended
September 30, 2005 included $343,935 and $462,603 respectively of the deferred
debt discount and the beneficial conversion feature on the convertible notes and
the warrants as required FITF98-05 and 00-27.
 
 During
the three months ended September 30, 2005, the Company issued 3,401,284 shares
of stock valued at $174,216 in connection with a partial conversion of principal
and interest of certain convertible debentures. As of September 30, 2005, the
outstanding balance of the debentures was $799,999, net of deferred debt
discount of $1,537,399.
 
  18
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
 
 NOTE 12 - Note
Financings ,
continued
 
 Other
Notes
 
 On each
of April 13, 2005 and May 20, 2005, an investor purchased two $50,000 notes from
the Company. These notes are convertible into Common Stock of the Company at
$0.05 per share, have a two-year term and bear interest at the higher of 8% and
prime plus 4%.
 
 In
connection with each Note issuance, the investor was issued 960,062 Series A
warrants with a exercise price of $0.12 per share (five year term) and 250,000
Series B warrants with a exercise price of $0.20 per share (five year
term).
 
 The gross
proceeds of the $100,000 in April-May of 2005 were allocated 45% or $45,044 to
the debentures and 55% or $54,956 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 feature for the total amount of the
debt principal of $100,000. Interest expense for the nine months ended September
30, 2005 includes amortization of $9,087 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.
 
 On August
31, 2005, Energy & Engine Technology Corporation entered into an amendment
to its three 7% Convertible Debentures, with an aggregated outstanding balance
of $449,000, with Monarch Pointe Fund, Ltd. and affiliates (the “Debentures”).
Pursuant to the amendments, the Maturity Date is extended to April 27, 2007.
Also, the principal amounts of the debentures were collectively increased by
five percent as an extension fee, with $5,000 in immediately available funds, in
the aggregate, due immediately, deducted from the five percent increase. The
Floor Price as defined in Paragraph 4 (c)(i) of the Debentures is amended to
equal $0.05 per share. After January 22, 2006, in the event of the closing bid
price of the Common Stock as reported by Bloomberg L.P. for the Principal Market
is less than $0.06, then for all future conversions, the Floor Price shall equal
$0. The aggregated outstanding balance as of September 30, 2005 was
$466,450.
 
 NOTE 13 - Subsequent
Events
 
 Issuance
of Common Stock
 
 From
October 1, 2005 through November 3, 2005, the Company issued an aggregate of
270,189shares of common stock valued at $15,669 to investors in connection with
conversions of a portion of the convertible debentures.
 
 From
October 1, 2005 through November 3, 2005, the Company issued an aggregate of
100,000 shares of common stock valued at $9,000 to a consultant for fees in
connection with a convertible note financing.
 
  19
  
 ENERGY
      & ENGINE TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
 
 NOTE 13 - Subsequent
Events ,
continued
 
 Litigation
 
 On
October 20, 2005, EENT filed a Petition in District Court in Collin County,
Texas against Fernando A. Pereira (former manager and President of EENT’s
subsidiary BMZ Generators Technology, Inc., terminated in early September 2005)
and BMZ Generators & Welders, Inc. (“Old BMZ”) alleging among other things
certain breaches of contract, fraud, and breaches of express warranty arising
from the July 2004 purchase by EENT of assets from Pereira and Old BMZ. The
petition was served on Defendants on October 24, 2005 by service of process on
the Secretary of State of the State of Florida. As the litigation is a
subsequent event to this reporting period, EENT has not yet performed an
analysis as to the impact of the litigation on impairment of assets purchased
from BMZ. EENT will perform the analysis in conjunction with its year end close
process and will disclose the results of its analysis in its Form 10-KSB filed
with the Commission for the year ended December 31, 2005.
  Convertible
Note and Term Note Financing
 
 On
October 14, 2005, the Company entered into a Convertible Note Financing with
several investors, including Longview Fund, L.P., Longview Equity Fund, L.P. and
Longview international Equity Fund, L.P. pursuant to which the investors
invested a total of $1,000,000 in the Company. $500,000 of the $1,000,000
invested is convertible notes bearing interest at the higher of 8% or Prime plus
4%.  The convertible notes have a two year term with principal and accrued
interest due at maturity and are convertible, at the holder’s discretion, at a
30% discount to the average of the five lowest closing bid prices for the
20 trading days preceding the conversion date, with a $0.05 per share minimum
conversion price. The balance of the funds invested, $500,000, were in the form
of term notes with a two-year term, bearing interest at an annual rate equal to
the higher of 8% or Prime plus 4%. The Company issued to the investors
17,241,379 Class A warrants exercisable at $0.12 per share with a five-year term
plus 5,000,000 Class B warrants exercisable at $0.20 per share with a five-year
term. The Notes are secured by a first lien on the assets of the Company and its
subsidiaries.
 
 Accrued
interest under the convertible Debentures may be paid in cash or Common Stock.
In the event of an uncured default, as defined within time periods prescribed in
the Debentures, or a non-permitted sale of securities, the holders of the
Debentures may convert at 65% of the then current Market Price.
 
 Dallas
Installation Facility Lease
 
 Effective
as of November 1, 2005, EENT entered into a lease with Twenty-One SAC
Self-Storage for its installation facility in Dallas, Texas. The term of the
lease is 18 months. Per month rent is $2,650 for the first year and $2,756 for
the last six months.
  20
  **Item 2. Management's Discussion and Analysis or Plan of
Operation.**
 
 Background
and Overview
 
 The
Company operates businesses which provide products to various aspects of the
transportation industry (long haul trucking). The innovative products 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 three months
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.
  21
  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% - 5% market
share, significant revenue generation would be possible. However, at this time,
the Company can not accurately project ability to capture a specified portion of
market share. Although sales of the product are demonstrating an upward trend,
growth has been limited in 2005 due to several factors including:
 
 «
    Limited
      component supply - Due to EPA certifications standards, EENT was only able
      to obtain 300 additional Lombardini engines in 2005 and 500 generators due
      to lead times needed to order from Bambozzi. To ameliorate this problem,
      the Company is exploring alternate sources of supply for engines and
      generators, which are more readily available.«
    Limitations
      in space at Anchor Manufacturing - Without running a second shift, Anchor
      can only produce 25 Over the Road Comfort Systems, so consideration of
      deployment of a contract manufacturer is in process to handle excess in
      the first quarter of 2006.«
    Product
      development - Unanticipated delays experienced in product finalization
      have been overcome, and new digital controls were substituted for the
      analog controls with any new changes being reserved for the 2006 model
      currently slated to be introduced at the March 2006 Mid-America Trucking
      Show.
 
 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. BMZ's former
owner, Freddy Pereira, had purchased a large facility in Pompano Beach, Florida,
which has been built out. 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 has direct access to its generator manufacturer, thus controlling supply.
 
 On the
supply chain issue, in March 2004, The Company's CEO and CFO traveled with
Freddy Pereira, former BMZ owner, to meet with the manufacturer of the custom
made generator used in the AXP 1000. The meetings proved successful in allowing
The Company to conduct sufficient due diligence to be comfortable that the
manufacturer will be able to meet The Company'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, Inc.’s design
won. For similar rationale to the acquisition of BMZ on supply chain concerns,
EENT purchased Anchor effective as of May 2, 2005. See Note 10 to the attached
financial statements for further information on the Anchor
acquisition.
 
  22
  
 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
2006.
 
 «
    Implementation
      of further internal controls and policies and procedures to continue to
      self manage the growth of The Company'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.
 
 FORWARD
LOOKING STATEMENT
 
 The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements. Certain information included in this document (as
well as information included in oral statements or other written statements made
or to be made by Energy & Engine Technology Corporation) contains statements
that are forward-looking, such as statements relating to the future anticipated
direction of the high technology and energy industries, plans for future
expansion, various business development activities, planned capital
expenditures, future funding sources, anticipated sales growth and potential
contracts. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of Energy & Engine
Technology Corporation. These risks and uncertainties include, but are not
limited to, those relating to development and expansion activities, dependence
on existing management, financial activities, domestic and global economic
conditions, changes in federal or state tax laws, and market competition
factors.
 
 RESULTS
OF OPERATIONS
 
 For the
three months ended September 30, 2004, the Company had net sales of $129,129 and
for the three months ended September 30, 2005, the Company had net sales of
$438,896. For the three months ended September 30, 2004, the Company had a net
loss from continuing operations of $1,055,233 and for the three months ended
September 30, 2005, the Company had a net loss from continuing operations of
$2,015.128. For the nine months ended September 30, 2004, the Company had net
sales of $169,137, and for the nine months ended September 30, 2005, the Company
had net sales of $797,150. For the nine months ended September 30, 2004, the
Company had a net loss from continuing operations of $3,458,376 and for the nine
months ended September 30, 2005, the Company had a net loss from continuing
operations of $4,358,071. For the three and nine months ended September 30,
2005, the Company had a negative gross profit of $96,130 and $110,132
respectively due to excess cost of overhead relative to the AXP 1000
sales.  AXP production commenced in early 2005 with consistent production
continuing in the third quarter of 2005. Third quarter gross revenue from AXP
1000 sales was $216,011. The Company generated revenue of $338,469 during the
nine months ended September 30, 2005 from Anchor Manufacturing,
Inc.
  23
  The
Company had a net loss from continuing operations of $1,055,233 for the three
months ended September 30, 2004 and $2,015,128 for the three months ended
September 30, 2005. The Company had a net loss from continuing operations of
$3,458,376 for the nine months ended September 30, 2004 and of $4,358,071 for
the nine months ended September 30, 2005. The Company had a net loss from
discontinued operations of $30,413 for the three months ended September 30, 2004
and $0 for the three months ended September 30, 2005. The Company had income
from discontinued operations of $148,967 for the nine months ended September 30,
2005 and a net loss of $132,546 for discontinued operations for the nine months
ended September 30, 2004. The increase in net loss is based primarily on
increased overhead due to labor costs in production rate increase and increased
spending on inventory due to production rate increase. The profit for the nine
months ended September 30, 2005 from discontinued operations include a gain of
approximately $176,000 from the sale of discontinued assets.
 
 Selling,
general and administrative expenses (including stock based compensation) for the
nine months ended September 30, 2004 and September 30, 2005 were $3,058,091 and
$3,037,275 respectively. Selling,
general and administrative expenses (including stock based compensation) for the
three months ended September 30, 2004 and September 30, 2005 were $710,126 and
$1,310,169 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 continues production of its products and
expansion through its Anchor Manufacturing, Inc. and Dallas installation
facility expansions.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As of
September 30, 2005, The Company's primary sources of liquidity included cash and
cash equivalents in the amount of $19,018.
 
 The
Company 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.
 
 In
September 2005, the Company raised $500,000 from an officer through a purchase
of $250,000 worth of Company common stock and issuance of a $250,000 term note.
The Company also raised an additional $1,000,000 from investors in October 2005
in a convertible note financing of which $250,000 was used to pay off a bridge
loan from its CEO.
 
 With
regard to known trends and events reasonably expected to have a material impact
on net sales and revenues, the Company strongly believes that the heightened
interest in idling alternatives should provide a stronger demand for the AXP
1000 device. EENT has worked out most final design challenges in its AXP 1000
and Over the Road Comfort Systems products and does not anticipate further set
backs due to continued long delays in development.
 
 Major
uncertainties could include market acceptance and inventory supply, although the
market currently shows good response to our product, and we have been able to
secure adequate supply of inventory for the foreseeable future. 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. The Company is also in the process of
developing its next generation engine driven genset, to replace the currently
used engine. This is an intermediate step to be taken before putting an
alternative fuel generation source into commercial production.
  24
  
 Another
guard against obsolescence is looking for new markets for generators. Therefore,
the Company will commence exploration of marketing and sales for the generator
products in other likely industries, most notably marine, military and mass
transportation.
 
 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”.
 
 **Item 3. Controls and Procedures.**
 
 Disclosure
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 filing of this report, the Chief Executive Officer and the Chief
Financial Officer believe that these procedures are not 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
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 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 significant
changes including adding additional personnel and updating periodic reporting
measures in such controls and in other factors that have significantly affected
those controls, including any corrective actions with regard to prior
significant deficiencies and material weaknesses.
 
  25
  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 one of only two full time employees with 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 formal
segregation of duties within the accounting function, leaving management of 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.
 
 Our
independent auditors have reported in the past 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. It was subsequently determined that many of these
reported conditions and material weaknesses have been eliminated to a large
extent as of September 30, 2005.
 
 Given
these prior reportable conditions and material weaknesses, management devoted
additional resources to resolving questions that arose during our year-end audit
and this Form 10-QSB for the three and nine months ended September 30, 2005. As
a result, we are confident that our financial statements for the year ended
December 31, 2004 and this Form 10-QSB for the three and nine months ended
September 30, 2005 fairly present, in all material respects, our financial
condition and results of operations.
 
 **PART
II - OTHER INFORMATION**
 
 Item 1. Legal Proceedings.
 
 600
Racing, Inc. v. EENT et. al.
 
 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, which is accrued for and
included in accrued expenses of September 30, 2005. As of August 31, 2005, the
case was converted to Chapter 7 and a trustee appointed. No significant events
have occurred in the Chapter 7 proceeding.
 
 Item 2. Changes in Securities.
 
 During
the three months ended September 30, 2005, the Company issued an aggregate of 4,
166, 667 shares of common stock valued at $250,000 to one investor in connection
with a private placement.
  26
  During
the three months ended September 30, 2005, the Company issued an aggregate of
250,000 shares of common stock valued at $18,750 to an employee for services
provided.
 
 During
the three months ended September 30, 2005, the Company issued 373,588 shares of
common stock to an investor pursuant to an anti-dilution agreement.
 
 During
the three months ended September 30, 2005, the Company issued 3,401,284 shares
of common stock valued at $174,216 in connection with the conversion of
principal and interest of certain convertible debentures.
 
 Item 3. Defaults Upon Senior Securities.
 
 Not
Applicable.
 
 Item 4. Submission of Matters to a Vote of Security
Holders.
 
 Not
Applicable.
 
 Item 5. Other Information.
 
 Not
Applicable.
 
 Item 6. Exhibits and Reports on Form 8-K and 8-K/A.
 (a)
    **Exhibit
      Number**
    **Description**31.1
    Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
    Certification
      by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
    Certification
      by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.32.2
    Certification
      by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
   (b)
    **Reports
      Item #**
    **Description**1.01
    Entry
      into a Material Definitive Agreement filed February 10,
    20058.01
    Other
      Events filed February 10, 20059.01
    Financial
      Statements and Exhibits filed February 10, 20058.01
    Other
      Events filed February 22, 20059.01
    Financial
      Statements and Exhibits filed February 22, 20051.01
    Entry
      into a Material Definitive Agreement filed February 24,
    20058.01
    Other
      Events filed February 24, 20058.01
    Other
      Events filed March 9, 20059.01
    Financial
      Statements and Exhibits filed March 9, 20057.01
    Regulation
      FD Disclosure filed March 10, 20051.01
    Entry
      into a Material Definitive Agreement filed March 22,
  20058.01
    Other
      Events filed March 22, 20059.01
    Financial
      Statements and Exhibits filed March 22,
2005
    27
  
 1.01
    Entry
      into a Material Definitive Agreement filed May 3, 20051.01
    Entry
      into a Material Definitive Agreement filed May 9, 20058.01
    Other
      Events filed May 9, 20058.01
    Other
      Events filed June 23, 20059.01
    Financial
      Statements and Exhibits filed July 15, 20051.01
    Entry
      into a Material Definitive Agreement filed September 7,
    20051.01
    Entry
      into a Material Definitive Agreement filed September 8,
    20051.05
    Changes
      in Control of Registrant filed September 8, 20051.01
    Entry
      into a Material Definitive Agreement filed October 17,
  20058.01
    Other
      Events filed October 17, 20051.01
    Entry
      into a Material Definitive Agreement filed October 31,
  20058.01
    Other
      Events filed October 31, 2005
 
 SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 
 Date:
    November
      14, 2005
    /s/
      Willard G. McAndrew, IIIEnergy
      & Engine Technology CorporationDate:
    November
      14, 2005
    /s/
      Willard G. McAndrew, IIIWillard
      G. McAndrew, IIICEO
      and PresidentDate:
    November
      14, 2005
    /s/
      Roger N. WurteleRoger
      N. WurteleCFO
      and Chief Accounting Officer
 
 *Print
the name and title of each signing officer under his signature.
 
  28