An engine system for generating hydrogen and oxygen, and a method using a by-product of electrolysis, for use in an internal combustion engine to improve efficiency and reduce emissions. The engine system has an electrolysis cell for generating hydrogen and oxygen by electrolysis of an aqueous solution, a battery as a source of power for providing electrical power to the electrolysis cell, and cooling system for maintaining the temperature of the electrolysis cell to reduce problems associated with overheating of the cell during electrolysis. The engine system traps sludge generated during hydrolysis in a filter. The sludge is released from the filter by agitation, resulting in a gas containing the sludge which is then used during combustion to improve fuel efficiency. The novel reconfiguration of existing engine parts and introduction of new features results in a less expensive, cleaner and more efficient hydrogen powered engine.