United StatesSECURITIES AND EXCHANGE
COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)

[XX] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

> For the quarterly period ended June 30,
>   2004

or

[   ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

> For the transition period from _______
>   to________

Commission File Number: 
333-33134

HYBRID FUEL SYSTEMS,
INC.(Exact name of registrant as specified in its
charter)

Georgia                                                                                               
58-2267238(State or other jurisdiction of incorporation or
organization)                                           
(I.R.S. Employer Identification No.)

12409 Telecom Drive, Tampa,
Florida 33637(Address of principal executive offices) (Zip
Code)

(813)-979-9222(Registrant's telephone number, including
area code)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 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 XX   No ___

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes ___   No  X

APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Sections
12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes ___   No
___

APPLICABLE ONLY TO CORPORATE
ISSUERS:

Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.  At November 1, 2004,the Company had 42,215 Series A
Preferred Shares and 195,209 Series B Preferred Shares outstanding.  At
October 29, 2004, the Company had 48,031,580 of its $0.001 par value common
shares outstanding.

Item 1 - Financial Statements

> Consolidated Balance Sheets for the
>   six-months ended June 30, 2004 and 2003Statement of Operations for the three
>   and six months ended June 30, 2004 and 2003Statement of Changes in
>   Stockholders' Equity for the period ended June 30,
>   2004Statement of Cash Flows for the three
>   and six month periods ended June 30,
>   2004 and 2003Notes to unaudited financial statements

Item 2 -

 Management's Discussion and Analysis of Financial
Condition and Results of Operations

Item 5 -

 Other Information

Item 6 -

 Exhibits
and Reports on Form 8-K

Item 7 -

 Litigation

Signatures

PART I - FINANCIAL INFORMATION

HYBRID FUEL SYSTEMS, INC.Consolidated Balance Sheets

> June 30, 2004
>       
>       December 31, 2003(Unaudited)
>       
>       (Audited)ASSETSCurrent AssetsCash
>       $        30,950
>       
>       $                        6Accounts Receivable
>       $        79,148
>       
>       $                10,953Inventory
>       $        12,584
>       
>       $                12,584Other Receivables
>       $         5,395
>       
>       $                  5,395Total Current Assets
>       $      128,077
>       
>       $                29,938Property Plant and Equipment Net
>       $        15,577
>       
>       $                15,577Total Assets
>       $      143,654
>       
>       $                44,515LIABILITIES AND CAPITALCurrent LiabilitiesAccounts Payable
>       $      390,024
>       
>       $              398,558Due to Related Parties
>       $      157,525
>       
>       $              157,528Due to related parties - convertible debt
>       
>       
>       $              179,746Notes Payable Related Parties
>       $        22,289
>       
>       $                       -Sales and Payroll Taxes Payable
>       $      202,939
>       
>       $              245,245Debt in Default
>       $        89,965
>       
>       $              123,272Convertible Debt in Default
>       $      233,200
>       
>       $              283,200Current Portion - Long Term Note
>       $        83,306
>       
>       $                       -Other current liabilities
>       $        46,362
>       
>       $                68,649Total Current Liabilities
>       $   1,225,610
>       
>       $            1,456,198Long-Term LiabilitiesNotes Payable - White Knight
>       $      659,720
>       
>       $                       -Redeemable Securities
>       $      530,000
>       
>       $              530,000Total Long-Term Liabilities
>       $   1,189,720
>       
>       $              530,000Total Liabilities
>       $   2,415,330
>       
>       $            1,986,198SHAREHOLDERS' EQUITYPreferred Stock - A ($.01 par value; 42215 authorized 
>   42,215 issued and outstanding; liquidation preference $8.021)
>       $            422
>       
>       $                     422Preferred Stock - B ($.01 par value; 954,563 shares
>       authorized 
>   195,209 shares issued and outstanding; liquidation preference 
>   $1,002,291)
>       $         1,952
>       
>       $                  1,952Common Stock ($.001 par value; 20,000,000 shares authorized
>       
>    12,163,464 and 11,963,646 issued and outstanding respectively)
>       $        12,164
>       
>       $                12,164Paid in Capital
>       $   3,852,714
>       
>       $            3,852,712Accumulated Deficit - Developmental Stage
>       $  (6,138,928)
>       
>       $          (5,808,933)Total Shareholders' Equity (Deficit)
>       $  (2,271,678)
>       
>       $          (1,941,683)Total Liabilities and Shareholders' Equity
>       $      143,654
>       
>       $                44,515
> 
>   (see Notes to unaudited Financial
>   Statements)

HYBRID FUEL SYSTEMS, INC.Statement
of Operations

|                                 | Three Months Ended           |  | Three Months Ended           |  | Six Months Ended         |  | Six Months Ended        
|-------------------------------- | ---------------------------- |  | ---------------------------- |  | ------------------------ |  | ------------------------
|                                 | June 30, 2004                |  | June 30, 2003                |  | June 30, 2004            |  | June 30, 2003           
|REVENUES                         |                              |  |                              |  |                          |  |                         
|Product Sales                    |                              |  |                              |  |                          |  |                         
|Revenue from Product Sales       | $                     9,079  |  | $                   10,789   |  | $               89,171   |  | $               59,567  
|Cost of product sales            | $                     8,517  |  | $                     5,063  |  | $               32,627   |  | $               29,752  
|Total revenues                   | $                        562 |  | $                     5,726  |  | $               56,544   |  | $               29,815  
|                                 |                              |  |                              |  |                          |  |                         
|EXPENSES                         |                              |  |                              |  |                          |  |                         
|Shipping                         | $                     1,138  |  | $                     1,423  |  | $                 2,577  |  | $                 2,313 
|Auto                             | $                     2,421  |  | $                     2,382  |  | $                 3,342  |  | $                 4,285 
|Rents & leases                   | $                     5,321  |  | $                     9,131  |  | $                 9,130  |  | $               19,225  
|Utilities                        | $                     3,797  |  | $                     6,462  |  | $               11,472   |  | $               10,724  
|Insurance                        | $                        587 |  | $                   20,289   |  | $                 2,028  |  | $               51,514  
|Travel                           | $                   24,870   |  | $                     7,357  |  | $               35,389   |  | $               17,406  
|Compensation                     | $                 106,164    |  | $                     3,159  |  | $             191,462    |  | $               13,794  
|Legal & accounting               | $                   36,278   |  | $                          - |  | $               47,117   |  | $               17,500  
|Professional fees                | $                     2,419  |  | $                          - |  | $                 3,939  |  | $                 4,440 
|Other operating expenses         | $                     4,640  |  | $                     3,647  |  | $                 9,630  |  | $                 9,217 
|research and development         | $                   33,520   |  | $                     2,143  |  | $               49,453   |  | $                 5,030 
|Interest                         | -                            |  | $                   13,481   |  |                          |  | $               13,481  
|Consulting Fees                  | $                   10,500   |  | $                   31,075   |  | $               21,000   |  | $               57,075  
|Total Expenses                   | $                 231,653    |  | $                 100,549    |  | $             386,539    |  | $             226,004   
|                                 |                              |  |                              |  |                          |  |                         
|Net Ordinary Income              | $                (231,091)   |  | $                  (94,823)  |  | $            (329,995)   |  | $            (196,189)  
|                                 |                              |  |                              |  |                          |  |                         
|Basic and diluted loss per share | $                     (0.02) |  | $                     (0.01) |  | $                 (0.03) |  | $                 (0.02)

> (see Notes to unaudited
>       Financial Statements)

HYBRID FUEL SYSTEMS, INC.Statement
of Changes in Stockholders' Equity

> Preferred
>     Stock
>     
>     Common
>     Stock
>     
>     
>     Stock
>     TotalShares
>     Amount
>     Shares
>     Amount
>     
>     
>     Paid-In
>     Accumulated
>     Subscription
>     Shareholders'Series A
>     Series A
>     Series B
>     Series B
>     Shares
>     Amount
>     Capital
>     deficit
>     receivable
>     deficitBalance at
>     
>     
>     
>     
>     11,313,646
>     $11,314
>     $3,412,981
>     $(4,653,538)
>     (200,000)
>     $     (1,429,243)Deceber 31. 2001Sale of Preferred A
>     45,215
>     422
>     
>     
>     
>     
>     99,563
>     
>     
>     99,985Sale of Preferred B
>     
>     
>     195,209
>     1,952
>     
>     
>     203,018
>     
>     
>     204,970Payment of stocksubscription recvbl
>     
>     
>     
>     
>     
>     
>     
>     
>     200,000
>     200,000Sale of common
>     
>     
>     
>     
>     650,000
>     650
>     117,350
>     
>     
>     118,000stock for cashNet loss
>     
>     
>     
>     
>     
>     
>     
>     (741,575)
>     
>     (741,575)Balance at
>     45,215
>     $    422
>     195,209
>     $ 1,952
>     11,963,646
>     $11,964
>     $3,832,912
>     $(5,395,113)
>     $           -
>     $       (1,547,863))December 31, 2002Stock issued for
>     
>     
>     
>     
>     100,000
>     100
>     9,900
>     
>     
>     10,000legal settlementIssuance of stockfor conversion of note
>     
>     
>     
>     100,000
>     100
>     9,900
>     
>     
>     10,000Net loss
>     
>     
>     
>     
>     
>     
>     
>     (413,820)
>     
>     (413,820)Balance at
>     45,215
>     $    422
>     195,209
>     $ 1,952
>     12,163,646
>     $12,164
>     $3,852,712
>     $(5,808,933)
>     $           -
>     $(1,941,683)December 31, 2003Net loss
>     
>     
>     
>     
>     
>     
>     
>     $(98,904)
>     
>     $(98,904)Balance at
>     45,215
>     $    422
>     195,209
>     $ 1,952
>     12,163,646
>     $12,164
>     $3,852,712
>     $(5,907,837)
>     $           -
>     $(2,040,587)March 31, 2004Net loss
>     
>     
>     
>     
>     
>     
>     
>     $(231,091)
>     
>     $(231,091)Balance at
>     45,215
>     $    422
>     195,209
>     $ 1,952
>     12,163,646
>     $12,164
>     $3,852,712
>     $((6,138,928))
>     $           -
>     $(2,271,678)June 30, 2004(see Notes to unaudited Financial
>     Statements)HYBRID FUEL SYSTEMS,
>     INC.Statement of Cash Flows

|                                          | Three Months           | Three Months           | Six Months             | Six Months           
|----------------------------------------- | ---------------------- | ---------------------- | ---------------------- | ---------------------
|                                          | Ended                  | Ended                  | Ended                  | Ended                
|                                          | June 30, 2004          | June 30, 2003          | June 30, 2004          | June 30, 2003        
|Cash Flows from operating activities      |                        |                        |                        |                      
|Net Income                                | $       (231,091)      | $          (94,823)    | $      (329,995)       | $      (196,189)     
|Adjustments to reconcile net              |                        |                        |                        |                      
|income to net cash provided               |                        |                        |                        |                      
|by operating activities                   |                        |                        |                        |                      
|Accounts Receivable                       | $            (3,850)   | $            20,581    | $        (68,197)      | $          (2,681)   
|Accounts Payable                          | $            24,467    | $            50,063    | $          (8,643)     | $          58,205    
|Employee loans                            | $                    - | $          (16,700)    | $                   -  | $        (49,600)    
|Other current liabilities                 | $                    - | $               (322)  | $                   -  | $          (2,913)   
|Notes Payable - White Knight              | $         230,922      | $                    - | $        479,974       | $                   -
|Notes and Loans Payble                    | $                    - | $                    - | $                   -  | $          (8,000)   
|Line of Credit                            | $                    - | $                    - | $                   -  | $        (13,681)    
|Federal PR Tax Settlement Pymt            | $          (15,000)    | $                    - | $        (27,377)      | $                   -
|Sales Tax Payable                         | $          (14,927)    | $                 330  | $        (14,929)      | $               424  
|                                          |                        |                        |                        |                      
|Total Adjustments                         | $         221,612      | $            53,952    | $        360,827       | $        (18,246)    
|                                          |                        |                        |                        |                      
|Net Cash provided by Operations           | $            (9,480)   | $          (40,871)    | $          30,832      | $      (214,435)     
|                                          |                        |                        |                        |                      
|Cash Flows from financing activities      |                        |                        |                        |                      
|Notes & Loans Payable II                  | $                    - | $              3,000   | $                   -  | $          (6,500)   
|Additional Paid-In Capital                | $                    - | $            55,121    | $                   -  | $        231,431     
|                                          |                        |                        |                        |                      
|Net cash provided by financing activities | $                    - | $            58,121    | $                   -  | $        224,931     
|                                          |                        |                        |                        |                      
|Net increase <decrease> in cash           | $            (9,480)   | $            17,250    | $          30,832      | $          10,496    
|                                          |                        |                        |                        |                      
|Summary                                   |                        |                        |                        |                      
|Cash Balance at End of Period             | $            30,950    | $            (2,620)   | $          30,950      | $          (9,502)   
|Cash Balance at Beg of Period             | $            (7,128)   | $            (6,883)   | $                  (6) | $          (7,011)   
|                                          |                        |                        |                        |                      
|Net Increase <Decrease> in Cash           | $            23,711    | $            (9,603)   | $          30,832      | $        (16,613)    

> (see Notes to unaudited
>           Financial
>   Statements)

HYBRID FUEL SYSTEMS, INC.Notes to Unaudited Financial
Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIESHybrid Fuel Systems,
Inc. (the "Company") licenses the worldwide exclusive rights to a combustion
engine fuel delivery system embodied in five US patents and one patent
pending.  The Company's current commercial application of the licensed
technology is referred to as Fuel2,  an aftermarket device for the
conversion of medium and heavy duty diesel engines to non-petroleum based fuels
such as natural gas.   Cash and Cash
EquivalentsFor purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.Accounts
ReceivableAccounts receivable, are stated at estimated net
realizable value. Accounts receivable are comprised of balances due from
customers. In determining collectibility, historical trends are evaluated and
specific customer issues are reviewed to arrive at appropriate
allowances.InventoriesInventories, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method. Inventories consist of component parts used in the manufacture and
assembly of retrofit systems for the conversion of gasoline and diesel engines
to non-petroleum based fuels such as compressed natural gas.Property,
Plant and EquipmentDepreciation is provided for using the
straight-line method, in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives (asset categories range
from three to seven years). Leasehold improvements are amortized using the
straight-line method over the lives of the respective leases or the service
lives of the improvements, whichever is shorter. Leased equipment under capital
leases is amortized using the straight-line method over the lives of the
respective leases or over the service lives of the assets for those leases that
substantially transfer ownership. Accelerated methods are used for tax
depreciation. Impairment of AssetsThe Company's
policy is to evaluate whether there has been a permanent impairment in the value
of long-lived assets, certain identifiable intangibles and goodwill when certain
events have taken place that indicate that the remaining balance may not be
recoverable. When factors indicate that the intangible assets should be
evaluated for possible impairment, the Company uses an estimate of related
undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of these assets. Losses on impairment are
recognized by a charge to earnings. Factors considered in the valuation include
current operating results, trends and anticipated undiscounted future cash
flows. Income TaxesThe Company utilizes the guidance
provided by Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS 109). Under the liability method specified by SFAS 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense is the result of changes in deferred tax assets
and liabilities. Valuation allowances are provided if necessary to reduce
deferred tax assets to the amount expected to be realized.Earnings
(Loss) Per Common ShareEarnings (loss) per share are computed using
the basic and diluted calculations on the face of the statement of operations.
Basic earnings (loss) per share are calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding for the
period. Diluted earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of shares of common stock outstanding for
the period, adjusted for the dilutive effect of common stock equivalents, using
the treasury stock method. The warrants outstanding were determined to be
antidilutive and therefore do not affect earnings per share.Use of
EstimatesThe preparation of financial statements in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities, as well as the reported
amounts of revenues and expenses for the period then ended. The actual outcome
of the estimates could differ from the estimates made in the preparation of the
financial statements.Revenue RecognitionRevenues are
recognized when the merchandise is shipped to the customer, which is when title
and risk of loss has passed to the customer. Stock Based
CompensationThe Company has adopted the disclosure-only provisions
of SFAS No. 123, Accounting for Stock Based Compensation, but applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for options issued to employees. Under Opinion No. 25, the intrinsic
method is used to determine compensation expense when the fair market value of
the stock exceeds the exercise price on the date of grant. As of the date of
this report, no options had been granted under the plan and therefore no
compensation expense has been recognized.Research and Development
CostsThe Company charges research and development costs to expense
as incurred.Fair Value of Financial InstrumentsThe
Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:

> Cash, Accounts Receivable, Accounts
>   Payable and Accrued Expenses: The carrying amounts reported in the balance
>   sheet for cash, accounts receivable, accounts payable and accrued expenses
>   approximate their fair value due to their relatively short
>   maturity.Long-Term Obligations: The fair value of the Company's
>   fixed-rate long-term obligations is estimated using discounted cash flow
>   analyses, based on the Company's current incremental borrowing rates for
>   similar types of borrowing arrangements. At December 31, 2003 and 2002, the
>   Company did not have any long-term obligations.

NOTE 2 - RELATED PARTY
TRANSACTIONSLicense AgreementDuring August, 2004, the
Company entered a series of agreements relating to its technology with a related
party who is a substantial shareholder.  A summary of each agreement is
included in this Form 10QSB under Item 5 - Other
Information.

Employment and Consulting
Agreements

During August 2004, the Company entered an
employment agreement with its Chief Executive Officer and Chairman of the Board
and consulting agreements with the technology inventor.  All three
individuals are substantial shareholders.  A summary of each agreement is
included with this Form 10QSB under Item 5 - Other
InformationLeasesThe Company currently subleases a
building from a related party on a month to month basis on the same terms and
amount as the primary lease. The monthly lease amount is $1,500NOTE 3 - DEBT IN DEFAULTThe
Company did not meet the payment terms on the note payable to Peachtree National
Bank through June 30, 2004. The note is secured by all assets of the
Company. The provisions of the note allow for the note to become immediately and
fully payable upon default of payments. Since July, the Company has been in
negotiations with the bank wherein White Knight SST would stand in place of
Hybrid as the guarantor of the note and Peachtree would accept a payment plan
which would liquidate the full amount owed within one
year.  Prior to December 31, 2003 the Company issued
convertible promissory notes to various individuals and to a corporation.
Following negotiations, the holders of the notes have collectively agreed to
accept $233,200 as payment in full of all principal and interest and such amount
is to be converted into shares of the Company's common stock at rates ranging
from $.06 to $.10 per share.  NOTE 4 - COMMITMENTS AND
CONTINGENCIESThe Company is delinquent in the payment of payroll and
state sales taxes. The Company is currently following payment schedules,
developed after negotiations with the taxing authorities. Amounts in arrears for
delinquent taxes, along with estimated penalties and interest assessed by the
taxing authorities are as follows, as of June 31, 2004 and 2003

> 2004
>       2003Payroll and sales
> taxes
>       $142,058
>       $162,739Penalties and interest
>       60,881
>       67,369Total
>       $202,939
>       $230,108

During June, 2004, the Company entered a
negotiated settlement with the IRS and began making monthly payments including
an initial payment of $15,000 plus $5,000 a month through January, 2005. 
During January 2005, the Company is obligated to payoff any remaining
balance.  Litigation    On November
14, 2003, Ambac International Corporation (" Ambac.") filed a lawsuit seeking
$109,915.60 together with interest at the rate of 15% per annum. The suits stems
from a contract for delivery of certain parts for use in the manufacturing of
our kits. We maintain the parts were delivered substantially past the date of
anticipated delivery and that the parts when received were defective. On August
3, 2004, we filed a Motion to Dismiss or, in the Alternative, Motion to Compel
Arbitration. During October 2004, the Court issued a Motion to Compel
Arbitration and we are awaiting the scheduling of such requirement.  We
intend to vigorously defend our position and believe we will ultimately prevail.
However, there can be no assurance that we will prevail and in the event we were
to not prevail, we could be required to pay the amount of the suit, plus
interest and associated fees. We do not believe the loss of this litigation will
have a material effect on our ability to execute our business
mission.

As of June 30, 2004, the company is
unaware of any claim or threat of litigation relating to Hybrid or our officers
or directors.   NOTE 5 - STOCK OPTIONSThe
Company's Stock Option Plan ("SOP") was adopted in 2001 to provide for the grant
to employees up to 2,000,000 incentive stock options within the meaning of
Section 422 of the Internal Revenue Code. The SOP, which is administered by the
Company's Board of Directors, is intended to provide incentives to directors,
officers, and other key employees and enhance the Company's ability to attract
and retain qualified employees. Stock options are granted for the purchase of
common stock at a price not less than the 100% of fair market value of the
Company's common stock on the date of the grant (110% for holders of more than
10% of the total combined voting power of all classes of capital stock then
outstanding). As of June 30, 2004 and 2003, no options had been granted under
the plan.WarrantsThe Company has issued warrants to
purchase shares of common stock to consultants and other non employees. The
company uses the Black Scholes option pricing model to value warrants issued to
non employees. As of October 18, 2004, all Warrants issued by the Company
have expired.  NOTE 6 - SHAREHOLDERS' EQUITYPreferred
Stock Effective February 1, 2002, the Company designated 999,779
shares of previously undesignated preferred stock as Series A Preferred Stock,
for which 45,216 shares are authorized and Series B Preferred Stock, for 954,563
shares are authorized.Series A Preferred Stock is convertible, at the
option of the holder, at any time, into shares of the Company's common stock as
determined by dividing $.19 by a conversion price determined on the date the
related certificate is surrendered. The conversion price is subject to periodic
adjustment and is initially established at $.01632. Series A Preferred Stock is
automatically convertible into shares of the Company's common stock upon (i) the
date specified by vote or written consent or agreement of holders of at least
three quarters of the shares of Series A Preferred outstanding, or (ii) upon the
closing of the sale of the company's common stock in a firm commitment,
underwritten public offering registered under the Securities Act in which the
Company receives gross proceeds of no less than $20 million. Series A Preferred
Stock has a liquidation preference of the greater of $.19 per share or the
amount that such share would be entitled to upon liquidation or distribution.
The Series A Preferred Stock has voting rights, except as to the election of
debtors, equal to the number of shares of common stock into which the Series A
Preferred Stock is convertible. The Series A preferred Stockholders have the
right to elect one director of the Company.Series B Preferred Stock is
convertible, at the option of the holder at any time, into shares of the
Company's common stock as determined by dividing the lower of $.09 or the price
per share paid by the holder of the Series B Preferred Stock by a conversion
price determined on the date the related certificate is surrendered. The
conversion price is subject to periodic adjustment and is initially established
at $.00773. Series B Preferred Stock is automatically convertible into shares of
the Company's common stock upon (i) the date specified by vote or written
consent or agreement of holders of at least three quarters of the shares of
Series B Preferred Stock outstanding, or (ii) upon the closing of the sale of
Company's common stock in a firm commitment, underwritten public offering
registered under the Securities Act in which the Company receives gross proceeds
of no less than $20 Million. Series B Preferred Stock has a liquidation
preference of the greater of $.09 per share or the amount that such share would
be entitled to upon liquidation or distribution. The Series B Preferred Stock
has voting rights, except as to the election of directors, equal to the number
of shares of common stock into which the Series B Preferred Stock is
convertible. The Series B Preferred Stockholders have the right to elect one
director of the Company.NOTE 7  - SUBSEQUENT EVENTSSubsequent
to June 30, 2004, the Company.

- On
  July 27, 2004, the Board of Directors authorized the issuance of 7,233,351
  shares of our restricted common stock to various members of the Davis family,
  employees and consultants.
- During
  August we settled a shareholder suit filed in 2003 with a settlement amount of
  $15,000.
- On
  August 31, 2004 we entered a new, worldwide exclusive technology license
  agreement as well as employment and consulting agreements with the inventor of
  the technology and our Chief Executive Officer.  A summary of all
  agreements is included this Form 10QSB under Item 5 - Other Information.
- During
  October, we negotiated a settlement with all outstanding Note holders allowing
  for the conversion of their Notes into shares of our restricted common
  stock.
- During
  October we received the first set of official emission measurements for our
  Fuel2 technology.  We provide a discussion of these results in Item 2
  - Management's Discussion and Analysis of Financial Condition and Results of
  Operations.

Item
2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion and analysis
provides information which management believes is relevant to an assessment and
understanding of the results of our operations and financial condition. The
discussion should be read in conjunction with the unaudited consolidated
financial statements and notes thereto.For the three months period
ended June 30,
2003 and 2004Since 1996, we have sought to commercialize our
dual-fuel technology with limited success. For the period ended June 30, 2003
we experienced a substantial slow-down in our operational state due principally
to under capitalization. We dedicated the majority of our resources during the
six months of 2004 on the research, development and
reengineering of our Fuel2 dual-fuel application. The following compares our
performance during these periods.

During the first six months ended June 30, 2003, we were in a product development stage and during the first
six months of  2004, we placed a heavy emphasis on the research, development and reegineering
of our Fuel2 application. During the three month period ended June 30, 2004 our research and
development expenses increased approximately 1,564% growing from $2,143 during the
three months period ended June 30, 2003  to $33,520 for the same three
month period in 2004. For the quarter ended June 30, 2003
and 2004, our revenue from product sales decreased by 110% from $410,789 to
$9,079 while our cost of product sales increased only 163% from $5,063 to
$8,517, respectively. Overall, our total revenues during this comparative period
decreased 198% from $5,726 to $562.  Overall
during this period, our net loss increased 94% from ($94,823) at June 30, 2003
to ($231,091) June 30, 2004 which encompasses a 295% decrease in consulting
fees, a 1,564% increase in research and development and an 3,360% increase in
compensation as well as an 127% increase in other expenses. We have
no off-balance sheet items connected with our Company or our
operations.

For the six months period ended
June 30, 2003 and 2004

We dedicated the majority of our resources during the
six months of 2004 on the research, development and
reengineering of our Fuel2 dual-fuel application. The following compares our
performance during these periods.

During the first six months ended June 30, 2003
and 2004, we were in a product development stage and during the first six months
of 
2004, we placed a heavy emphasis on the research, development and reegineering
of our Fuel2 application. During the first six months of 2004 our research and
development expenses increased approximately 983% growing from $5,030 during the
first six months of 2003 to $49,453 for the same six month period in 2004. For the
six months ended June 30, 2003
and 2004, our revenue from product sales increased by 149% from $59,567 to
$89,171 while our cost of product sales increased by 8% from $29,752 to $32,627, respectively. Overall, our total revenues during this
comparative period increased 189% from $29,815 to $56,544.  Overall
during this period, our net loss increased 168%% from ($196,189) at June 30, 2003
to ($320,995) June 30, 2004 which encompasses a 272% decrease in consulting
fees, a 983% increase in research and development and a 1,388% increase in
compensation as well as an 4.9% increase in other expenses. We have
no off-balance sheet items connected with our Company or our
operations. 2004 and certain expectations for 2005
We recently filed our Form 10KSB for the years ended December 2002 and 2003. Since the date of that filing we can report encouraging results from our current
technology  verification testing. The positive result of our verification cannot be minimized in importance relative to the success of our technology in the domestic marketplace. 
During the past several years, federal and state governments have enacted ever increasing mandates
restricting harmful emission pollutants of diesel engines.  In essence, according to these mandates, new vehicle manufacturers will have to ensure their product meets the minimum quantities for certain emissions.  At the very least, any aftermarket product such as our
Fuel 2 dual-fuel technology must meet the statutory minimum emission standards. 
In a report provided to our Company by an independent lab titled
Emission and Fuel Consumption Data Obtained in Accordance with CARB Retrofit Verification Protocol for On-Road Heavy-Duty Engine Applications to Verify Particulate and NOx Reductions When Operating with The Hybrid Dual Fuel System Using a 2001 Model E7-350 Mack Diesel Engine
- October 12, 2004  ("Summary Report") exceed the statutory emission standards as contained in the Federal Register for new vehicles.  In addition, the results contained in the Summary Report exceed the statutory emission standards as contained in California Codes.  The following table
summaries our results as compared with the Federal and State of California new vehicle emission standards:

> Calculations are in grams
>       per brake horsepower-hour (g/bhp-hr)
>       Displacement
>       of Diesel with
>       Natural Gas
>       Total
>       Hydrocarbons
>       (THC)
>       Carbon
>       Monoxide
>       (CO)
>       Nitrogen
>       Oxides
>       (NOx)
>       Particulates
>       (PM)Hybrid's Fuel2 Certified Emissions
>       62%
>       0.048
>       1.258
>       3.243
>       0.027540 CFR Parts 85 and 86 (Federal standards)
>       No standard
>       1.3
>       15.5
>       4
>       0.1California Codes 1956.8 (State standards)
>       No standard
>       1.3
>       15.5
>       4
>       0.05

Of greater importance to our Verification process however is the percentage
reduction in NOx and Particulates.  In the case of the Verification program
currently underway, the granting authorities have published reductions in certain emission in order to qualify as an Emission Control Device.  Principally, this verification process is geared toward reductions in Nitrogen Oxides
or NOx and Particulates or PM.  The following chart includes the target reductions sought by the granting authority followed by the certified results achieved by our
  Fuel 2 dual-fuel technology.  We believe these overall results position our Company to engage in meaningful sales during 2005.

> NOx
>           PMApproving authority required minimum emission reductions
>           15%
>           25%Hybrid's Fuel2 Certified Emission Reductions
>           19.3%
>           73%

Should the reductions we've achieved
highlighted above remain consistent during the 1,000-hour durability cycle
followed by a final round of official results, our Company will have the first
dual-fuel technology verified as an Emission Control Device. We believe these
reductions position our Company to engage in meaningful sales during 2005. 
Should the reductions we've achieved highlighted above remain consistent
following the 1,000-hour durability cycle, 200-hours on road cycle and final round of official results, our
Fuel 2 technology will be the first dual-fuel technology verified as an Emission Control Device.

We derived the information for the
two charts cited above from the following three sources:

> Hybrid's Fuel2Certified Emissions
>   extracted from an independent engine testing lab Summary Report - Emission
>   and Fuel Consumption Data Obtained in Accordance with CARB Retrofit
>   Verification Protocol for On-Road Heavy-Duty Engine Applications To Verify
>   Particulate and NOx Reductions When Operating With The Hybrid Dual Fuel System
>   Using a 2001 Model E7-350 Mack Diesel Engine by the Official EPA Transient
>   Cycle Heavy-Duty Procedure dated October 12, 2004.
>   Federal Standards extracted from 40 CFR Parts 85 and 86
>   Emissions Control, Air Pollution From 2004 and Later Model Year Heavy-Duty
>   Highway Engines and Vehicles; Light-Duty On-Board Diagnostics Requirements,
>   Revision; Final Rule
>   State Standards
>   extracted from California Codes 1956.8. Exhaust Emissions Standards and Test
>   Procedures -1985 and Subsequent Model Heavy-Duty Engines and Vehicles.

We continue to be encouraged by the market potential for our technology for
three principal reasons.  The price of diesel fuel continues to rise as the
price of oil increases while the price of natural gas appears to be somewhat
stable at a lower cost than diesel.  This price differential can represent a substantial economic
motivator for fleet conversion.  Second, the preliminary emission test
results cited above could potentially open the domestic US marketplace, an arena
where our Fuel 2 kit would be the only dual-fuel verified technology available
for medium and heavy-duty diesel engines.  Finally, while federal and state
environmental regulators have long sought creative means to reduce atmospheric
pollutants, during the past two years, there has been a focused effort to clean
up the 400,000+/- diesel-only yellow school buses.  A Fuel 2 penetration
rate of only 1% into the school bus market place would translate into
approximately $18 million dollars in revenue.  
During 2003, our liquidity was limited to small amounts of financing provided on a sporadic basis principally from friends and family. During the first quarter 2004, all our financing was provided by White Knight SST, Inc..  For the quarter ended
June 30 2004, White Knight has provided $659,720 and the
principals of  White Knight have served as our Chief Executive, Chief Financial Officer
and Chairman of our Board of Directors since December 2003.  During August 2004, we entered an employment agreement with White Knight to provide for
these positions to remain for an additional two-year period.  We believe that our current and anticipated sales together with financing provided by White Knight will be sufficient to ensure we can continue our operations for the foreseeable future.

Item 5 - Other
Information

During August, 2004, the Company entered a
series of agreements relating to its technology and the engagement of certain
individuals.  The following is a summary of these agreements.

Technology License
Agreement

On the 18th of August 2004, Hybrid
Fuel Systems, Inc., ("Hybrid" or the "Company") entered a world wide exclusive
Technology License Agreement (the "License Agreement") with Engine Control
Technologies, LLC ("ECT").  ECT is
the sole and exclusive owner of US Patents 5,408,978 Gaseous Fuel Entrainment
Apparatus and Process issued April 25, 1995; 5,083,547 Air and Fuel
Mixing Apparatus issued January 28, 1992; 5,103,795 Air and Fuel Mixing
Apparatus and Method issued April 14, 1992; 4,479,466 Natural Gas and Air
Mixing Device issued October 30, 1984 and 5,370,097 Combined Diesel and
Natural Gas Engine fuel Control system and Method of Using Such issued
December 6, 1994 as well certain patents pending relating to the same material
as the above referenced patents (collectively the "Patents").

Under the term of the License
Agreement; Hybrid has the world-wide exclusive rights to use, manufacture, lease
and/or sell products and/or systems which embody the Patents. To maintain the exclusive nature of the
License Agreement, Hybrid must sell a minimum of 750 Fuel2
kits during calendar 2005 and 2,500 Fuel2
kits in each subsequent year.  The
term of the License Agreement is the expiration of the last-expiring Patent or
ten years.

In exchange for granting the License
Agreement, ECT is entitled to a one-time fee of $250,000 payable (a) upon the
first anniversary of the License Agreement; (b) receipt of $1million through
equity or debt financing; or (c) upon the sale of the 100th Fuel2
kit.  In addition, ECT is entitled
to a royalty rate of either (a) $250 per Fuel2
kit, or (b) 3.5% of net sales but in no event shall a royalty payable be created
which is lower than $250 or higher than $1,000.

The License Agreement may be
terminated (i) in the event Hybrid is adjudicated bankrupt or insolvent, enters
into a composition with creditors, makes an assignment of all or substantially
all of its assets for the benefit of its creditors, or if a receiver is
appointed for its assets; (ii) in the even that Hybrid fails to produce,
manufacture, sell, market or distribute or cause to be produced manufactured,
sold, marketed or distributed the kits; (iii) in the event that any of Hybrid or
its affiliates, agents, distributors or sub-licensees of Hybrid is in material
breach or default of any provision of the License Agreement which default or
breach is not cured within the applicable time period granted herein; (iv) upon
the failure or refusal of Hybrid to pay ECT the royalty when and as it becomes
due and payable; (v) in the event that any Hybrid or its affiliates, agents,
distributors or sub-licensees pledge, lien, mortgage, secure or otherwise
encumber the Patents in any manner, whether arising by contract, as a matter of
law, by judicial process or otherwise; (vi) in the event there is a material
adverse effect in the financial condition, operations, assets, business,
properties or prospects of Hybrid. 
"Material adverse effect" means any event, change, violation, inaccuracy,
circumstances or effect that is or is reasonably likely to be, individually or
in the aggregate, materially adverse to the condition (financial or otherwise),
capitalization, operations or business of Hybrid, or; (vii) in the event Hybrid
fails to maintain its status as a public company.

In the event of any material breach,
Hybrid has 30 days from the notice of such breach to cure any outstanding
default.  A copy of the Technology
License Agreement is included with the filing of this Form 10Q. Consulting Agreement
On August 31, 2004, we entered a Consulting Agreement with Frank Davis, the
inventor of our Fuel 2 technology. Under the terms of the Consulting Agreement,
Mr. Davis shall provide general advice, guidance and counsel to and consult with
senior management of Hybrid with respects to all aspects of our business for a
period of five years. The Consulting Agreement automatically extends for
subsequent one year periods if not cancelled. Mr. Davis is to receive health and
dental insurance as well as an automobile as compensation for the Consulting
Agreement.Consulting Agreement
On August 31, 2004, we entered a Consulting Agreement with Engine Control
Technologies, LLC (ECT), the Licensor of our Fuel 2 technology. Under the terms
of the five year consulting agreement, ECT shall provide customary consulting
services relating to the technology. Compensation for the ECT Consulting
Agreement is initially $7,000 per month increasing to $12,000 per month upon the
sale of the first 100 kits or closing of financing of $1,000,000 in equity, debt
or a combination.Employment Agreement
On August 30, 2004, we entered an employment agreement with Mark Clancy and John
Stanton, (collectively "White Knight") to serve in the capacities as
Chief Executive Officer and Chairman of the Board of Directors for a period of
at least two years. Compensation for both individuals was fixed at $25,000 per
month, payable entirely in restricted shares of our common stock. According to
item 6c of the Employment Agreement, If, for the duration of the Employment
Agreement (initial two year period), either Mr. Stanton is not nominated and
elected as our Chairman of the Board and Mr. Clancy does not continue as our
Chief Executive Officer and a Director, then the Technology License between our
Company and Electronic Control Technologies is automatically cancelled. This
provision may be waived only with the express written consent of Messrs. Stanton
and Clancy. Item
6 - Exhibits and Reports on Form 8-K

> On
>   March 26, 2004, we filed a Form 8-K to report our change of independent
>   accountants.

Item 7 - Litigation

On November
14, 2003, Ambac International Corporation (" Ambac.") filed a lawsuit seeking
$109,915.60 together with interest at the rate of 15% per annum. The suits stems
from a contract for delivery of certain parts for use in the manufacturing of
our kits. We maintain the parts were delivered substantially past the date of
anticipated delivery and that the parts when received were defective.
Subsequently we filed a response on December 22, 2003. Ambac subsequently made a
motion for default judgment because the statutory period to file a response was
30 days and our response was filed in 35 days. Further, the response was
submitted by a " non-attorney." which is alleged to be a further violation of
South Carolina civil procedure. Our CFO filed the response during 2003 at the
direction of our then-Chief Executive Officer.

On August 3,
2004, we filed a Motion to Dismiss or, in the Alternative, Motion to Compel
Arbitration. During October 2004, the Court issued an order to Compel
Arbitration.  We are now awaiting the scheduling of the
arbitration.   We intend to vigorously defend our position and believe
we will ultimately prevail. However, there can be no assurance that we will
prevail and in the event we were to not prevail, we could be required to pay the
amount of the suit, plus interest and associated fees. We do not believe the
loss of this litigation will have a material effect on our ability to execute
our business mission. The full amount of the liability has been recorded as a
payable in our financial statements as of December 31, 2003.

There is no
other pending litigation or other proceedings against the
Company.

SIGNATURE

Pursuant to
the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by theundersigned thereunto
duly authorized.

Hybrid Fuel
Systems, Inc.   registrant

November
1,
2004

By:    s/s MARK
CLANCY                                                                                                     
Mark
Clancy                                                                                                     
Chief Executive Officer