Prepared by: Michael E. Gabor, 111 North Dodge Street, Algona, IA 50511
PH: (515) 295-3565

                                 LOAN AGREEMENT


         WITNESSETH  this Loan Agreement  dated this 27th day of June,  2005, by
and between Algona Area Economic Development  Corporation,  hereinafter referred
to as "AAEDC",  and Hydrogen  Engine Center,  Inc.,  hereinafter  referred to as
"HEC".

         WHEREAS,  AAEDC desires to promote and assist  economic  growth through
the expansion of  businesses  and the creation of jobs in and around the City of
Algona, Iowa; and

         WHEREAS,  HEC has  proposed a project to  further  those  goals and has
applied  to AAEDC for  financial  assistance  for the  project  in the form of a
request for the conveyance of real estate  currently  owned by AAEDC and legally
described as:

                  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   (W'/2NWfrl'/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; and

         WHEREAS, HEC will construct major improvements that will become part of
the real estate; and

         WHEREAS,  AAEDC and HEC have agreed to the terms of a payment  plan for
the real estate in the case where certain performance obligations of HEC are not
accomplished; and

         WHEREAS, the real estate and  to-be-constructed  improvements and other
property  will stand and be pledged by HEC to AAEDC as security for any payments
that may be required to be made from HEC to AAEDC.

         NOW,  THEREFORE,  in  consideration  of the  foregoing  and the  mutual
covenants and conditions herein set forth, the parties agree as follows:

         1. PRINCIPAL  AMOUNT OF LOAN.  AAEDC hereby loans to HEC the sum of One
Hundred Forty-six Thousand One Hundred Twenty-four Dollars ($146,124.00).

         2.  INTEREST.  Interest  on the loan shall  accrue at the rate of eight
percent (8%) per annum. Interest shall be capitalized on a yearly basis.

         3. FORGIVABLE LOAN/PAYMENTS, IF NOT FORGIVEN.

                  A. As a ten year  forgivable  loan of One Hundred  Thirty-five
         Thousand Three Hundred Dollars  ($135,300.00)  conditioned upon the HEC
         achieving a performance target obligation of one hundred (100) new full
         time equivalent  (FTE) positions by June 1, 2015, all FTEs to be paid a


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         minimum  wage  equal to or greater  than the  average  hourly  wage for
         workers  in  Kossuth  County,  Iowa,  as  determined  annually  by Iowa
         Workforce Development.

                  B. Provided HEC has  certified  fifty (50) new FTEs by June 1,
         2010,  and such fifty  (50) FTEs are  continuously  retained  in Algona
         until  June 1, 2015,  AAEDC  shall  forgive  Sixty-seven  Thousand  Six
         Hundred Fifty  Dollars  ($67,650.00)  of the principal  balance of this
         obligation and all associated interest.

                  C. If HEC certifies an  additional  fifty (50) FTEs by June 1,
         2015 (100 FTEs  total),  then an  additional  Sixty-seven  Thousand Six
         Hundred  Fifty  Dollars  ($67,650.00)  of  principal  balance  and  all
         associated  interest shall be forgiven and HEC's only obligation  shall
         be to pay the lump sum balance of the loan,  Ten Thousand Eight Hundred
         Twenty-four  Dollars  ($10,824.00)  to AAEDC on June 1,  2015,  without
         interest.

                  D. In the  event  the HEC  fails to  achieve  the  performance
         target  obligation  of fifty  (50) FTEs by June 1,  2010,  then the HEC
         shall  pay  to  AAEDC  One  Hundred  Forty-six   Thousand  One  Hundred
         Twenty-four   Dollars   ($146,124.00)  of  principal  plus  capitalized
         interest to said date.

                  E. In the  event  the HEC  achieves  the  initial  performance
         target  obligation on June 1, 2010, but fails to retain said jobs until
         June 1,  2015,  then HEC  shall  pay to  AAEDC  One  Hundred  Forty-six
         Thousand One Hundred  Twenty-four  Dollars  ($146,124.00)  of principal
         plus capitalized interest on June 1, 2015.

                  F. In the event HEC fails to achieve  the  second  performance
         target   obligation  on  June  1,  2015,   then  HEC  shall  pay  AAEDC
         Seventy-eight  Thousand Four Hundred  Seventy-four Dollars ($78,474.00)
         of principal  plus  capitalized  interest to said date on June 1, 2015.
         Capitalized  interest  on  said  amount  of  principal  shall  only  be
         calculated from June 1, 2010, to June 1, 2015.

         4. PURPOSE. The purpose of the loan is to assist HEC in the purchase of
the following described real estate now owned by AAEDC:

                  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   (W'/zNWfrl'/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.

         5.  PROMISSORY  NOTE.  HEC shall sign a standard form  Promissory  Note
incorporating the terms hereof.

         6. MORTGAGE SECURITY. As security for all sums due or which will become
due from HEC to AAEDC,  HEC  shall  execute  a  Mortgage  to AAEDC in and to the
following described real estate:

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<PAGE>

                  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  (W'/zNWfrl/) 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.

         The  mortgage  shall  include  any and all  improvements  which  may be
constructed by HEC on the above-described real estate.

         7.  EMPLOYMENT  RECORD  DOCUMENTATION  AND  RETENTION.  HEC shall  make
employment  figure  available to AAEDC on an annual  basis,  with reports due on
June 15th of each year  until the loan is  repaid.  In  addition  to the  annual
reports  to AAEDC HEC  agrees  to retain  all of its  employment  records  for a
minimum of seven (7) years beyond the date of this loan and shall allow AAEDC or
its designated  representative to examine their employment  records at any point
in time to insure that the minimum job requirements are being met.

         8. DEFAULT. In the event HEC sells,  assigns or otherwise transfers its
interest in the  above-described  real estate (excluding any mortgages HEC might
grant  upon  the  real  estate),  or  involuntarily  or  voluntarily  files  for
bankruptcy, or the conditions of this Loan Agreement are not met, then HEC shall
be  considered  in default and the total unpaid  balance  under the loan will be
immediately due and payable.

         9.  ADDITIONAL  DEFAULT.  It shall also be considered an act of default
if, in
AAEDC's  judgment,  the  greater  percentage  of  HEC's  business  operation  or
employees has moved from Algona,  Iowa, or been  outsourced  during the ten (10)
year period of this loan.

         10. REMEDIES. No remedy herein conferred upon or reserved to AAEDC 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.

         11.  JURISDICTION.  This Loan  Agreement  was  entered  into in Algona,
Kossuth  County,  Iowa,  and shall be governed by the laws of the State of Iowa.
The parties consent to the jurisdiction of the District Court of Iowa in and for
Kossuth County to resolve any and all disputes hereunder.

         12. ENTIRE AGREEMENT.  This instrument contains the entire Agreement of
the parties with respect to the subject matter hereof, any other oral or written
agreements  entered into with respect thereto are revoked and superseded by this
Agreement;  and no representations,  warranties or inducements have been made by
either  of the  parties  except as  expressly  set forth  herein.  Any  changes,
modifications, adjustments or amendments to this Agreement must be in writing.

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         13. SEVERABILITY.  If any provision of this Agreement is declared void,
such  provision  shall be  deemed  severed  from  this  Agreement,  which  shall
otherwise remain in full force and effect.

         14. BINDING EFFECT/ASSIGNABILITY.  This Agreement shall be binding upon
the parties hereto and upon their respective  executors,  administrators,  legal
representatives,  and successors. This Loan Agreement may not be assigned by HEC
without the express written consent of AAEDC.

         15.  CONSTRUCTION.  This  Agreement  shall be governed and construed in
accordance  with  the  laws of the  State of Iowa.  Captions  are  included  for
convenient  reference only and shall not in any way affect the interpretation of
any provision hereof.

         16. NOTICES.  All notices under this Agreement must be in writing.  The
notices must be delivered personally or mailed by certified mail, return receipt
requested, to the other party or to that party's attorney.

         17. LEGAL COUNSEL. All parties affirmatively  represent and acknowledge
that they have been  represented by competent legal counsel of their choosing in
connection with this Agreement.

         18.  ATTORNEY  FEES AND COURT  COSTS.  If either  party  files  suit to
enforce
any of the terms of this  Agreement,  the prevailing  party shall be entitled to
recover court costs and reasonable attorney's fees.

         Dated this 27th day of     June, 2005.

                                    ALGONA AREA ECONOMIC
                                    DEVELOPMENT CORPORATION

                                    By: s/Bruce Jensen
                                         ------------------------------
                                           Bruce Jensen, President

                                    By: John Kern
                                         ------------------------------
                                           John Kern, Secretary


                                    HYDROGEN ENGINE CENTER, INC.

                                    By:  s/Theodore G. Hollinger
                                         ------------------------------
                                            Theodore G. Hollinger, President

                                    By:  s/Dana Sue Hollinger
                                         ------------------------------
                                            Dana Sue Hollinger, Secretary


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