ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on, our behalf. We disclaim any obligation to update forward looking statements.

In April 2004, we, along with a then newly created wholly owned subsidiary of our company, PFCE Acquisition Corp, a Nevada corporation, entered into an Agreement and Plan of Merger with Cellfoods Corporation, a Nevada corporation ("Cellfoods"), whereby our wholly owned subsidiary merged with and into Cellfoods, which survived this transaction and is currently a wholly owned subsidiary. Effective on or about May 17, 2004, this merger was consummated. Cellfoods is a development stage corporation that was organized on November 1, 2001, and is engaged in the business of developing a new, more nutritious soybean powder for use in food preparation. This product has a greater shelf life than current soybean powders. The principal product, Soycell Powder, is a uniquely processed soybean powder whereby each cell of the soybean is separated by an exzymatic process. Because the powder remains in cellular formation, it does not smell or taste like conventional soybean powder or flour. It has very little taste or smell, which makes it easier to be used as an additive or filler in recipes and food products. The product and be produced and stored for up to 6 months or more without degradation, compared to conventional soybean powder, which is good for only 3 months before degradation occurs.

As of the date of this Report, we are considering "spinning off" Cellfoods as a separate public company in the future, but no definitive decision has been reached in this regard.

We did not generate any revenues during the six month period ended June 30, 2004. During the six month period ended June 30, 2004, we incurred costs and expenses totaling $59,682, including $17,462 in research and development costs and $31,574 in selling, general and administrative expense. As a result, we incurred a net loss of $(59,682) during the six month period ended June 30, 2004. Because we did not generate any revenues during the six month period ended June 30, 2004, following is our Plan of Operation, rather than a comparison of results of operations.

Plan of Operation

Our initial business plan was to develop and produce low cost fuel cells for transportation. During 2002, we revised our business plan to emphasize the development and production of low cost fuel cells for personal electronics or other applications requiring small size and longevity of use. We revised our original business plan as a result of the costs associated with developing transportation related fuel cells, which exceeded our available capital. We may reinstate the elements of the original business plan if our current business plan proves successful, of which there can be no assurance. As of the date of this Report, in order to bring about commercialization, we are focused on building a commercial prototype, enhancing product performance, reducing product costs, designing market- ready products, developing volume-manufacturing capability, and building customer and supplier relationships.

On November 21, 2002, we entered into an agreement with the University of California at Riverside to develop a commercially viable fuel cell prototype. The initial term of this agreement ran through February 2003. In February 2003, we entered into an amendment which extended the term of this agreement through February 29, 2004. On May 4, 2004, this agreement was extended again, through April 30, 2007. Pursuant to the terms of this agreement, as amended, we have agreed to reimburse the University for all costs and expenses incurred, both direct and indirect, in an amount not to exceed $181,271, pursuant to a budget agreed to by the parties. The University, through its SMART program, provides matching funds for all direct costs applicable to development of our project. We tendered an initial payment of $70,000 upon execution of the initial agreement, and a second advance payment of $61,266 was tendered in March 2003, pursuant to our exercise of our option to extend this agreement. As a result of the amendment extending this agreement which was executed in April 2004, we are required to make additional payments totaling $150,486, including $50,005, which was paid in May 2004, $50,229, which is due on or before May 1, 2005, with the balance of $50,252 due May 1, 2006. All information which we provide to the University has been deemed confidential for a period of one (1) year after expiration or termination of the agreement.

As previously reported, we have applied for additional matching funds through the SMART program. We recently obtained a favorable decision and expect a grant of approximately $120,000 to be provided over the next three years. This also provides a multi-year relationship with the University of California at Riverside.

As a result of the above described relationship with the University of California at Riverside, on November 10, 2003, we announced that a research team headed by Professor Yushan Yan of the University has successfully developed a fuel cell using carbon nanotube-based electrodes. As a result of our research and development activities with the University, we expect that the use of multi- walled carbon nanotubes as a platinum support for proton exchange membrane fuel cells will reduce the manufacturing cost of fuel cells through a decreased use of platinum. Current technology uses platinum, a precious metal, as the catalyst for hydrogen to separate into a proton and electron. Since platinum is a high cost metal in very limited production, it is cost prohibitive, preventing fuel cells from being economically viable even at high volume production. Our proposed method of producing fuel cells is expected to minimize or eliminate the use of platinum. If successful, the result will be low cost fuel cells at high volume production levels. We believe that a fuel cell unit can replace conventional batteries because a fuel cell unit should provide longer usage at lower consumer cost. While no assurances can be provided that this development will result in our generating revenues, this development is considered by management to be a significant step forward in the use of fuel cell technology. We expect to have additional information concerning this development available in the near future.

We intend to use our proprietary technology to severely reduce or eliminate the need for platinum as a catalyst. We believe our next step in the implementation of our business plan is to develop a viable manufacturing prototype which, if it meets expectations, will be ready to be placed in production. In order to accomplish this objective, we have opened our own laboratory to develop this additional prototype. We were able to open this new lab as a result of receipt of funding more fully described under "Liquidity and Capital Resources," below.

We have also entered into preliminary discussions with potential strategic partners to utilize our current technology position in order to assume a market leadership position in our target market of micro fuel cells. However, as of the date of this Report, no agreements have been entered into and there are no assurances that such discussions or any such agreement will occur in the foreseeable future.

We have also investigated the possibility of using our proprietary fuel cell technology to provide electricity for small commercial establishments and households. Although we do not currently have the rights to utilize our fuel cell technology in this market, we believe that, if we decide to pursue this market, we can acquire such rights from Fullerene on advantageous terms. However, there can be no assurances that we will be able to acquire such rights in the future.

Fuel cell acceptance appears to be accelerating. Large and small corporations, as well as the United States government, all appear convinced of the value of fuel cell technology. Despite all this activity, we have still not seen a commercial product that, in our opinion, is competitively priced with other forms of energy. We believe that, while fuel cell products will begin to proliferate, market acceptance will come only when prices fall to competitive levels.

There are currently several different technologies in use for fuel cell power generation. Each of these processes differs in methodology, suitable scale and efficiency. Our interest (and patent applications) is in the Proton Exchange Membrane (PEM) method which is very suitable for low temperature operation.

Liquidity and Capital Resources

At June 30, 2004, we had $739,849 in cash. We had $1,292 in accounts payable, plus $917 in accrued interest payable.

In May 2004, we entered into a financing arrangement with HEM Mutual Assurance LLC, Minneapolis, Minnesota, an accredited investor (as that term is defined under Rule 501, Regulation D, promulgated under the Securities Act of 1933, as amended) to issue up to $1,000,000 in aggregate principal amount of convertible debentures pursuant to Rule 504 of Regulation D under the Securities Act of 1933, as amended. These Debentures were originally issued by Cellfoods in two separate convertible debentures of $997,000 and $3,000, respectively (hereinafter referred to in the aggregate as the "Debentures"). As of the date of this Report, an aggregate of approximately $541,716 has been converted by the Debenture Holder into shares of our common stock. See "Part II, Item 2, Changes in Securities," below.

We believe our next step in the implementation of our business plan is to develop a viable manufacturing prototype which, if it meets expectations, will be ready to be placed in production. We hope to accomplish this objective by opening our own laboratory to develop this additional prototype, which is now open as a result of the financing described above.

We also had outstanding loans in the principal amount of $60,000 and $10,000, due to Fullerene, USA, Inc., our majority stockholder. In regard to the $60,000 loan, we originally received an unsecured, non-interest bearing loan for $60,000 which was due September 14, 2002. On

December 5, 2002, this note was cancelled with the consent of Fullerene and replaced with a note extending the due date to August 14, 2004. Both of these notes have been paid in full, during the period ended June 30, 2004.

We believe that we currently have sufficient funds available for us to continue to implement our business plan for the next 12 months. However, we estimate that we will require an additional $2.5 million in additional debt or equity capital to fully implement our business plan in the future and there are no assurances that we will be able to raise this capital when needed. However, while there are no definitive agreements in place as of the date of this Report, we are currently engaged in various discussions with interested parties to provide these funds or otherwise enter into a strategic alliance to provide such funding. The inability to obtain sufficient funds from external sources when needed will have a material adverse affect on our results of operations and financial condition.

Subsequent Event

In July 2004, we received notice that we had been selected by the United States Department of Energy for a Phase I STTR (Small Business Technology Transfer) grant. We expect to receive an initial grant in the amount of $100,000 beginning in September 2004. We intend to apply for additional grant money from the US government, as well as other potential sources, in the future. There are no assurances that our applications will be approved.

Trends

Since our announcement of the successful development of a carbon nanotube support base fuel cell electrode in November 2003, we have been receiving a significant amount of attention from the investment community. In this regard, while there are no assurances, we are hopeful that we will be able to raise approximately $2.5 million in additional funding in order to allow us to produce and demonstrate to fuel cell manufacturers a commercially viable prototype. See "Liquidity and Capital Resources," above.

Our new laboratory is also expected to function as a hub to attract additional researchers from the University of California at Riverside, which is on the path to become a leader in the nano- technology field. We believe that there are many potential useful applications of nano-technology which can be expected in the immediate future, including fuel cells and flat panel displays. Also at this laboratory, functional prototypes will be made before bringing in manufacturers. Our plan is to have the manufacturers inspect the prototype once completed in order to generate their own test production unit. If successful, manufacturing can commence producing products in quantity in less than 12 months. We foresee the initial application to be a battery replacement for cell phones, mobile notebook computers/laptops and other applicable applications. This segment is known as the micro fuel cell market. We expect that these fuel cells will eventually be produced like modular computer chips and components.

We believe that the reason that the fuel cell market is not rapidly expanding at this time is due to high manufacturing costs. We believe that this development is inevitable, due to the advantages of low pollution and independence from fossil fuels. Major automobile, industrial and power supply companies are heavily involved in research and development activities of fuel cell technology and many have announced prototypes and commercial models. However, there has not been a major commercial breakthrough, which we attribute to the high cost of the products and the lack of consumer proven reliability. While no assurances can be provided, once the problem of high costs is resolved, we expect the micro fuel cell market to increase significantly.

Inflation

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material affect on our results of operations during the six month period ended June 30, 2004.