**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**





**[x]
      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934**





For
      the
      quarterly period ended March 31, 2006





**[
      ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934**


For
      the
      transition period from _______________ to _________________





000-29743


(Commission
      file number)







**INTERNAL
      HYDRO INTERNATIONAL INC.**


(Exact
      name of small business issuer as specified in its charter)







Florida
            88-0409143(State
                or other jurisdiction of
                incorporation or organization)
            (IRS
                Employer Identification
                No.)




**334
      S. HYDE PARK AVE., TAMPA, FLORIDA 33606**


**** (Address
      of principal executive offices) (Zip Code)





813-286-7144


(Issuer's
      telephone number)







Check
      whether issuer (1) has filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
      for
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days.




Yes
      [X]
      No [  ]






The
      number of shares outstanding of common stock as of May 1, 2006 is shown below:




There
        is
        a limited trading market for the registrant's Common Stock. There were
        81,285,498 shares of Common Stock, and 5,049,445 shares of preferred stock
        issued and outstanding as of March 31, 2006.


Documents
      Incorporated by Reference: None













1
 
 **INTERNAL
          HYDRO INTERNATIONAL INC.**
 **INDEX
          TO THE FORM 10-QSB**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2006**




PagePART I - FINANCIAL
              INFORMATION
            4Item
              1
            Financial
              Statements
            4Balance
              Sheets as of March 31, 2006
            4Statement
              of Operations for the years ended December 31, 2005 and 2004
            5Statement
              of Cash Flows for the years ended December 31, 2005 and 2004
            6Notes
                to Financial Statements for the three months ended March 31,
                2006
            7Item
              2
            Management's
              Discussion and Analysis or Plan of Operations
            15Item
              3
            Controls
              and Procedures
            24PART
              II - OTHER INFORMATION
            25Item
              1
            Legal
              Proceedings
            25Item
              2
            Unregistered
              Sales of Equity Securities and Use of Proceeds
            25Item
              4
            Submission
              of Matters to a Vote of Security Holders
            25Item
              6
            Exhibits
            25SIGNATURES
            26


2





Forward
      looking statements





We
      are
      including the following cautionary statement in this Form 10-KSB to make
      applicable and take advantage of the safe harbor provision of the Private
      Securities Litigation Reform Act of 1995 for any forward-looking statements
      made
      by, or on behalf of, the Company. Forward-looking statements include statements
      concerning plans, objectives, goals, strategies, expectations, future events
      or
      performance and underlying assumptions and other statements which are other
      than
      statements of historical facts. The statements contained herein and other
      information contained in this report may be based, in part, on management's
      estimates, projections, plans and judgments. These forward-looking statements
      are subject to certain risks and uncertainties that could cause actual results
      to differ materially from historical results or those anticipated. In this
      report, the words "anticipates", "believes", "expects", "intends", "future",
      "plans", "targets" and similar expressions identify forward-looking statements.
      Readers are cautioned not to place undue reliance on the forward-looking
      statements contained herein. We undertake no obligation to publicly revise
      these
      forward-looking statements to reflect events or circumstances that may arise
      after the date hereof. Our expectations, beliefs and projections are expressed
      in good faith and are believed to have a reasonable basis, including without
      limitations, management's examination of historical operating trends, data
      contained in our records and other data available from third parties, but there
      can be no assurance that management's expectations, beliefs or projections
      will
      result or be achieved or accomplished. In addition to other factors and matters
      discussed elsewhere herein, the following are important factors that could
      cause
      actual results to differ materially from those discussed in the forward-looking
      statements: our dependence on limited cash resources, dependence on certain
      key
      personnel within the Company, and the ability to raise additional capital;
      our
      ability to obtain acceptable forms and amounts of financing; the demand for,
      and
      price level of, our products and services; competitive factors; the ability
      to
      mitigate concentration of business in a small number of customers; the evolving
      industry and technology standards; the ability to protect proprietary
      technology; the dependence on key personnel; and our ability to efficiently
      manage our operations. Accordingly, actual results may differ, possibly
      materially, from the predictions contained herein.




3


**PART
      I. FINANCIAL INFORMATION**


**Item
      1. Financial Statements**




INTERNAL
      HYDRO INTERNATIONAL
      INC.




**BALANCE
        SHEET**
  **As
        of March 31,
        2006**


**ASSETS****CURRENT
                      ASSETS**Cash
                      and equivalents
                  
                  **$**
                  **93,797**Security
                      Deposit
                  
                  
                  **2,500****96,297****PROPERTY
                      & EQUIPMENT**Computers
                      & Equipment(net
                      of accumulated depreciation)
                  
                  
                  **10,137****OTHER
                      ASSETS**Investment
                      - Langley Park
                  
                  
                  **14,124**Investment
                      - Kinetic Energy
                  
                  
                  **68,750****82,874****$**
                  **189,308****LIABILITIES
                      & STOCKHOLDERS' EQUITY****CURRENT
                      LIABILITIES**Accounts
                      payable
                  
                  **$**
                  **12,003**Contingent
                      Payroll Tax
                  
                  
                  **97,627**Accrued
                      Liabilities
                  
                  
                  **60,948**Due
                      to shareholder
                  
                  
                  **77,500**Notes
                      Payable
                  
                  
                  **4,900****252,978****OTHER
                      LIABILITIES**Debt
                      under professional management (Note 4)
                  
                  
                  **906,879**Total
                      Liabilities
                  
                  
                  **1,159,857****STOCKHOLDERS'
                      EQUITY**Preferred
                      stock, $.001 par value, 70,000,000 shares authorized5,049,445
                      shares issued and outstanding
                  
                  
                  **5,049**Common
                      stock, $.001 par value,200,000,000 shares authorized81,146,831
                      shares issued and outstanding
                  
                  
                  **81,147**Additional
                      paid-in capital
                  
                  
                  **7,111,504**Unrealized
                      gain on Investment
                  
                  
                  **(83,786**
                  **)**Deficit
                      accumulated during Development Stage
                  
                  
                  **(8,084,463**
                  **)**Total
                      Stockholders' Equity
                  
                  
                  **(970,549**
                  **)****$**
                  **189,308**


See
        accompanying notes to unaudited financial
        statements


4


**INTERNAL
        HYDRO INTERNATIONAL INC.**




**STATEMENT
        OF OPERATIONS**
  For
          the
          quarters ended March 31, 2006 and 2005
  **Date
                      of Inception****3
                      Months Ended**
                  
                  
                  **3
                      Months Ended**
                  
                  
                  **through****March
                      31, 2006**
                  
                  
                  **March
                      31, 2005**
                  
                  
                  **March
                      31, 2006**NET
                      SALES
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -COST
                      OF SALES
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -GROSS
                      PROFIT
                  
                  
                  -
                  
                  
                  -SELLING,
                      GENERAL & ADMINISTRATIVE EXPENSES
                  
                  
                  **1,529,683**
                  
                  
                  **476,754**
                  
                  
                  **5,703,058**RESEARCH
                      & DEVELOPMENT
                  
                  
                  **86,644**
                  
                  
                  **65,137**
                  
                  
                  **752,577**LOSS
                      FROM OPERATIONS
                  
                  
                  **1,616,327**
                  
                  
                  **541,891**
                  
                  
                  **6,455,635**LOSS
                      ON SALE OF SECURITIES
                  
                  
                  **-**
                  
                  
                  **-**
                  
                  
                  **697,237**PERMANENT
                      IMPAIRMENT WRITEDOWN ONMARKETABLE
                      SECURITIES
                  
                  
                  **7,996**
                  
                  
                  **-**
                  
                  
                  **911,464**OTHER
                      INCOME
                  
                  
                  **(65,000**
                  **)**
                  
                  
                  
                  
                  **(65,000**
                  **)**INTEREST
                      EXPENSE
                  
                  
                  **1,096**
                  
                  
                  **16,800**
                  
                  
                  **85,127**NET
                      LOSS
                  
                  **$**
                  **1,560,419**
                  
                  **$**
                  **558,691**
                  
                  **$**
                  **8,084,463**BASIC
                      NET LOSS PER COMMON SHARE
                  
                  **$**
                  **(0.02**
                  **)**
                  **$**
                  **(0.02**
                  **)**DILUTED
                      NET LOSS PER COMMON SHARE
                  
                  **$**
                  **(0.02**
                  **)**
                  **$**
                  **(0.02**
                  **)**WEIGHTED
                      AVERAGE OF COMMON SHARES OUTSTANDING
                  
                  
                  **70,154,950**
                  
                  
                  **26,751,149**
 See
        accompanying notes to unaudited financial
        statements





5


INTERNAL
      HYDRO INTERNATIONAL INC.




**STATEMENT
        OF CASH FLOWS**
  For
        the
        quarters ended March 31, 2006 and 2005
  **Accumulated
                    from****Date
                    of
                    Inception****For
                    the period ended**
                
                
                **For
                    the period ended**
                
                
                **through****March
                    31, 2005**
                
                
                **March
                    31, 2006**
                
                
                **March
                    31, 2006****OPERATING
                    ACTIVITIES**Net
                    Loss
                
                $
                (558,691
                )
                $
                (1,560,419
                )
                $
                (8,084,463
                )Adjustments
                    to reconcile net loss to cash used by operating
                    activities:Depreciation
                    expense
                
                
                925
                
                
                980
                
                $
                8,611Rent
                    Deposit
                
                
                -
                
                
                (2,500
                )
                $
                (2,500
                )Issuance
                    of common and preferred stock for services performed
                
                
                451,605
                
                
                1,368,347
                
                $
                4,844,484Issuance
                    of common stock for Regent
                
                
                -
                
                
                -
                
                $
                296,000Other
                    Income from cancellation of common stock
                
                
                
                
                
                -
                    65,000
                
                $
                (65,000
                )Loss
                    on sale of securities
                
                
                -
                
                
                -
                
                $
                697,237Permanent
                    Impairment of marketable securities
                
                
                -
                
                
                7,996
                
                $
                911,464Changes
                    in assets and liabilitiesStock
                    subscription receivable
                
                
                2,500
                
                
                -
                
                $
                -Stock
                    Loan receivable
                
                
                -
                
                
                -
                
                $
                7,000Contingent
                    payroll liability
                
                
                -
                
                
                59,639
                
                $
                97,626(Decrease)
                    Increase in accounts payable and accrued liabilities
                
                
                20,005
                
                
                (4,931
                )
                $
                74,048Cash
                    used by operating activities
                
                $
                (83,656
                )
                $
                (195,888
                )
                $
                (1,215,493
                )**INVESTING
                    ACTIVITIES**Purchase
                    of equipment
                
                $
                -
                
                $
                (665
                )
                $
                (16,668
                )Cash
                    on proceeds on sale of marketable securities
                
                
                -
                
                
                -
                
                $
                193,388Employee
                    advances
                
                
                -
                
                
                -
                
                $
                (7,000
                )Cash
                    provided used in investing activities
                
                $
                -
                
                $
                (665
                )
                $
                169,720**FINANCING
                    ACTIVITIES**Proceeds
                    from shareholder advances
                
                $
                47,200
                
                $
                289,750
                
                $
                1,139,570Cash
                    provided by financing activities
                
                $
                47,200
                
                $
                289,750
                
                $
                1,139,570**INCREASE
                    IN CASH AND CASH EQUIVALENTS**
                
                $
                (36,456
                )
                $
                93,197
                
                $
                93,797**CASH
                    AND CASH EQUIVALENTS, beginning of period**
                
                
                38,051
                
                
                600
                
                
                -**CASH
                    AND CASH EQUIVALENTS, end of period**
                
                $
                1,595
                
                $
                93,797
                
                $
                93,797**SUPPLEMENTAL
                    SCHEDULE OF NON-CASH INVESTING AND FINANCING
                    ACTIVITIES**Stock
                    issued for debt conversion
                
                
                
                
                $
                377,950


See
      accompanying notes to unaudited financial
      statements





6
 **INTERNAL
            HYDRO INTERNATIONAL INC.**
 **NOTES
            TO FINANCIAL STATEMENTS**
 **FOR
            THE THREE MONTHS ENDED MARCH 31, 2006**
   NOTE
        1 -
        DESCRIPTION OF BUSINESS AND SIGNIGICANT ACCOUNTING
        POLICIES





Background
      and Nature of Business





INTERNAL
      HYDRO INTERNATIONAL INC., (formerly Internal Command International (“ICI”)) was
      incorporated under the laws of the State of Florida on January 21, 2003 (the
      “Company”).





On
      January 2, 2004 the Company entered into a merger agreement with Home Services
      International, Inc. (“HSI”). HSI issued 27,500,000 shares of its Series A
      Preferred stock. The Company is a development stage enterprise. The Company
      intends to manufacture and distribute its alternative energy products that
      use
      water pressure flow to generate electricity. In connection with this
      acquisition, the company was re-named INTERNAL HYDRO INTERNATIONAL
      INC.





As
      a
      result of the merger transaction with HSI, the former Company stockholders
      obtained control of HSI’s voting stock. For financial accounting purposes, the
      acquisition was a reverse acquisition of HSI by the Company, under the purchase
      method of accounting, and was treated as a recapitalization with the Company
      as
      the acquirer. Accordingly, the historical financial statements have been
      restated after giving effect to the January 2, 2004, acquisition of the Company.
      The financial statements have been prepared to give retroactive effect to
      January 21, 2003 (date of inception), of the reverse acquisition completed
      on
      January 2, 2004, and represent the operations of the Company. Consistent with
      reverse acquisition accounting: (i) all of the Company’s assets, liabilities,
      and accumulated deficit, are reflected at their combined historical cost (as
      the
      accounting acquirer) and (ii) the preexisting outstanding shares of the HSI
      (the
      accounting acquiree) are reflected at their net asset value as if issued on
      January 21, 2003.





Basis
      of
      Presentation





The
      Company follows the accrual basis of accounting in accordance with accounting
      principles generally accepted in the United States of America and has adopted
      a
      year-end of December 31.





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





Management
      further acknowledges that it is solely responsible for adopting sound accounting
      practices, establishing and maintaining a system of internal accounting control
      and preventing and detecting fraud. The Company’s system of internal accounting
      control is designed to assure, among other items, that 1) recorded transactions
      are valid; 2) valid transactions are recorded; and 3) transactions are recorded
      in the proper period in a timely manner to produce financial statements which
      present fairly the financial condition, results of operations and cash flows
      of
      the Company for the respective periods being presented.





Going
      Concern Uncertainty





The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplate continuation of the Company as a going concern. As reflected in
      the
      accompanying consolidated financial statements, the Company has had recurring
      losses and negative cash flows from operations, and negative working capital.
      The Company has abandoned it’s only operating business segment and is attempting
      to raise capital seek acquisition targets and commence operations in a new
      business segment. There are no assurances that the Company will be successful
      in
      any of these endeavors. These factors raise substantial doubt about the
      Company's ability to continue as a going concern. Without realization of
      additional capital, it would be unlikely for the Company to continue as a going
      concern. The financial statements do not include any adjustments relating to
      the
      recoverability and classification of recorded asset amounts, or amounts and
      classification of liabilities that might be necessary should the Company be
      unable to continue its existence.





7
 
 **INTERNAL
          HYDRO INTERNATIONAL INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2006**




NOTE
      1 -
      DESCRIPTION OF BUSINESS AND SIGNIGICANT ACCOUNTING POLICIES -
      continued








Principles
      of Consolidation





The
      accompanying consolidated financial statements include the accounts of HSI
      and
      its wholly owned subsidiary, ICI. All intercompany accounts and transactions
      have been eliminated.





Use
      of
      Estimates





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





Fair
      Value of Financial Instruments





The
      carrying amount of cash, accounts payable, notes payable and accrued
      liabilities, as applicable, approximates fair value due to the short term nature
      of these items.





Cash
      and
      Cash Equivalents





The
      Company considers all highly liquid investments purchased with original
      maturities of three months or less to be cash equivalents.





Concentration
      of Credit Risk





The
      Company places its cash in what it believes to be credit-worthy financial
      institutions. However, cash balances may exceed FDIC insured levels at various
      times during the year. There were no bank balances exceeding insured limits
      at
      March 31, 2006.





Revenue





There
      was
      no revenue generated in the quarter ended March 31, 2006.





Income
      Taxes





Income
      taxes are provided for based on the liability method of accounting pursuant
      to
      Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
      Income Taxes.” Deferred income taxes, if any, are recorded, using enacted tax
      rates expected to apply, to reflect the tax consequences on future years of
      differences between the tax bases of assets and liabilities and their financial
      reporting amounts at each year-end.





Loss
      Per
      Share





The
      Company calculates earnings per share in accordance with SFAS No. 128, "Earnings
      Per Share," which requires presentation of basic earnings per share ("Basic
      EPS") and diluted earnings per share ("Diluted EPS"). The computation of Basic
      EPS is computed by dividing loss available to common stockholders by the
      weighted average number of outstanding common shares during the period. Diluted
      EPS gives effect to all dilutive potential common shares outstanding during
      the
      period. The computation of Diluted EPS does not assume conversion, exercise
      or
      contingent exercise of securities that would have an anti-dilutive effect on
      earnings. As of March 31, 2006, there were no stock options and 107,497 warrants
      outstanding.








8
 
 **INTERNAL
          HYDRO INTERNATIONAL INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2006**





NOTE
      1 -
      DESCRIPTION OF BUSINESS AND SIGNIGICANT ACCOUNTING POLICIES -
      continued




Stock
      Based Compensation





In
      1996,
      SFAS No. 123 "Accounting for Stock-Based Compensation," became effective for
      the
      Company. SFAS No. 123, which prescribes the recognition of compensation expense
      based on the fair value of options on the grant date, allows companies to
      continue applying APB 25 if certain pro forma disclosures are made assuming
      hypothetical fair value method, for which the Company uses the Black-Scholes
      option-pricing model.





The
      Company accounts for employee stock options in accordance with Accounting
      Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
      Employees.” Under APB 25, the Company recognizes no compensation expense related
      to employee stock options, as no options are granted at a price below market
      price on the date of grant.





For
      non-employee stock based compensation, the Company recognizes an expense in
      accordance with SFAS No. 123 and values the equity securities based on the
      fair
      value of the security on the date of grant. For stock-based awards the value
      is
      based on the market value for the stock on the date of grant and if the stock
      has restrictions as to transferability a discount is provided for lack of
      tradability. Stock option awards are valued using the Black-Scholes
      option-pricing model.





Advertising





The
      Company expenses advertising costs as incurred. The Company had no advertising
      expense in the quarter ended March 31, 2006.





Recently
      Issued Accounting Pronouncements





In
      December 2004 the FASB issued a revised Statement 123 (SFAS 123R),
“ *Accounting
      for Stock-Based Compensation* ”
      requiring public entities to measure the cost of employee services received
      in
      exchange for an award of equity instruments based on grant date fair value.
      The
      cost will be recognized over the period during which an employee is required
      to
      provide service in exchange for the award — usually the vesting period. The
      Company is evaluating the impact of this new pronouncement and does not expect
      the effect of implementation will have a significant impact on the Company’s
      financial statements.





NOTE
      2 -
      RELATED PARTY TRANSACTIONS





The
        Company borrows funds from officers and shareholders from time to time to
        cover
        operating expenses and certain accounts payable. As of March 31, 2006, the
        balance of these loans was $77,500. Currently, there has been no repayment
        terms
        specified for the shareholders loans; therefore, the Company has classified
        the
        loans as a current liability. These are non-interest bearing loans.


In
      addition, our Company has entered into an a comprehensive Agreement for
      Licensing, Joint Venture Agreement, and Manufacturing Agreement on October
      12,
      2005 with Regent Machine Products, LLC. for the exclusive rights to the
      HydroCam/EC V technology which was developed by Regent Machine Products, LLC
      .
      Anthony Pecoraro, our new Chairman of the Board of Directors and VP of New
      Technology is the current Vice President and Co-Founder of Regent Machine
      Products, LLC. In addition, Mr. Pecoraro is married to Mary Pecoraro, the
      President and Co-Founder of Regent Machine Products, LLC. who also serves as
      our
      Secretary. Mr. Pecoraro was appointed as Chairman of the Board of Directors
      on
      January 18, 2006. Mr. Pecoraro was not affiliated with the Company at the time
      the comprehensive Agreement for Licensing, Joint Venture Agreement, and
      Manufacturing Agreement was signed although Mary Pecoraro was Secretary of
      the
      Company at that time. The total consideration for the Regent Contract was
      7,400,000 restricted shares and $150,000, of which five payments of $8,333
      for a
      total of $41,665 out of a total of 18 payments were expensed in the quarter
      ended March 31, 2006.











9
 
 **INTERNAL
          HYDRO INTERNATIONAL INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2006**





NOTE
      3 -
      NOTE PAYABLE





The
      Note
      Payable is a 1 year Term, due April 30, 2006. The Note carries an interest
      rate
      payable of 12% per annum. The Note is Convertible into common stock at the
      discretion of the Lender, including all accrued interest at the lesser of $7.50
      per share or at a 30% discount to the three lowest closing bid prices for the
      five days prior to the conversion date. The Note also includes a warrant to
      purchase 100,000 shares of common stock at a price of $5.00 per share for a
      period of 5 years.





The
      Company has valued the beneficial conversion feature of this Note Payable at
      $60,000. This amount was charged as a discount to the note and amortized to
      interest expense over a one year period. The Note has a balance of
      $4,900.





During
        the quarter ended March 31, 2006, the Lender exercised their right to convert
        a
        portion of the amount due to common stock. A total of $50,227 has been converted
        into 928,679 common shares including accrued interest.








NOTE
      4 -
      STOCKHOLDERS' DEFICIENCY





During
      the year ended December 31, 2003, HSI declared a 1 for 28.9 reverse stock split.
      The number of shares presented in these financial statements has been
      retroactively restated for all periods to reflect this reverse stock
      split.





During
      the year ended December 31, 2004, the Company declared a 5 for 1 stock split.
      The number of shares presented in these financial statements has been
      retroactively restated for all periods to reflect this reverse stock
      split.





During
      the year ended December 31, 2005, 7,400,000 shares were issued for the
      comprehensive Agreement for Licensing, Joint Venture Agreement, and
      Manufacturing Agreement on October 12, 2005 with Regent Machine Products,
      LLC.





During
      the year ended December 31, 2002, the Company placed 2,813,180 shares of its
      common stock in an escrow account. These shares are contingently issuable as
      they are to be issued to creditors as part of a plan to negotiate Company
      obligations through an intermediary. The Company is attempting to settle
      obligations by negotiating with creditors to take Company common stock as
      payment for the obligations. During the year ended December 31, 2002, the
      Company had not issued any of these shares to creditors. During the year ended
      December 31, 2003, the Company negotiated a settlement in which 249,905 shares
      of common stock were issued out of escrow to settle a creditor obligation that
      had an original balance of $65,000. The settlement was recorded at the trading
      value of the shares on the date of settlement. That value was $299,866. The
      result was an additional expense of $234,866 charged to operations for the
      year
      ended December 31, 2003. During the quarter ended March 31, 2006, the Company
      did not issue any of these escrow shares to creditors.





On
      July
      29, 2004 (the Company entered into a Stock Purchase Agreement ("Purchase
      Agreement"), effective October 7, 2004, with Langley Park Investments Plc
      ("Langley"), a corporation organized under the laws of England and Wales which
      is admitted to trade on the London Stock Exchange ("LSE") as an investment
      trust. Pursuant to the Purchase Agreement, the Company sold 2,375,000 shares
      (post-split) of its common stock ("Company Stock") to Langley for a total
      purchase price of approximately $1,780,000.





Langley
      paid the purchase price by delivering 882,778 Ordinary Shares of Langley
      ("Langley Shares") to the Company with a value of one (1.00) British Pound
      Sterling (approximately U.S.$1.80) per share. The Company issued the Company
      Stock to Langley. Both the Company Stock and the Langley Shares will initially
      be placed into escrow, including fifty percent (50%) of the Langley Shares
      to be
      deposited into escrow as Downside Price Protection (the "Langley Escrow
      Shares").








10
 
 **INTERNAL
          HYDRO INTERNATIONAL INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2006**





NOTE
      4 -
      STOCKHOLDERS' DEFICIENCY - continued




The
      Company intends to liquidate the Langley Shares released to it within a
      reasonable period of time following their listing on the LSE in order to fund
      operations.





On
      November 3, 2004 the Company sold 441,389 shares of Langley Park Investment,
      (London Exchange: LPI) for $193,388. This was the first liquidation pursuant
      to
      the Agreement. These gross proceeds represented a loss of $697,237 based upon
      the difference between the selling price on November 3, 2004 and the Company’s
      trading price on July 29, 2004.





On
      the
      two (2) year anniversary of the Purchase Agreement ("Two Year Anniversary"),
      the
      market value of the Company's common stock will be compared to the purchase
      price of the Company Stock under the Purchase Agreement" Market Value" is
      defined as the average of the ten (10) closing bid prices per share of the
      Company's common stock during the ten (10) trading days immediately preceding
      the Two Year Anniversary of the Agreement. If the Market Value of the Company's
      common stock on the Two Year Anniversary is the same or higher than purchase
      price per share, then at that time, the Company will receive all of the Langley
      Escrow Shares. If the Market Value on the Two Year Anniversary is less than
      purchase price per share, then for each percentage point decline in value,
      the
      Company must sell a corresponding percentage of the Langley Escrow Shares back
      to Langley for nominal consideration, up to the maximum number of Langley Escrow
      Shares, and the balance of the Langley Escrow Shares is released from escrow
      to
      the Company.





Internal
      Hydro International was approached with the investment by the Langley, at a
      time
      where the 2 year lock up of the shares to be issued was voted on by the Board
      of
      Directors as being acceptable for purposes of investment given the stock price
      and discount proposed by Langley. Given that the escrowed shares which would
      be
      held by Langley of IHDR’s shares in the fund, these were accounted for in the
      analysis and date on December 31, 2004, as being accounted for as if they would
      eventually be sold at the two year mark for the investment holding period.
      At
      the time of the investment and at the time of the accounting determination,
      it
      was believed by the Company’s management that the Company would meet the
      criteria as set forth in the Langley agreement which would allow the sale of
      the
      remaining shares in the fund. The Company has recorded an additional unrealized
      loss of $83,786 on this investment as of March 31, 2006 due to this provision.
      The additional write down was calculated on the basis of the quoted value of
      the
      Langley shares less the pro-rata value of shares that would be returned to
      Langley based on the trading value of the Company's common stock at March 31,
      2006.


NOTE
      5 -
      COMMON AND PREFERRED STOCK





**COMMON
      STOCK**


The
      Company’s articles of incorporation authorize the issuance of up to 200,000,000
      shares of common stock, with a par value of $.001.





The
        Company issues its common stock from time to time to compensate employees
        and
        consultants as consideration for services rendered. These shares are valued
        at
        the trading value on the date of grant. For the quarter ended March 31, 2006,
        a
        total of 9,490,758 shares were issued to 15 individuals as payment for services
        totaling $1,348,347.
 
 During
          the quarter ended March 31, 2006, the Company cancelled 1,000,000 common
          shares
          as part of a legal settlement.
 During
        the quarter ended March 31, 2006, shareholders converted 2,117,948 Preferred
        shares into the Company's Common shares on a 1 for 1
        basis.


11
 
 **INTERNAL
          HYDRO INTERNATIONAL INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2006**




**PREFERRED
        STOCK**
 The
        Company's articles of incorporation authorize the issuance of up to 70,000,000
        shares of serial A convertible preferred stock, with a par value of $.001.
        Series A convertible stock can be exchanged at the option of the stockholder
        into shares of common stock at the rate of one share of series A
        convertible





NOTE
      6 -
      FURNITURE AND EQUIPMENT





Furniture
      and equipment is stated at cost less accumulated depreciation. Depreciation
      is
      recorded on a straight-line basis over the estimated useful lives of the assets
      of 3 to 5 years. Depreciation
        expense for the quarters ended March 31, 2006 and 2005 was $980 and $925
        respectively.





Property
      and equipment consisted of the following at March 31, 2006:





Office
                and computer equipment
            
            $
            34,053Less
                accumulated depreciation
            
            
            23,916Furniture
                and equipment, net
            
            $
            10,137





NOTE
      7 -
      STOCK OPTIONS





There
      were no stock options granted nor was there any pro forma effect of the vesting
      of options granted in previous periods in the quarter ended March 31,
      2006.





NOTE
      8 -
      COMMITMENTS AND CONTINGENCIES





The
      Company is not delinquent and is not attempting to pay current creditors and
      vendors with common stock.





However,
      prior to the merger of Internal Command with Home Services, the Company (HSVI)
      had incurred additional deficits in cash flow from operating activities. The
      Company had accrued approximately $343,000 in obligations to vendors,
      consultants and former employees. We are attempting to settle these obligations,
      primarily through the issuance of common stock. Management believes we will
      ultimately settle these obligations for no more than amounts accrued at December
      31, 2004. As a part of the Merger Agreement with Internal Command International,
      Inc. (ICI), the then Chief Executive Officer of HSVI, Jay Budd, had and did
      affirm that the outstanding debts of HSVI have been properly structured for
      management of the debt post-merger; namely, that the debt was in the hands
      of
      suitable professional debt management team, including Fletcher & Associates,
      and Harry J. Miller, PLLC, that there has been set aside as part of the issued
      common stock for obligation and satisfaction of the debt, and that the incoming
      principals of ICI will be held harmless for this debt. The company in the summer
      of 2005, released Harry Miller,
      PLLC and Fletcher & Associates from their duties as debt managers, taking
      control of such matters internally due to the amount of legal expertise held.
      To
      date, the shares issued to secure these debts are unissued, and held by both
      Harry Miller PLLC in trust, and with the company, should the need arise for
      settlement of any such debts, if communication and demand for the same is made.
      To date no such verified debt demands have been made, so the shares are still
      held in safekeeping. Any settlements will be valued at the fair value of the
      stock at the time the settlement is reached, or some other amount as
      negotiated.








12
 
 **INTERNAL
          HYDRO INTERNATIONAL INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2006**





NOTE
      9 -
      MERGER TRANSACTION





On
      January 2, 2004, the Company entered into a merger transaction with HSI. The
      Company had net assets of $385. The net deficit of HSI was approximately
      $1,034,000 at January 2, 2004. As discussed in Note 1, the Company accounted
      for
      this transaction under the purchase method of accounting, and it was treated
      as
      a recapitalization with the Company as the acquirer. HSI had office equipment
      of
      approximately $2,000, accounts payable and accrued liabilities of $400,000
      and
      other liabilities of $636,000.





NOTE
      10 -
      LOSS PER SHARE





Outstanding
      options and warrants were not considered in the calculation for diluted earnings
      per share for the years ended December 31, 2004 and 2005 because the effect
      of
      their inclusion would be antidilutive.





Warrants
      and options to purchase 107,497 shares of common stock were outstanding and
      excluded from the loss per share calculation at December 31, 2005.





NOTE
      11 -
      INVESTMENTS





During
      the year ended December 31, 2004, the Company entered into a Stock Purchase
      Agreement to acquire 882,778 shares of Langley Park Investments Plc ("Langley"),
      a corporation organized under the laws of England and Wales which is admitted
      to
      trade on the London Stock Exchange ("LSE") as an investment trust. Pursuant
      to
      the Purchase Agreement, the Company sold 2,375,000 shares (post-split) of its
      common stock ("Company Stock") to Langley for a total purchase price of
      $1,781,250 based on the trading value of the Company’s shares delivered to
      Langley. The Company sold one half of its Langley holdings during the year
      ended
      December 31, 2004.





The
      Company currently classifies all investment securities as available-for -sale.
      These securities are presented at their estimated fair value. Unrealized gains
      and losses on such securities, net of the related income tax effect, are
      excluded from earnings and reported as a separate component of stockholders’
equity until realized. Realized gains and losses are included in earnings and
      are derived using the specific identification method for determining the cost
      of
      securities sold.




Investment
        in Langley and Kinetic securities consisted of the following at March 31,
        2006:




Cost
            
            
            Gross
                Gains
            
            
            Unrealized
                Losses
            
            
            Impairment
                Write-down
            
            
            Fair
                ValueLangley
              Kinetic
            
            $
              
              $
            890,625
              
              187,500
            
            
            ---
              ----
            
            $
              
              $
            83,789
              
              --
            
            $
              
              $
            (792,714
              
              (118,750
            )
              
              )
            $
              
              $
            14,124
              
              68,750








During
      the quarter ended September 30, 2005, the Company determined that the decline
      in
      value of the Langley shares was other than temporary. They believed that it
      had
      the ability and intent to hold an investment indefinitely. However, there was
      no
      basis to determine a forecasted recovery of fair value up to (or beyond) the
      cost of the investment. Therefore, the Company wrote the carrying value down
      to
      the investment's quoted trading value at September 30, 2005.





Proceeds
      from sales of equity securities were $193,388 and gross realized (losses) gains
      were ($697,237) for the year ended December 31, 2004. The fair value at December
      31, 2005 is determined based on the trading price of Langley and translated
      to
      U.S. dollars at the exchange rate on December 31, 2005.





The
      value
      on March 31, 2006 is determined based on the trading price of Langley and
      translated to U.S. dollars at the exchange rate on March 31, 2005.








13
 
 **INTERNAL
          HYDRO INTERNATIONAL INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2006**




NOTE
      11 -
      INVESTMENTS - continued





During
        the year ended December 31, 2004, the Company invested in Kinetic Energy
        Systems, Inc. (“Kinetic”) by issuing 1,250,000 shares of its common stock for
        approximately 20% of Kinetic. The value of the investment was determined
        to
        $187,500 based on the trading price of the Company’s common stock at the time of
        the agreement. The Company intends to jointly develop and market complimentary
        technologies with Kinetic. The Company classifies its investment in Kinetic
        as
        available for sale and has carried its investment at cost. Kinetic is a private
        company and there is no quoted market price for its securities. The company
        recorded an impairment on the investment in the year ended December 31, 2005.
        The impaired value is $68,750. The impairment was based on management’s estimate
        of value considering the financial position and cash flows of kinetic. The
        company recorded the $118,750 impairment as a charge in the accompanying
        statement of operations for the year ended December 31, 2005. The Company
        owns
        2,000,000 voting preferred shares of Kinetic Energy Systems, Inc. Kinetic
        has
        10,000,000 preferred shares issued and outstanding and 1,000,000 common shares
        outstanding. The Company’s interest in Kinetic is approximately 18%. The Company
        exercises no management control and therefore, the cost method was
        used.


14


**Item
      2. Management's Discussion and Analysis or Plan of Operation.**





**GENERAL
      INFORMATION ABOUT INTERNAL HYDRO**





Internal
      Hydro International, Inc. ("IHDR" or "Company") was organized on December 31,
      1996 as Tel-Voice Communications, Inc. as a Nevada Corporation. On January
      6,
      2003, we changed our name to Home Services International, Inc. On January 2,
      2004, the Company entered into a merger agreement with the Company and on
      January 13, 2004, the name was changed to Internal Hydro International, Inc.
      The
      Company was re-domiciled to Florida on February 4, 2004. We are a publicly
      traded company listed on the OTC Electronic Bulletin Board under the symbol
      "IHDR". Our offices are located at 334 S. Hyde Park Ave., Tampa, Florida 33606.
      Our website is www.internalhydro.com.





**HISTORY
      OF COMPANY**





Tel-Voice
      Communications, Inc. ("Tel-Voice") was incorporated under the laws of the State
      of Nevada on December 31, 1996 to engage in any lawful corporate activity,
      including, but not limited to, selected mergers and acquisitions. From 1996-2000
      Tel-Voice was a development stage company with no business activity. On June
      30,
      2000, Tel-Voice acquired Smartdotcom, Inc. ("SDC") in a transaction accounted
      for as a reverse merger. The Company retained the name Tel-Voice Communications,
      Inc. SDC had developed a technology that provides private electronic networks
      for labor unions and integrated communities, both of which include subscribers
      of the unions and communities. SDC intended to provide the hardware, software
      and technical support required to setup and maintain the networks; however,
      SDC
      was never able to grow the Company due to liquidity issues.





In
      December 2002, we addressed its liquidity problems and discontinued the
      operations of SDC and determined that it would abandon this business plan.
      On
      December 16, 2002, we closed a stock for debt exchange with its creditors
      effective on December 11, 2002 whereby all of its outstanding debt was converted
      to unregistered common stock at a conversion rate of one (1) share of common
      stock for each $0.45 of debt. In addition, on January 10, 2003, a majority
      of
      the shareholders approved a reverse split of the 28.9 shares of the old common
      stock for 1 share of new common stock effective January 13, 2003, the
      acquisition of a private entity name Home Services, Inc. and a name change
      to
      Home Services International, Inc.





Home
      Services International, Inc. (“HSVI”) intended to act as a holding company for
      service businesses related to the home building and home buying that want to
      expand into national markets. HSVI intended to acquire, joint venture and
      develop such businesses.





However,
      HSVI was presented with a business plan for a unique alternative energy
      technology by the management of Internal Command International (“ICI”) a Florida
      based private entity. HSVI felt that the Energy Commander technology for low
      impact hydro power production presented a unique opportunity. HSVI saw ICI’s
      technology as fulfilling a unique niche in the energy market. Thus, HSVI sought
      to acquire the technology, and related expertise through the reverse merger
      process.





On
      January 2, 2004, Internal Hydro entered into a merger agreement with Home
      Services International, Inc. ("HSVI"). HSVI issued 27,500,000 shares of its
      Series A Preferred stock to the shareholders of ICI. In connection with this
      acquisition, the company was re-named Internal Hydro International, Inc.
      (“IHDR”). On February 4, 2004, the company was redomiciled to Florida. ICI was
      not a related party.





As
      a
      result of the merger transaction with HSVI, the former Company stockholders
      obtained control of HSVI's voting stock. For financial accounting purposes,
      the
      acquisition was a reverse acquisition of HSVI, under the purchase method of
      accounting, and was treated as a recapitalization with the Company as the
      acquirer.




















15




Item
      2. Management's Discussion and Analysis or
      Plan of Operation - continued




**BUSINESS
      STRATEGY**





IHDR
      is a
      development stage enterprise. We intend to manufacture and distribute
      alternative energy products that use water pressure flow to generate
      electricity. IHDR is currently finalizing production units of the Energy
      Commander Version Five ("EC V") super efficient low impact hydro units. The
      Company entered into an a comprehensive Agreement for Licensing, Joint Venture
      Agreement, and Manufacturing Agreement on October 12, 2005 with Regent Machine
      Products, LLC. for the exclusive rights to the HydroCam/EC V technology which
      was developed by Regent Machine Products, LLC. Anthony Pecoraro, our Chairman
      of
      the Board of Directors and Vice President of New Technology Development, is
      also
      the Vice President and Co-Founder of Regent Machine Products, LLC.





IHDR
      has
      now entered into the production and fielding phase of its business plan, both
      domestically, and with an overseas strategic partner. IHDR is now centering
      activities on the final production plans, of a 10 unit fielding of its new
      energy units, the EC V. These units will be deployed to strategic locations
      around North America and in Europe for direct industrial use and for use in
      industrial flows such a cement, chemical, refineries, electrical utility plants,
      steam lines, pipelines, cooling applications and with application to natural
      flows such as water pipelines, rivers, aquaducts, and dams that can not support
      normal turbine hydro systems. Additionally, IHDR is identifying undervalued
      and
      underutilized alternative energy technologies that the company can either
      license or acquire other technologies as second divisions for the corporation.
      This will be done in order to maximize shareholder value and to utilize the
      relationships in the EU and other alternative energy friendly
      areas.




Initial
      production of the EC units will be done in Europe with Internal Hydro’s joint
      venture partner, Cm2 and in the United States with a domestic partner and
      production team. Cm2's production facility is located in Terni, Italy, about
      one
      hour north of Rome. The facility encompasses a large 19,000 sq. meter area
      with
      a 7,000 sq. meter production warehouse. With on staff engineers, marketing
      and
      production, Cm2 is well positioned to handle the Energy Commander (“EC”)
      systems. Cm2 manufactures and produces large industrial electrical components
      for utilities and industries, including such items as transformers, MV and
      LV
      electrical switchboards, auxiliaries and conduits for big transformers, cooling
      ducts, conduit bars, motors and generators. Cm2 also works in the area of hydro
      technologies for implementation of systems to unutilized water flows, where
      the
      EC units will fill a large role. Cm2's clients include Siemens, Colgate
      Palmolive Europe, Alitalia and every large Italian utility, among others. Cm2
      has already arranged and dedicated through their engineering department a proper
      space in their 800,000 sq. foot warehouse for hosting the final development
      and
      the starting of the production line for the EC generator. Cm2 has also reached
      an agreement with Politecnico, one of the foremost Italian universities, for
      their endorsement of the technology under a transfer plan which we think will
      assist Cm2 in obtaining EU grants and the contribution from the Italian state
      and from the regional governments. Cm2 is ISO 9001 certified, and IQ NET
      certified for the production, maintenance and installation of all electrical
      systems, as well as maintaining certifications in the same for quality control.
      RINA (Italian Air and Shipping Registry), certifies that Cm2 works in accordance
      with ISO 9001 quality regulations in the making of the following products --
      process -- services: Planning, production, installation and assistance of civil
      and industrial technological systems for electric, electronic and mechanical
      sectors. We believe that additional manufacturing will occur in the United
      States, with other machining houses and manufacturers, yet to be selected and
      negotiated. However, IHDR has identified potential production partners in the
      United States that will be able to be contracted for machining and production
      purposes of the EC V.




The
      patent for the base technology is held under a permanent assignment from the
      inventor, Rianey Nelson. Other intellectual property patents on the new
      technology will be generated into patent pending status before and commensurate
      with fielding. Additional patents will, in the opinion of management, be
      generated from the improvements in the technology.























16




Item
      2. Management's
      Discussion and Analysis or Plan of Operation -
      continued




IHDR
      has
      several advantages over all other alternative energy sources available. The
      patented Energy Commander ( “ EC ” )
      system
      represents the first time, to our knowledge, that a technology has been created
      to use the positive displacement of water pressure to create mechanical force
      to
      create electricity. The advantages of the EC are numerous. Primarily, the system
      will use 100% of the flow pressure into the system, unlike hydro units that
      are
      only 30% to 70% efficient at best. The EC system uses less water flow than
      normal hydro, and is able to be used where flows for traditional hydro will
      not
      work. Second, the EC units will take up very little space; an EC unit takes
      up
      1/100 the space of a solar array to gain the same amount of electrical output.
      Third, the price of EC system will be a fraction of the competition. Per Kw,
      the
      system cost will be around $150.00 that is 1/10 the usual renewable energy
      goal.
      This means enormous profit margins with the three available revenue streams
      and
      more competitive market entry. The EC has no direct competition. Solar, wind,
      biomass and large flow hydro-power sources are much different than the IHI
      technology, and these alternative energy sources can co-exist. The advantages
      that IHDR has over these sources are its cost, its flexibility and its constant
      availability. In the United States alone, IHDR estimates our technologies will
      surpass wind-generated power within three years and exceed solar in four years.
      IHDR is not competing with these segments, since our source of power is
      different than solar, wind, geothermal (although the system can use geothermal
      outlets as power sources), or biomass. The EC V technology is related to
      traditional hydropower, only in the sense that it can use water flows; however,
      the flows of water necessary for hydropower are much larger. Thousands of
      gallons per second are required. Our technology is low flow, and much less
      demanding than hydro. EC system optimizes and efficiently uses 100% of the
      flow.
      Hydropower is much less efficient. IHDR hopes to be a contributor to the
      renewable energy segment of the United States economy.





The
      search and demand for alternative energy sources is reaching the highest
      priority possible, with many alternative energy initiatives being proposed
      domestically and internationally. IHDR’s EC technology saves expenditures,
      provides reliable electricity at a cheaper cost than current alternatives,
      and
      does so with free flows of wasted water or gas flows. The need for alternative
      energy is only as great as its reliability and value on a per kilowatt-hour
      of
      electricity basis. The common industry standard in the alternative energy field
      is to attempt to beat the cost of $1,500.00 per kilowatt of energy produced.
      IHDR will set a new benchmark for that goal in the alternative energy industry
      and we believe that the Energy Commander System beats that goal in the $150
      per
      kilowatt range **.**





The
      unique aspect of IHDR’s technology is that our energy conversion technology, the
      EC System, has no direct competitor. No other technology uses low flow fluid
      or
      gas pressure for the creation of vast amounts of mechanical force to create
      electricity. No other technology has utilized positive displacement of flow
      pressure to create electricity. Solar power depends upon a clear day; wind
      upon
      the strength of nature at a given point, and hydro upon vast amounts of water
      flow. EC uses small flows to create mechanical force up to a hundred times
      the
      incoming pressure of natural or manmade flows. These flows are wasted potential
      energy and are free. We harness it and make it work to create electricity
      wherever needed.





In
      today’s energy and renewable energy market, the positions of the players have
      stagnated. The renewable energy market has hinged around the six per cent mark
      for a number of years. IHDR is targeting industries as a whole. We are not
      tied
      to the notion that our technology somehow has to be seen in the same vein as
      solar, biomass, or wind. This technology will simply fit where the opportunity
      is present in the flows available in a given area, building, or industrial
      use.
      IHDR is targeting industries with high electric utility costs and access to
      flow
      pressures of gas or fluid, which will run the EC. Wasted flows will give rise
      to
      the target areas. IHDR will target those who have the need to cut utility costs
      in the sectors identified with special emphasis on the textile, oil and gas
      refining and drilling, home development, agricultural, poultry, and other
      industries, which have communicated the greatest interest in placement of units.
      All of the industries are ones that will either have access to natural flow,
      be
      near man-made flow, which is wasted, or have internal wasted flow after the
      flow
      is used.

















17




Item
      2. Management's
      Discussion and Analysis or Plan of Operation -
      continued




IHDR’s
      Energy Commander System will be used in the industrial areas of steel and metals
      manufacturing, oil and gas drilling, oil and gas refining, chemical plants
      and
      processing, wood processing, paper and wood pulp, battery manufacturing, all
      areas of agriculture and food processing, cement and material processing, gas
      pipelines, and numerous other industrial and commercial applications. The EC
      technology will have many applications in rural and third world areas. In the
      United States alone, there are over 70,000 dams that do not produce electricity,
      but many are capable of doing so with no environmental impact. The technology
      has numerous applications in third world areas where ready access to natural
      flow exists, and yet is unused. Such flows as in these areas would not support
      conventional hydropower systems, but will support constant 24 hour a day power
      from the EC. Each unit of the EC will be kept as a corporate asset in North
      America, and will be shared with the user on a lease/revenue sharing model.
      Each
      unit will create and approximate $17,500.00 in revenue in the United States
      and
      Canada, which will be shares with the end user through savings on electrical
      costs, while IHDR will retain the tax credits, renewable energy credits, and
      portions of the energy value. In the EU where IHDR has strategic partnership
      for
      manufacturing and distribution of the units, the same model will be in place,
      where the units will be held by the Joint Venture, and the revenue distribution
      will be shared by IHDR along with the JV partner, and the user will be able
      to
      enjoy the reduced electrical costs, and revenue sharing in the EU, where
      revenues for a 30 Kw unit have been estimated by Cm2 to be approximately
      $44,000.00 per unit, per year.





EC
      will
      mean huge savings, and potentially, even payback to municipal, county, state
      and
      federal government facilities. Lowering or excluding power costs, while giving
      back potential revenue to governmental entities utilizing the EC to produce
      electricity in buildings, compounds, and governmental facilities. IHDR’s
      technology will have far reaching military aspects, able to be used by the
      U.S.
      military to help build nations the third world areas where power projection
      can
      be accomplished by the supplying of power to areas of need. EC will be used
      as a
      power source for direct power supply and for back-up power sourcing for
      hospitals, nursing homes, and other uses where back up power generation is
      required. The potential applications for the EC will only be limited by the
      flows available where they are found.





We
      have
      prepared a business model that will market the EC V system through a distributor
      network around the world. Numerous municipalities, counties, manufacturing,
      textile, petroleum, residential development, and other industries have entered
      into agreements and intents with the Company for application of these units.
      We
      also intend to further its business plan by acquisition of similar technologies
      and by execution of contracts for future units and rights to distribution of
      the
      technology.





However;
      since inception, we have suffered recurring losses from operations and have
      been
      dependent on existing stockholders and new investors to provide the cash
      resources to sustain our operations.





Our
      long-term viability as a going concern is dependent on certain key factors,
      as
      follows:





-
            Our
                ability to continue to obtain sources of outside
                financing.





-
            Our
                ability to increase profitability and sustain a cash flow level that
                will
                ensure support for continuing
                operations.





**ACQUSITIONS
      OF SIMILAR TECHNOLOGIES**





CM2
      AGREEMENT:





In
      February 2005, IHDR ** entered
      into a large scale joint venture agreement for production, distribution and
      sale
      of its Energy Commander units to the European Union. Under the performance
      based
      contract, Cm2,
      an
      Italian Energy Manufacturing and Supply Company, will manufacture units in
      Italy
      for distribution, sale, and lease into Europe. Cm2 will supply engineering,
      production, marketing, distribution, and service for the Energy Commander units.
      Cm2 believes they will build and place a minimum of between 300 and 600 thirty
      Kw units in Europe in the first year
      of
      full production. Under the agreement IHDR pays no significant capital
      expenditure, however, it receives revenues in various forms.


18




Item
      2. Management's
      Discussion and Analysis or Plan of Operation -
      continued




Cm2
      is a
      producer and supplier of electrical systems for European utilities and
      industrial users. Cm2 is positioned to supply Internal Hydro’s units for all of
      the European Union for the foreseeable future. Cm2 will be producing the units
      under a revenue sharing and payment license from IHDR. Cm2 believes they will
      be
      able to produce 100 units per week in full production.





Cm2
      will
      distribute, and service the units throughout Europe through a joint venture
      entity. IHDR shall receive an up front sum of $2,000 to $3,000 per unit produced
      for Europe plus a large portion of the revenue stream from all units placed
      in
      Europe, including electricity, renewable energy credits, and other readily
      available credits. Cm 2 estimates the unit revenue for a 30 Kw unit to be
      approximately $44,000 per unit per year. Energy credits in Italy are expected
      to
      be about 3 to 10 times the projection of revenue for IHDR units placed in the
      U.S. Under the agreement, Cm2 will be a strategic partner for delivery of the
      EC
      units to IHDR’s domestic US use for less than IHDR could produce the units in
      the United States. Due to their extensive experience in the European energy
      market, Cm2’s ability to produce, sell, and maintain the units, will give IHDR a
      strong partner for the EU.





KINETIC
      ENERGY





On
      July
      8, 2004, we announced that we had entered into an agreement with Kinetic Energy
      Systems, Inc. (“Kinetic”), a privately held Florida Corporation, for a strategic
      partnership. IHDR received 20% of the shares of the private company with access
      to license and assist in the development of the technology Kinetic held for
      underwater and over water power generation. IHDR issued 1,250,000 shares of
      treasury stock for this interest. IHDR agreed to help develop the technology
      and
      market it within its resources. Kinetic has several new hydro and wind based
      technologies, all patented or patent pending at this time. These include the
      Hydrokinetic Generator; Offshore Energy Platform; KESC Bowsprit Generator;
      and,
      KESC Tidal Generator. These technologies create generate electrical power or
      hydrogen using kinetic energy from moving water and wind, utilizing wind and
      tides. The Hydrokinetic Generator is at the prototype and engineering stage.
      The
      Offshore Energy Platform is at the prototype and engineering stage. The KESC
      Bowsprit Generator at the prototype and engineering stage. The Bowsprit is
      being
      designed for prototyping in the dual role of hydrogen production. The KESC
      Tidal
      Generator is at the engineering and prototype stage. KESC is preparing to
      display the Bowsprit technology for the first time at the NERL conference.





To
      date
      this relationship still exists, and IHDR will help market and develop the
      Kinetic line of production, in Europe and the United States. This support of
      Kinetic is tied to IHDR’s capital ability to do so. IHDR will help introduce
      Kinetic’s products to European entities for development and
      marketing.





TRITON
      TECHNOLOGIES :





In
      April
      2005, IHDR entered into a future marketing and distribution agreement with
      Triton Technologies of Reston Virginia. Through this agreement, Triton has
      the
      rights to market the Energy Commander technology. Under the agreement, Triton
      took on certain responsibilities for the capital support of the Energy Commander
      build out and engineering. Through the third quarter of 2005, Triton had
      directly taken on the contractual obligations for payment to the engineering
      firm APTEC for unit plans and production of the EC IV. IHDR was relieved of
      such
      payments during the period that Triton fulfills its obligations to APTEC, and
      to
      date has paid APTEC approximately $40,000 as reported to IHDR. The primary
      purpose of the agreement will be for Triton to develop and implement a strategic
      marketing plan for industry awareness and for sales of the Energy Commander
      under IHDR’s control, once units are fielded and able to be displayed. Under the
      agreement, Triton will receive a portion of the revenue flow from units placed
      under its marketing and distribution work. As part of the agreement, IHDR would
      also receive an equity position in Triton based upon the future position of
      Triton’s public company. IHDR was informed by management of Triton in September,
      2005, that they would be repositioning the assets of Triton, and this agreement
      for marketing and licensing to a new private entity in the near future, which
      IHDR did not object to. To date this contract will be fulfilled by the use
      of
      Triton as a marketing arm for the EC technology in the United States.


19




Item
      2. Management's
      Discussion and Analysis or Plan of Operation -
      continued




ETIG





On
      November 3, 2004, we entered into agreement with El Tigre Development (“ETIG”),
      a Florida Corporation, for the purchase of one hundred units of Energy Commander
      IV units. The purchase price of the one hundred units was $2,250,000, with
      the
      first ten units to cost $50,000 each. The agreement itself had a three year
      term
      and called for the Company and ETIG to share in revenue generated from each
      unit
      beyond the purchase price. For the first ten units, revenue is 20% from any
      source on the units. Additional units include 50% revenue. In exchange for
      the
      initial ten-unit purchase, we are granted rights for placement to ETIG in the
      states of Washington, North Carolina, Oregon and Utah. Upon execution of the
      first ten-unit purchase, two lines of credit will become effective. Each line
      of
      credit shall be for $5,000,000 to our benefit. The first line of credit will
      entitle ETIG to place units in Idaho and Asia. The second line of credit will
      entitle ETIG to place units in South America and Scotland. These lines of credit
      were represented by ETIG to be from financial houses and resources, which did
      not develop. The lines of credit were stated to be available for the production
      of units, at descending rates of pricing per Energy Commander Unit produced.





As
      of
      April 15, 2006, we have not received the initial payment for the ten-unit order
      and ETIG, which had renamed itself McGregor Energy, Inc. We had previously
      requested a thirty (30) day extension for the payment of the initial ten units.
      The extension was granted. This contract was subsequently noticed by IHDR to
      be
      in default, with no answer being given by ETIG. We have determined that there
      was no operable or available source of recourse due to the lack of any financial
      resources or assets of ETIG, which became defunct in early 2005.





NEW
      IMPACT





On
      November 2, 2004, IHDR and New Impact, LLC, a private Arizona based Company,
      entered into a contract for the purchase of energy units from IHDR, with rights
      for distribution and use of IHDR's technology. The initial phase of the contract
      calls for supplying ten units at a purchase price of $500,000 for use in New
      Impact's water treatment facilities and other areas in the Southwest. This
      contract has not been funded to date; however, in March 2005, this contract
      was
      absorbed by the later agreement with Triton Technologies of Reston Virginia,
      to
      be the marketing and sales arm of IHDR when IHDR is in a nit production ability.





**RESULTS
      OF OPERATIONS**





Our
      first
      goal was the refinement of the technology to prove the large scale of the power
      potential of the Energy Commander ("EC") technology. This entailed the design
      and engineering of a new style of unit on a much larger scale. It required
      the
      acquisition of materials, fabrication of unique machined parts; the manufacture
      and design of a valve system extremely unique; the assembly of the unit; and
      the
      testing of the unit under pressure simulation. This work resulted in the final
      production of a unit in late August, 2004 (the Energy Commander IV - A Model).
      The EC IV (A) was a four cylinder unit, designed for a four inch feed of water
      at 65 p.s.i. The EC IV (A) was shown to produce energy via its 25 kilowatt
      generator, successfully under real world conditions. With the successful
      completion of the EC IV (A) we proceeded to design a smaller sized unit which
      would produce even more power. The planning and design of the variant model
      EC
      IV (B) has now begun. The EC IV (B) will be an eight cylinder unit 50% the
      size
      of the (A) model producing 30 kilowatts at 55 p.s.i.





IHDR
      is
      focused on the new prototype design for the EC V, which is an alternate design
      from the EC IV in line system. The EC V will be smaller, as powerful, and easier
      to manufacture than the EC IV system. The new design of the EC IV uses new
      parts, a new engineering firm, new plans and new equipment to make it smaller
      and standardized for mass production. The EC V developmental prototype is
      showing itself to be a fifth of the size of the EC IV, for the same power output
      and is projected to be displayed, or deployed in the field early in 2003. The
      new EC V prototype is a twelve cylinder radial system working from the same
      65
      p.s.i. flow placed into use through 12 cylinder "slices" with the usual set
      of
      four slices to produce the standard 30 Kw per unit. Each unit uses from 1200
      to
      1500 gallons per minute of flow. From this system the cylinders work on a common
      cam or shaft which is a unique
      new technology which produces the mechanical force to run a generator. The
      inlet
      and outlet of the system works through a common shaft system around the device
      to a common generator.


20




Item
      2. Management's
      Discussion and Analysis or Plan of Operation -
      continued




IHDR
      has
      also sought the identification of undervalued and undercapitalized technologies
      that would be part of the corporate philosophy for renewable energy products.
      IHDR has explored other possible technologies including tire remediation,
      ethanol and bio-diesel production from appropriate feedstocks, clean water
      technologies, rapid response home security for provision of electricity and
      waste remediation, hazardous waste technologies, and other renewable and
      critical use technologies.





**COMPARISON
      OF THREE MONTHS ENDED MARCH 31, 2006 TO THREE MONTHS ENDED MARCH 31, 2005.**





Revenue
        for the three months ended March 31, 2006 and 2005 was $-0-.
 
 General
          and administrative expenses for the three months ended March 31, 2006 of
          $1,464,683 increased by $987,929 company to the general and administrative
          expenses for the three months ended March 31, 2005 which were $476,754.
          In the
          last half of 2004, the management of IHDR developed a plan for addressing
          their
          liquidity issues. This plan included minimizing or reducing selling, general
          and
          administrative expenses to the maximum extent possible.
  **LIQUIDITY
        AND CAPITAL RESOURCES**




Our
      operating activities used cash in the amount of $ 1,560,419 for the quarter
      ended March 31, 2006 related primarily to stock issuances to consultants and
      an
      increase in accounts payable and accrued liabilities. We intend to continue
      development of the Energy Commander systems but will need additional private
      placements, debt financing or equity investment in order to participate fully
      and at the levels intended. There can be no assurance that any of the plans
      developed will produce cash flows sufficient to ensure its long-term
      viability.





The
      Company has incurred additional deficits in cash flow from operating activities.
      These deficits have been funded from loans from significant shareholders. The
      Company is in discussions with several capital organizations with a view to
      selling more common and preferred shares as a means of financing future capital
      needs. The company anticipates it will be successful in these discussions;
      however there can be no assurances that the Company will be successful in doing
      so.





**OUTLOOK
      FOR 2006**





During
      the next twelve months, IHDR's technology is targeted to be produced and field
      tested. At that point, IHDR will be entering into the is full production phase
      of its business plan, with revenues being produced, and further, an
      implementation of the new management structure for roll out in the global energy
      market. With the contractual arrangement with Cm2, IHDR has now partnered with
      a
      ready and able partner for production, and implementation of the Energy
      Commander systems in Europe. Given the vast experience and ongoing operations
      of
      Cm2 in the energy market, IHDR will have significant production ability for
      the
      EC units. IHDR forecasts that the final stage units will be made with Cm2,
      and
      other domestic resources for final stage production hopefully by the first
      half
      of 2006. IHDR will implement the new radial system of low impact hydro with
      Cm2,
      for production in the latter part of 2006, and for production of the initial
      10
      units of the system for field testing IHDR will also be implementing the portion
      of its business plan which for new personnel to take over certain management
      positions, and the creation of new positions in order to get ready for direct
      market participation in the alternative energy sector, and for the expansion
      of
      the company beyond the start up phase and into the global and domestic
      alternative energy market. Included in this plan is the implementation of new
      management with energy experience, and new board membership. IHDR met this
      goal
      with the implementation of a new board of directors in January,
      2006.





21




Item
      2. Management's
      Discussion and Analysis or Plan of Operation -
      continued




We
        will
        enter into three important phases for the production mode and field testing
        of
        its energy units, set to occur in the second half of 2006. First, we will
        seek
        new capital contribution for carryover of operations and production in the
        United States, and for a limited need of capital for use with the existing
        relationship in Italy with Cm2. This will


**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





Our
      discussion and analysis of the financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenue
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      ongoing basis, we evaluate estimates. We base our estimates on historical
      experience and on various other assumptions that are believed to be reasonable
      under the circumstances. These estimates and assumptions provide a basis for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions, and these differences
      may
      be material.





We
      believe the following critical accounting policies affect its more significant
      judgments and estimates used in the preparation of its consolidated financial
      statements.





**UNCERTAINTIES**




Implementation
      of Business Strategy Dependent on Additional Financing






Internal
      Hydro must obtain financing to fund the expansion of operations. Such outside
      financing must be provided from the sale of equity or third party financing.
      Further, the sale of equity securities will dilute our existing stockholders'
      interests, and borrowings from third parties could result in our assets being
      pledged as collateral. While the Company is currently able to fund all basic
      operating costs, it is possible our operations could be restricted if loan
      terms
      increase our debt service requirements. There is no assurance that we can obtain
      financing on favorable terms.










March
                31, 2006
            Date
                of Inception
              Through
                  December
                    31, 2003Net
                Income (loss)
            (1,560,419)
            (
                8,084,463)







The
      Company's continuing negative operating results have produced a working capital
      deficit accumulated during Development Stage of $ 8,084,463 as of March 31,
      2006. The above factors represent continue to raise doubt about the Company's
      ability to fully establish itself as a going concern.





Development
      Stage Company


The
      Company is in the development stage. There is no assurance that the Company's
      activities will be profitable. The likelihood of the success of the Company
      must
      also be considered in light of the problems, expenses, difficulties,
      complications, delays and all of the inherent risks frequently encountered
      in
      the formation and operation of a relatively new business.


22




Item
      2. Management's
      Discussion and Analysis or Plan of Operation -
      continued





Going
      Concern


The
      financial statements are presented on the basis that the Company is a going
      concern, which contemplates the realization of assets and the satisfaction
      of
      liabilities in the normal course of business over a reasonable length of
      time.





Management
      believes that current plans to expand the Company's operations and a combination
      of its financing and capital raising plans will provide sufficient working
      capital to allow the Company to continue as a going concern.





Costs
      of Conducting Business


The
      Company will be required to incur substantial costs for research and development
      and equipment, establishing production and marketing operations, and related
      costs. A substantial portion of those costs must be paid whether or not any
      of
      its products prove to be commercially successful on a broad scale. The ability
      to generate a profit depends, among other factors, on the amount of equipment
      acquisition costs incurred, the amount of revenues from the sale of its products
      by the Company, and its operating costs.





Technological
      Change


The
      Company expects that many new technologies and products will be introduced
      over
      the next several years. The Company's success will depend, among other things,
      on its ability to develop and maintain a competitive position technologically.
      There can be no assurance that the Company will have access to subsequently
      developed technology by other persons. Technological advances by a competitor
      may result in the Company's present or future products becoming non-competitive
      or obsolete. The Company cannot be assured that competitors will not develop
      functionally similar or superior products, which event could have an adverse
      effect on the Company's business.





Contracts


There
      can
      be no assurance that the Company will be able to obtain sufficient and suitable
      contracts for its business plan.





Fluctuations
      in Operating Results


The
      Company's revenues and results of operations may vary significantly in the
      future. The Company's revenues and results of operations are difficult to
      forecast and could be adversely affected by many factors, some of which are
      outside the control of the Company, including, among others, the expected
      relatively long sales and implementation cycles for the Company's products;
      the
      size and timing of individual license transactions and joint venture
      arrangements; seasonality of revenues; changes in the Company's operating
      expenses; changes in the mix of products sold; timing of introduction or
      enhancement of products by the Company or its competitors; market acceptance
      of
      new products; technological changes in technology; personnel changes and
      difficulties in attracting and retaining qualified sales, marketing, technical
      and consulting personnel; changes in customers' budgeting cycles; quality
      control of products sold; and economic conditions generally and in specific
      industry segments.





There
      can
      be no assurance that the Company's products will achieve broad market acceptance
      or that the Company will be successful in marketing its products or enhancements
      thereto. In the event that the Company's current or future competitors release
      new products that have more advanced features, offer better performance or
      are
      more price competitive than the Company's products, demand for the Company's
      products would decline. A decline in demand for, or market acceptance of, the
      Company's products as a result of competition, technological change, or other
      factors would have material adverse effects on the Company's business, financial
      condition and results of operations.





Seasonality


The
      Company does not expect to experience material seasonal variations in revenues
      or operating costs.





**OFF
      BALANCE SHEET ARRANGEMENTS.**





The
      Company's liquidity has not dependent upon off balance sheet transactions.
      For
      the period ended March 31, 2006, the Company did not engage in any off balance
      sheet transactions.





23




**Item
      3. Controls and Procedures**





The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in our annual and periodic reports
      filed with the SEC is recorded, processed, summarized and reported within the
      time periods specified in the SEC's rules and forms. These disclosure controls
      and procedures are further designed to ensure that such information is
      accumulated and communicated to our management, including our Chief Executive
      Officer and Principal Accounting Officer, to allow timely decisions regarding
      required disclosure.





Based
      on
      the most recent evaluation, which was completed within 90 days of the filing
      of
      this report, our Chief Executive Officer and Principal Accounting Officer
      believes that the Company's disclosure controls and procedures are effective
      and
      there have been no significant changes in the Company's internal controls or
      in
      other factors that could significantly affect the internal controls subsequent
      to the date of the most recent evaluation.





Craig
      A.
      Huffman, our Chief Executive Officer, and Lior Segal, our Chief Financial
      Officer, have concluded that our disclosure controls and procedures are
      appropriate and effective. They have evaluated these controls and procedures
      as
      of the end of the period covered by this report on Form 10-QSB. There were
      no
      significant changes in our internal controls or in other factors that could
      significantly affect these controls subsequent to the date of their evaluation,
      including any corrective actions with regard to significant deficiencies and
      material weaknesses.


































































































24




**PART
      II - OTHER INFORMATION**




Pursuant
      to the Instructions on Part II of the Form 10-QSB, Items 3, and 5 are omitted.







**Item
      1. Legal Proceedings**




As
        of the
        date hereof, Internal Hydro is a party to a lawsuit titled Internal Hydro
        International v. Raymond Breland and Breland and Associates. This lawsuit
        involves the attempt by Mr. Breland and his company to convert IHDR shares
        to
        his own use. The shares were originally issued to Mr. Breland in order for
        him
        to secure financing for Internal Hydro, however, Mr. Breland failed to perform,
        but nonetheless tried to convert the shares and sell them for his own profit.
        The lawsuit was filed in the Thirteenth Judicial Circuit in and for Hillsborough
        County Florida and currently there is an injunction issued by the Judge which
        effectively freezes the shares and allows no one to trade them. Internal
        Hydro
        believes that it has a high probability of success in this lawsuit, and the
        Judge agreed and granted their request for an immediate injunction. No lawsuits
        are known to be contemplated against Internal Hydro.





**Item
      2.****Unregistered
      Sales of Equity Securities and Use of Proceeds**




During
      our quarter ended March 31, 2006, we completed the following transactions in
      reliance upon exemptions from registration under the Securities Act of 1933,
      as
      amended (the "Act") as provided in Section 4(2) thereof. Each certificate issued
      for unregistered securities contained a legend stating that the securities
      have
      not been registered under the Act and setting forth the restrictions on the
      transferability and the sale of the securities. None of the transactions
      involved a public offering. We believe that each person had knowledge and
      experience in financial and business matters which allowed them to evaluate
      the
      merits and risks of our securities. We believe that each person was
      knowledgeable about our operations and financial condition.




A
        total
        of 9,490,683 shares were issued to 13 employees and outside consultants for
        a
        recognized compensation expense of $1,348,347. A total of 5,716,455 shares
        were
        issued for loans to the company for a total loan value of $378,177.
  During
        the period January 1, 2006 to March 31, 2006 shareholders converted 2,117,948
        Preferred shares into the Company’s Common shares on a 1 for 1
        basis.






**Item
      4. Submission of Matters to a Vote of Security Holders**




None







**Item
      6. Exhibits**





31.1
            Certification
                of Chief Executive Officer of Internal Hydro International, Inc.
                required
                by Rule 13a - 14(1) or Rule 15d - 14(a) of the Securities Exchange
                Act of
                1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.





31.2
            Certification
                of Chief Financial Officer of Internal Hydro International, Inc.
                required
                by Rule 13a - 14(1) or Rule 15d - 14(a) of the Securities Exchange
                Act of
                1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002.





32.1
            Certification
                of Chief Executive Officer of Internal Hydro International, Inc.
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350
                of 18
                U.S.C. 63.





32.2
            Certification
                of Chief Financial Officer of Internal Hydro International, Inc.
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350
                of 18
                U.S.C. 63.





25




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Action
      of
      1934, as amended, the registrant has duly caused this Report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized.





**INTERNAL
      HYDRO INTERNATIONAL INC.**





*By:
                /s/ CRAIG A. HUFFMAN*
              *Craig
                A. Huffman*
              *CHIEF
                EXECUTIVE OFFICER*








Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      Report has been signed below by the following persons on behalf of the
      registrant and in the capacities and on the dates indicated.





*Signature
                Title Date*
              
              */s/
                CRAIG A. HUFFMAN*
              *Craig
                A. Huffman, Chief Executive Officer May 22, 2006*





26