LOAN AGREEMENT
                     (INDUSTRIAL AND COMMERCIAL BUSINESSES)

                        Revolving Loan Fund (RLF) Program
                              City of Algona, Iowa



         THIS AGREEMENT,  made and entered into this 5th day of August, 2005, by
and between the City of Algona,  Iowa,  (hereinafter  referred to as "City") and
Hydrogen Engine Center, Inc.,  (hereinafter referred to as "Borrower"),  with an
office located at 700 East Fair Street, Algona, Kossuth County, Iowa.

         WHEREAS,  the City is desirous to promote  and assist  economic  growth
through the development and expansion of qualified  businesses,  the creation of
jobs, and the expansion of the municipal tax base in the City of Algona; and

         WHEREAS,  Borrower has  proposed a project to further  these goals and,
having  exhausted all other  financing  options,  has applied for City financial
assistance for the project.

         NOW,  THEREFORE,  in  consideration  of the  foregoing  and the  mutual
covenants  and  conditions  contained  herein,  the City and  Borrower  agree as
follows:

         Section  1. The City  agrees to loan  Borrower  the sum of Two  Hundred
Thousand Dollars  ($200,000.00).  The Borrower will carry out a project totaling
Six Hundred Forty Thousand Dollars ($640,000.00). The project total includes the
City's loan amount.  The City will not include an amount to reimburse the City's
administrative costs.

         Section 2.        Borrower shall:

         (a) Abide by the terms and conditions of the Promissory Note;

         (b) Exclusively use the proceeds of the loan from the City for building
         construction purposes, which use shall be made within one (1) year from
         the date of this  Agreement,  unless an extension is granted in writing
         by the City; and

         (c) Meet job performance measures as follows:

                  1. Job  Creation in Algona,  Iowa.  The  Borrower  commits and
         agrees  that within two (2) years from the date of this  Agreement,  it
         will create at least forty-two (42) new full time positions in addition
         to its current  employee total of two (2) full time  positions.  All of
         the current employee positions as well as the minimum of forty-two (42)
         new full time  positions  that are  created  must then be  retained  in
         Algona continuously for an additional five (5) years.



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                  2. Borrower shall provide  documentation of the number of jobs
         created by the project, and if applicable, the number of jobs filled by
         low and moderate income persons.

                  3.  Borrower  shall not  discriminate  against any employee or
         applicant for employment  because of race, color,  religion,  sex, age,
         disability, or national origin.

         Section 3. The funds from the City will not be loaned to Borrower until
Borrower has started  construction.  Borrower shall submit the appropriate bills
it receives to the City and the City shall then advance the needed loan proceeds
to  Borrower.  Borrower  then agrees to use said funds to pay the bills.  If the
bills  submitted  to the City  total  less  than Two  Hundred  Thousand  Dollars
($200,000.00),  then not all loan proceeds will be made available by the City or
used by Borrower.

         Section 4. Borrower hereby agrees to grant to the City, as security for
the  $200,000.00  loan, a mortgage over real estate  located in Kossuth  County,
Iowa, legally described as follows:

         Lots Three (3),  Four (4) and Five (5) of  Snap-On  Industrial  Park as
         recorded in the Plat as Document No. 2002-1701,  located in part of the
         West  Half of the  Northwest  Fractional  Quarter  (W1/2  NWfrl1/4)  of
         Section Six (6), Township  Ninety-five (95) North,  Range  Twenty-eight
         (28), West of the 5th P.M., City of Algona, Kossuth County, Iowa.

         Section 5. Borrower  acknowledges that the interest rate on the loan it
is receiving from the City is ten percent (10%) per annum,  however,  so long as
Borrower  complies with all the job creation and job retention  requirements set
forth in Section  2(c)(1),  the interest  will be forgiven  annually  which will
result in the rate of  interest  being zero  percent  (0%) per  annum.  Borrower
agrees that in the event it ever fails to meet any of the requirements set forth
in Section  2(c)(1),  then the total balance under the loan will be  immediately
due and  payable.  In  addition,  Borrower  agrees to pay to the City all of the
interest that was forgiven in prior years as well as interest at the rate of ten
percent  (10%) per annum from the date of the last  principal  payment until the
entire loan is paid in full.  Said interest  that was forgiven  shall be due and
payable within sixty (60) days after demand is made by the City.

         Section 6. Borrower agrees to an annual  performance report to the City
by the fifteenth (15th) day after December 31 until the loan is repaid.

         (a)  Borrower  agrees  to  submit  all  information  and  documentation
         regarding project expenditures and employment as requested by the City.

         (b)  Borrower  shall at all times  keep  proper  books of  account in a
         manner satisfactory to the City.

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         (c) Borrower  will retain all records  relating to the  Revolving  Loan
         Fund project for a minimum of five (5) years beyond the loan, or longer
         if any  litigation  or an audit is  begun,  or if a claim is  initiated
         involving the records. In these instances, the records will be retained
         until the litigation, audit or claim has been resolved.

         Section 7. Borrower  agrees to submit annual job creation and retention
performance  reports  to the  City  by the  fifteenth  (15th)  day of the  month
following the end of each calendar year until the loan has been repaid.

         Section 8. This Agreement is not  assignable by Borrower  without prior
written consent of the City.

         Section  9. In the  event  that  Borrower's  business  is sold,  or the
business involuntarily or voluntarily files for bankruptcy, or the conditions of
the loan  agreement  are not met,  then the total balance under the loan will be
immediately due and payable.

         Section  10. The City may  declare  the loan to be in default if any of
the following events shall occur and be continuing:

         (a)  Borrower  shall  make  any  written  representation  under  or  in
         connection  with this Agreement that shall prove to have been incorrect
         in any material respect when made.

         (b) Borrower shall fail to make a timely payment in accordance with the
         terms of the Promissory Note.

         (c)  Borrower  shall  fail to  perform  or  observe  any other  term or
         condition contained in this Agreement and any such failure shall remain
         unremedied for thirty (30) days after written notice thereof shall have
         been given by the City by return receipt mail.

         (d) Borrower  assigns this Agreement to another party without the prior
         written consent of the City.

         Section  11.  Upon the  City's  declaration  of  default  as defined in
Section 10, the City may:

         (a)  By  notice  to  Borrower,  declare  the  Loan  payable  under  the
         Promissory  Note and this  Agreement to be  forthwith  due and payable,
         without  presentment,  demand,  protest, or further notice of any kind,
         all of which are hereby expressly waived by the parties.

         (b) Take  whatever  action at law or in equity may appear  necessary or
         desirable  to  collect  the  payments  and other  amounts  then due and
         thereafter to become due or to enforce  performance  and  observance of
         any obligation, agreement or covenant of Borrower under this Agreement.


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         No remedy herein  conferred upon or reserved to the City is intended to
         be exclusive  of any other remedy or remedies,  and each and every such
         remedy  shall be  cumulative,  and shall be in  addition to every other
         remedy given hereunder or now or hereafter existing at law or in equity
         or by statute.

         Section 12. If Borrower  fails to comply  with the  conditions  of this
Agreement,  the City may,  after  notice,  suspend the  Agreement  and  withhold
further payments or prohibit Borrower from incurring  additional  obligations of
Agreement funds, pending corrective action or a decision to terminate.

         Section  13.  Either  the City or  Borrower  may  pursue  any remedy to
enforce this contract at law or equity under the laws of the State of Iowa.  The
prevailing party shall be reimbursed for reasonable attorney fees.

         Section 14. In  carrying  out the  provisions  of the  Agreement  or in
exercising any power or authority granted to Borrower thereby, there shall be no
liability,  personal or otherwise,  upon the City.  Furthermore,  Borrower shall
indemnify  and save  harmless  the City  from  suits,  actions  or claims of any
character  brought for or on account of any injuries or damages  received by any
person or property  resulting from operations of Borrower or any persons working
under Borrower out of the terms of this Agreement.

         Section  15.  This  Agreement  shall be binding  and shall inure to the
benefit of the assigns, representatives and/or successors in interest.

         Section  16.  Borrower  has  filed an EDSA  Application  for  Financial
Assistance.  The City and  Borrower  agree that all EDSA  requirements  are also
applicable in this Agreement and are hereby incorporated by reference.


CITY OF ALGONA, IOWA                   HYDROGEN ENGINE CENTER, INC.

By: s/ Lynn R. Kueck, Mayor            By: s/Theodore G. Hollinger, President
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ATTEST:

s/Rexann McEnroe, City Clerk           By: s/Dana Sue Hollinger, Secretary
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