UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                               -------------------

                                   FORM 10-KSB


            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     For The Fiscal Year Ended June 30, 2006

     [_]  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 0-29351

                               HYBRID FUELS, INC.
                              ---------------------
           (Name of small business issuer as specified in its charter)

                   NEVADA                                88-0384399
         -------------------------------          ------------------------
          (State of incorporation)            (IRS Employer Identification No.)

            237 Main Street, Box 880, Niverville, MB           R0A 1E0
          ------------------------------------------       --------------
           (Address of Principal Executive Offices)           (Zip Code)

Issuer's Telephone Number (888)550-2333

Securities registered pursuant to section 12 (b) of the Act:  None
Securities registered pursuant to section 12 (g) of the Act:  Common stock with
                                                 par value of $0.001.

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 last 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

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

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]

The number of shares issued and outstanding of the registrant's common stock as
of October 11, 2006 is 26,332,933.

Amount of revenue for most recent fiscal year   $0.00

Aggregate market value of the common equity held by non-affiliates: $8,180,407

<PAGE>

                                TABLE OF CONTENTS

                                     PART I

 Item 1.   DESCRIPTION OF BUSINESS....................................Page  3

 Item 2.   DESCRIPTION OF PROPERTY....................................Page 16

 Item 3.   LEGAL PROCEEDINGS..........................................Page 17

 Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........Page 17


                                     PART II

 Item 5.   MARKET FOR REGISTRANT'S COMMON
           EQUITY AND RELATED STOCKHOLDER MATTERS.....................Page 17

 Item 6.   PLAN OF OPERATION..........................................Page 20

 Item 7.   FINANCIAL STATEMENTS.......................................Page 24

 Item 8.   CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS
           ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................Page 25

 Item 8A.  CONTROLS AND PROCEDURES....................................Page 25

 Item 8B.  OTHER INFORMATION..........................................Page 25

                                    PART III

 Item 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
           AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (A)
           OF THE EXCHANGE ACT........................................Page 25

 Item 10.  EXECUTIVE COMPENSATION.....................................Page 27

 Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
           OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
           MATTERS....................................................Page 28

 Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............Page 29

 Item 13.  EXHIBITS AND REPORTS ON FORM 8-K...........................Page 29

 Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.....................Page 30

 Signatures...........................................................Page 30

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                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

This Form 10-KSB contains forward-looking statements. The words "anticipate",
"believe", "expect", "plan", "intend", "estimate", "project", "could", "may",
"foresee", and similar expressions identify forward-looking statements that
involve risks and uncertainties. Except for disclosures that report the
Company's historical results, the statements in this document are
forward-looking statements. You should not place undue reliance on
forward-looking statements because of their inherent uncertainty and because
they speak only as of the date hereof. Actual results could differ materially
from the results discussed in the forward-looking statements and the Company
assumes no obligation to update forward-looking statements or the reasons why
actual results may differ therefrom.

The following discussion and analysis should be read in conjunction with the
various disclosures made by us in this Report and in our other reports filed
with the SEC.

GENERAL INFORMATION ON THE COMPANY

Hybrid Fuels Inc. is a development-stage company and has had no income since the
acquisition of the hybrid fuels technology in June 1998. The Company is unlikely
to have any significant cash flow until after the first quarter ending September
30, 2006.

The Company acquired Hybrid Fuels, USA, Inc. on May 28, 1998, which was
accounted for as a reverse takeover. All historical financial statements are
those of Hybrid Fuels, USA, Inc. Since the inception date of Hybrid Fuels, USA,
Inc. was January 28, 1998, this is the inception date used in the presentation
of the Company's financial statements. In May 1998, the Company changed its
domicile to Nevada and, on June 10, 1998, changed to its current name, Hybrid
Fuels, Inc.

In May of 1998, in a stock for stock exchange, the Company issued 12,000,000
shares to Donald Craig to acquire all of the issued and outstanding shares of
Hybrid Fuels, U.S.A., Inc. and 330420 B.C. Ltd., (which subsequently changed its
name to Hybrid Fuels (Canada) Inc.). At the time of the acquisition, Mr. Craig
held all of the issued and outstanding shares of Hybrid Fuels, U.S.A., Inc., and
Hybrid Fuels (Canada) Inc., as Trustee for a group of individuals and companies
that had contributed to the development of the Hybrid technology. At the time of
the acquisition, Hybrid Fuels (Canada) Inc., owned the rights to the technology,
with the result that, as a part of the acquisition, the Company acquired control
over the technology necessary for the Company's intended operations. Prior to
the acquisition of Hybrid Fuels, U.S.A., Inc. and Hybrid Fuels (Canada) Inc.,
the Company had no significant operations and was seeking a business
opportunity.

At this time the Company's intended principal business is to integrate cattle
feeding and finishing with the production of wet ethanol. The main source of
revenue for the Company is expected to come from the sale of finished cattle and
denatured ethanol. The Company is actively pursuing other sources of revenue
related to their integrated farm system.

A test facility is being constructed on a 12-acre parcel of land in Oyama, BC,
Canada to demonstrate the economic feasibility of the system. A group of Hybrid
Fuels, Inc. shareholders is bearing the financial burden of construction and
retains legal ownership of the facility. It is expected that once the facility
has been completed for the Company's intended operations, the Company will

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negotiate with this group to acquire the facility on mutually agreeable terms.
Once this first facility is operating, we plan to use it as a demonstration and
training facility and to earn revenue from its operation.

The facility will not be run at full capacity until approximately four months
have passed from the facility becoming operational. We believe that at the end
of the fourth month of operations, when we sell the first group of finished
cattle, we will have sufficient data to estimate revenue streams and expenses to
establish a more comprehensive business plan.

It is intended that future facilities will be constructed for the Company by
independent contractors on privately-owned farms after a written, contractual
agreement is made between the Company and the operator (s).

THE PROPOSED FACILITIES

The proposed facilities are planned to consist of a cattle barn,
ethanol-producing plant, gasifier/burner (manure/straw burning unit) and a
hydroponics barley-grass growing system.

The cattle barn at the Oyama facility has been designed to accommodate 200 head
of cattle and the hydroponics barley-grass growing system. Once the facility is
operational, it is expected that the cattle will be fed starting with 50 head
and adding another 50 approximately every four weeks until the barn is at full
capacity. As we gain experience with the facility, we intend to operate the barn
continuously at full capacity during the subsequent 100-day feeding cycles. At
the end of each feeding cycle, the cattle will be sold at auction.

The cattle barn includes floor space for six individual pens - five occupied
pens and one pen remaining empty and free of manure and bedding waste. Cattle
are to be moved to a clean pen every five days on a rotational basis. The manure
and bedding straw is removed from the pens and destroyed in the gasifier/burner
that provides heat energy for the ethanol production and the hydroponics feed
system.

In the ethanol plant, grains are fermented and then distilled to produce the wet
ethanol. The heat is supplied from the burning of the used bedding straw and
manure in the gasifier/burner. The ethanol production process also generates a
high protein product, called "distillers mash" and a liquid byproduct called
"stillage water." The mash and liquid is supplemented by barley grass and
creates an excellent feed for the cattle. The expected weight gain is an average
of four pounds a day per head during the planned 100-120 day feeding cycle.

Ethanol produced by the first facility in the first two to three months of its
operation is expected to be used for testing purposes. Once the facility is
operating at full capacity, we project that the ethanol production will be
approximately 200 US gallons per day.

It is intended that the wet ethanol will be blended with a proprietary
emulsifier and diesel fuel. When this newly created fuel was tested in an
unaltered diesel engine at the British Columbia Institute of Technology in June
1996, it reduced particulate emissions (black smoke) by over 62% and the
smog-causing nitrogen oxide (NOx) emissions by more than 22%. Researchers also
noted no measurable loss of engine power when testing this fuel blend.

The hydroponics barley-grass growing system is expected to produce a ration of
10-15 pounds per day of fresh grass per animal, year round, regardless of
climate. We believe each grass unit represents approximately the equivalent of
400 acres of grass growing land.

The barns have been designed to raise beef cattle under controlled atmospheric
conditions. The buildings are constructed from prefabricated metal, insulated
sufficiently to keep the cattle warm in cold weather and cool in warm weather.
The barns are intended to include air-to-air heat exchangers that in cold
weather, exchange the warm, heavily moisture-laden barn air with fresh air from
outside, that is heated and dried as it passes through a heat exchanger. Based
on the heat exchanger equipment we plan to use, the calculations estimate heat

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losses from the barn at a total of 404,052 BTU per hour with gain from animal
heat production of 407,078 BTU per hour at -17 Degrees F outside temperature. At
this outside temperature, the inside building temperature should remain around
50 Degrees F. Management believes that these heat exchangers will keep the barn
warm and dry in winter and that simple "swamp type" coolers common to the
greenhouse industry will be adequate to provide summer cooling.

The barns are to be equipped with Ultra Violet (UV) type fly control units -
Johnson Wax Co. Model 200A or 601T that are designed to control flies under the
worst conditions, according to the manufacturer. The Company believes that
regular removal and burning of the waste will also help to control flies and
other parasites and thus reduce or even eliminate the need for toxic chemicals
to control those pests.

Cattle being finished generally produce an average of approximately 12 pounds of
manure and urine each day, containing about 80% moisture. Moisture content in
the waste is controlled by spreading bedding, in the form of chopped straw, wood
shavings, or sawdust (depending on price and availability) into the pens to
absorb moisture from the manure and urine. The amount of bedding is adjusted so
that one week's accumulation of manure and urine in the bedding will generate
waste with moisture content of approximately 45%, which is ideal for waste
destruction within the gasifier, according to the manufacturer.

This commercially available gasifier unit is rated by its manufacturer at
900,000 BTU per hour and daily waste removal from one pen is estimated by the
company to yield +/- 6.5MM BTU. Estimated energy need for distillation and
cooking totals +/- 4MM BTU leaving a surplus of energy for other uses, including
a greenhouse if desired. This gasifier has five burning stages and, according to
the manufacturer, is expected to burn waste such as manure and bedding virtually
free of emissions and residual waste.

The cattle are expected to be started at a weight of between 600 and 1000 pounds
and finished in the range of 1100 to 1400 pounds. The cattle are introduced into
the barn in stages and thus are at various weights within the stages of the
finishing cycle.

It is expected that these facilities will be operated manually by two people.
These trained people are expected to be in contact with the animals several
times a day, while the cattle are being fed, or moved from one pen to another.
These operators are expected to be able to detect any illness or disease early,
separate any ill animal from the rest of the herd, and treat it for that
specific illness, rather than giving a general course of antibiotics to all the
animals as a precautionary measure. As a result, the Company intends to have a
policy that permits the use of antibiotics only as required on any sick animal.

In the proposed facilities, grains, that are referred to as feedstock, are to be
used for the dual purpose of ethanol production and as livestock feed. Grains
such as barley, wheat, rye, corn, etc., are all suitable. Barley is most
attractive because of its abundance and high starch content. It ferments well
and has long been used for alcohol production.

CONCERNS ABOUT COMMON CATTLE FINISHING METHODS

a.  THE USE OF ANTIBIOTICS AND GROWTH HORMONES

According to John Robbins in "Diet For A New America", the production of beef,
pork, poultry and dairy products has become focused on giant facilities. In
these "factories", antibiotics are used to prevent the animals from becoming
sick, growth hormones are implanted or fed to force weight gains and toxic
chemicals are used to kill flies and to protect the animals from other pests
that might interfere with productivity.

                                       5
<PAGE>

Robbins makes the case for consumers who are becoming concerned about the
adverse effects on their immune systems of consuming meat and poultry that has
been raised using antibiotics and growth hormones. He also refers to evidence
that suggests links between the increasing incidence of a number of diseases to
the consumption of meat, dairy products and other foods that contain
antibiotics, hormones and toxic chemicals.

b.  GROUNDWATER CONTAMINATION

Typical beef operations produce manure and bedding which are expensive to
dispose of and cause tremendous groundwater contamination.

From the cattlenetwork.com (Source: Dr. Mindy Spiehs, University of Minnesota
Beef Team):

"Large confinement feedlots have often been viewed as the primary threat to
local water supplies."

"The primary pollutants in beef manure are nitrogen, phosphorus, and pathogens.
Nitrate-nitrogen can leach into ground water from stockpiled manure or silage
and open lots."

The cover story from Macleans Online for June 12, 2000 says in part about the
dangers of factory farms:

"The monstrous size of these profitable operations has raised troubling
questions about water quality and threats to public health from coast to coast.
Manure from factory farms often contains a variety of heavy metals, lake-choking
nutrients and deadly pathogens such as e-coli 0157."

This article says, in describing the resulting groundwater pollution problem in
great detail:

"In the US, the EPA estimates that agricultural runoff from animal factories and
traditional farms is the leading source of water pollution in that country."

The article then quotes Les Klapatiuk, who runs a firm specializing in water
treatment, that there isn't a single government in Canada with adequate
legislation to deal with these volumes of animal waste. The article says:

"The leakage from lagoons is incredible, and when you spread millions of gallons
of waste on a field it just runs into the surface water. If a city or oil
company operated in this way, they would be shut down."

Other concerns which led to the development of this "farm integration plan"
include:

c. ENVIRONMENTAL IMPACT FROM USE OF FOSSIL FUELS

When coal, natural gas or oil are burned, they release gases into the
atmosphere:

     o    Carbon monoxide (CO) is a colorless, odorless and poisonous gas
          produced by incomplete burning of carbon in fuels. When CO enters the
          bloodstream, it reduces the delivery of oxygen to the body's organs
          and tissues. Health threats are most serious for those who suffer from
          cardiovascular disease, particularly those with angina or peripheral
          vascular disease. Exposure to elevated CO levels can cause impairment
          of visual perception, manual dexterity, learning ability and
          performance of complex tasks. The largest emissions contribution comes
          from highway motor vehicles.
     o    Sulfur dioxide (SO2)is a primary contributor to acid deposition, or
          acid rain, which causes acidification of lakes and streams and can
          damage trees and crops. In addition, sulfur compounds in the air
          contribute to visibility impairment in large parts of the country.
          This is especially noticeable in national parks. High concentrations
          of sulfur dioxide (SO2)

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          affect breathing and may aggravate existing respiratory and
          cardiovascular disease. Ambient SO2 results largely from stationary
          sources such as coal and oil combustion, steel mills, refineries, pulp
          and paper mills and from nonferrous smelters.
     o    Nitrogen oxide (NOx) contributes to acid rain and smog, as well as
          health issues such as lung inflammation, immune system changes and eye
          irritation. NOx forms when fuel is burned at high temperatures. The
          two major emissions sources are transportation and stationary fuel
          combustion sources such as electric utility and industrial boilers.

In addition, the process of bringing fossil fuels to the surface, such as strip
mining or oil exploration, can be detrimental to the surrounding habitat.
(Source: Environmental Protection Agency, epa.gov)

Other concerns which led to the development of the Hybrid Fuels "farm
integration plan" include:

d.DECLINING FOSSIL FUEL RESERVES;
e.DECLINING FARM INCOME AND THE NUMBER OF FAMILY FARMS;

This business is intended to be proactive in reducing air pollution and
conserving fossil fuels, reducing ground pollution through the destruction of
animal waste, producing cleaner food, and perhaps reducing some of the cause
behind the spread of auto-immune diseases. At the same time, it is intended to
create a new source of income for farmers.

HISTORY

The Company's technology has been continually developed and refined since the
early 1990s. Pilot testing of the first proprietary developments relating to
fermentation techniques and distillation procedures of ethanol were carried out
in Kelowna, B. C., Canada in the early 1990s. After initial tests, a
confinement-type barn and adjoining buildings were leased at Dalum, Alberta in
1994 for full-scale testing. These facilities were utilized for animal feed test
trials, fermentation testing, and other associated full-scale research and
testing on all aspects of the system for a period of two and a half-years.
Encouraging test results persuaded us to begin commercialization of the process.

ETHANOL ENERGY BALANCE INFORMATION

The term "energy balance" associated with ethanol production, means the
relationship or ratio between the energy in the ethanol compared to the energy
used to produce the ethanol and is written as 1.5:1, 2:1, etc. Energy contained
in a gallon of fuel (when referring to liquids) is measured in BTUs (British
Thermal Units). Those ratios would mean 1.5 or 2 BTU's of energy in a quantity
of ethanol compared with 1 BTU of energy from some external source required to
make that quantity of ethanol.

The production of ethanol requires expenditure of energy and is one of the major
costs. Ethanol contains approximately 80,000 BTUs per gallon. If production of
that gallon requires burning of 1 gallon of diesel fuel which is rated at
125,000 BTUs per gallon then there is a negative "Energy Balance." Modern
distilleries should run with approximately 2:1 favourable "Energy Balance."

Management believes that a ratio of around 4:1 is probably fairly representative
of the Company's intended facilities.

In our case we recover the energy required to produce ethanol from the
gasifying/burning of manure and waste bedding. Our final "energy balance" is
therefore highly favourable and is as low as shown only because we include the
energy costs of growing the grain and most calculations do not take this into
account.

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HYBRID FUELS ETHANOL PRODUCTION

The Hybrid Fuels process starts with the feedstock grain being soaked in water
overnight, crushed and then heated to prepare it for fermentation. An enzyme
reaction is then started, using commercially available enzymes. The entire
fermentation process is carried out in the feedstock preparation tanks, that are
part of the ethanol plant. A proprietary process is then used to promote rapid
fermentation. This process, which was discovered by the Company and is not
currently patented, will be protected by non-disclosure agreements that each
operator will be required to sign. The total cost of all the enzymes and other
fermentation additives are expected to cost the Company about $500.00 per month.

At a pre-determined stage of fermentation the resulting mash is passed through a
centrifugal type separator, or "spinner", which separates the liquid "beer" from
the solids, called wet distillers grains, or WDGs. The separation of the liquid,
called stillage water (or beer) from these WDGs, dries them to an appropriate
moisture content for feeding, and they are then conveyed to the animal feed
troughs. At the same time, the "beer" is drained off to be used for the
distillation of the ethanol.

Distillation of the ethanol from the "beer" is the next step in the process. The
Company uses a proprietary separation column that is inexpensively produced and
has no moving parts. The beer from the fermentation is run through this column
and heat from the gasifier is used to separate, or distill, the ethanol from the
stillage water. This ethanol, containing approximately five percent (5%) water,
is hydrous. To produce anhydrous (dry) ethanol, either molecular sieves or
azeotropic distillation equipment is required. This equipment, and the energy
costs associated with operating it are expensive, and are not necessary for the
Hybrid Fuels process, because we use the ethanol in its wet form.

Management believes that the combination of the Company's proprietary
fermentation process and distillation column, will result in completion of the
entire process in about 12 to 15 hours. In most typical distillation operations,
the process takes approximately 60 hours.

In more typical ethanol producing plants, the WDGs are dried so they can be
transported without becoming moldy. The energy and other costs of drying the
WDGs to make dry distillers grains (DDGs) and then transporting them elsewhere
are eliminated in the hybrid process by using the wet distillers grains onsite.
Using such "co-products" onsite is important in reducing costs and improving the
economics of the operations.

At the completion of distillation, the de-alcoholized stillage water is
recovered and stored for delivery to appropriate feed containers for the animals
in the barn. According to the research described below under the heading
"Feeding Wet Distillers Grains and Stillage Water", the feeding of wet
distillers grains and stillage water to cattle promotes weight gains. In
addition, feeding the WDGs and stillage water to the animals in the adjacent
barn is very important because it uses another co-product on-site, eliminates
transport and drying costs and addresses the challenge of stillage disposal. The
Biomass Energy Monograph by Edward Hiler and Bill Strout of Texas A. & M.
University, states:

"If the nation were to replace 10 percent of its gasoline consumption with
ethanol, the liquid stillage from ethanol fuel production would constitute a
biochemical oxygen demand (BOD) load equivalent to all its domestic sewage.
Therefore, expensive water pollution controls must be major goals of the
emerging fuel-alcohol industry."

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These "expensive water pollution controls" are not necessary in our process, as
the stillage becomes a valuable animal feed supplement, not a by-product
destined for disposal.

Aside from the capital costs of the facility, the two major costs of ethanol
production are the feedstock and the input energy required for fermentation and
distillation. For ethanol to be accepted as a fuel extender, it must be
available in a practical price range. By using the feedstock for the dual
purpose of producing ethanol and feeding cattle, our process effectively reduces
the cost of producing the ethanol. Also, by using the heat from burning the
waste as an energy source for the fermentation and distillation processes, the
Company believes it will not have to pay for energy from an outside source to
produce the ethanol, which means the process will not incur that input energy
cost. Producing ethanol also generates another potential stream of income for
the Company.

The distillers grains that are left over from the ethanol-producing process have
a low moisture content of around 5% and are fed as wet distillers grains (WDGs).
The stillage water is also to be fed to the animals. The facilities are designed
to run in a balanced state, producing 200 US gallons of ethanol per day and
enough distillers grains to supply enough food for 200 head of cattle.

FEEDING WET DISTILLERS GRAINS AND STILLAGE WATER

There is a considerable body of literature that indicates that the feed value of
the distillers grains is superior to that of ordinary grain, and feeding
stillage water increases weight gains. For example, see Dr. T. J. Klopfenstein
of the University of Nebraska, in an article entitled: "How Do Wet Distillers
Grains (Byproducts) Compare To Dry Distillers Grains?" in a report to the 31st
Distillers Feed Conference on the "Digestibility of Distillers Grains", and G.
M. Erickson and G. R. Tisher, writing in a Beef Science article #72-980 in 1989;
"Barley Distillers Grains As Supplements For Beef Cattle". These articles
generally indicate a significantly higher feed value of dried distillers grains
(DDG) over ordinary grain, and higher still for wet distillers grains (WDG),
that our process uses, over DDG.

The Company believes the results mentioned in the last paragraph, related to
feeding wet distillers grains, originate from the results of Cargill's kill
record dated September 23, 1994, for 123 heifers from the Company's experimental
Dalum facility. The kill record is a record of the number of animals processed,
and the weight and grade of the carcass. In addition, we have the Slaughter Sale
Summary for these animals dated September 13, 1994 that shows the price paid for
the animals and their average weight, along with the information for all of the
other animals sold at that auction on that day. Those documents show that these
animals brought the highest price of the day at that auction and by comparing
the average weight at auction to the carcass weight from the kill record, we can
calculate the average live weight to carcass ratio.

These animals, that were fed wet distillers grain and stillage water at the
Dalum facility, had a packout grade of 62% AAA, 34% AA and 4% A. This
categorization represents a meat grading system that helps the consumer
distinguish the quality of the meat. AAA represents a superior grade of meat
based on a variety of factors including the amount of back fat, the color of the
fat, the marbling of fat in the meat, and the size of the rib eye. AA is a lower
level of these factors, A is less desirable still, and B is less desirable than
A.

The packout grade for these 123 animals was higher than average in the AAA
category according to statistics published by CCA (The Canadian Cattleman's
Association). Their figures typically show industry average of about 48% AAA,
48% AA and 4% A. From those same records, the conversion rate from live weight
to carcass was 60%, meaning there was more edible meat per carcass, and
therefore less waste, than the industry average of 57 to 58%, according to CCA.

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Both these figures translate into greater revenue to those who raised the
animals because they represent more meat at higher grades.

The same kill report showed there was no death loss, no liver damage and none
were condemned. Industry average for death loss and rejected animals is about 1%
according to CCA. Because of these processing results, Cargill offered a premium
of $0.10 per pound, for all animals that could be produced using this process,
FOB the facility, which eliminates trucking and auction costs.

BEEF WITHOUT ADDED HORMONES

There is a growing market for beef that is free of added hormones or
antibiotics. This beef also commands a higher price in the marketplace.

In order to access the hormone-free beef market, the Company intends to require
that when animals are brought in for finishing that they are certified "hormone
free" in accordance with an existing certification protocol. This program
requires that calves be registered and ear-tagging records be kept of the
ancestry, ranch of origin and every inoculation, injection and implant.

Company policy will also require compliance with the "hormone-free" protocol and
that antibiotics not be used generally on the animals, although use on an ill
animal as prescribed by a vet will be allowed.

Hormones are generally used to reduce the cost of weight gains. The Company
believes that feeding the wet distillers grains and stillage water will result
in lower cost weight gains without resorting to hormones.

NEW TECHNOLOGIES

During the period between the closure of the Cardston-area facility and the
present time, the Company has developed a simple to operate, hydroponics-growing
system that will be tested for internal housing purposes in the cattle-feeding
barn. This technology has the potential to produce daily rations of fresh feed
grasses for the cattle regardless of outside weather conditions.

Analyses of the green feed performed by Norwest Labs of Lethbridge, Alberta in
May, 2001, indicates that with a barley grass feed ration of fifteen (15) pounds
per day for each animal, the company could eliminate the use of feeding hay. The
Company also has a feed enrichment process that has been described in reports
previously filed with the SEC. As the green grass from this system is expected
to be more beneficial to the cattle at less cost than the feed enrichment
process, that process will no longer be included in each facility. The equipment
to produce this green feed is expected to cost around $15,000 and to fit into
the barn so that feeding is relatively easy.

The growth and use of hydroponics grass in feeding cattle is a process with
minimal research data. The Company has learned that mold and fungi are real and
persistent problems that can be perilous to the animals.

After months of research and testing we recognized the benefits inherent in the
application of ozonated water using recently developed equipment and techniques.
We believe the judicial use of ozonated water in the field of hydroponics grass
will result in absolute destruction to molds, fungi and disease carrying
bacteria.

We believe the use of ozonated water also offers freedom from bacterial problems
associated with fermentation and this will eliminate the concerns always
inherent in ethanol production.

We intend to utilize the ozone equipment in the cattle barn as well. Following
removal of manure and bedding which are incinerated through gasification, the

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floor of the pen will be washed with ozonated water which we believe can
virtually sterilize the area and thus inhibit spread of disease. We also intend
to install misting spray heads over the pens. Every few days the animals are
thereby treated to prevent harmful bacterial spread.

While ozone is simply a gas composed of three oxygen atoms it has proven to be
an extraordinary sanitizing agent, economical to use and is remarkably effective
in direct application as well as for multi-surface cleaning and sanitation of
equipment, drains, floors, chutes, tanks, barrels, etc.

The Company expects to expand the size of the cattle barn in future facilities
to accommodate 400 head of cattle for economy of scale. The Company believes the
additional heat energy that will be generated as a result of this expansion
makes it feasible to develop renewable energy generation systems. It is expected
that each facility could produce up to 1,500 litres of ethanol daily, generate
up to 0.5 megawatt of power, finish up to 1,200 head of cattle annually and
provide up to 5 full time jobs. The hydroponics section of the barn is designed
to have the grass growing capacity equivalent to approximately 800 acres of
grassland.

Efforts to improve every aspect of the whole operation continue with positive
results. We believe the overall Hybrid Fuels program involving progressive and
environmental sensitivity towards cattle feeding, maintenance and processing
will present a chemical-free product cycle which offers a world class benchmark
for the industry.

THE HYBRID FUEL

The ethanol is "de-natured" by blending about 2% emulsifier and diesel fuel into
the ethanol in the vaporization column so there is no pure ethanol accessible in
the plant. Each day, 200 gallons of ethanol are expected to be produced. This
ethanol and chemical mixture would be stored in an appropriate tank (3500 to
5000 gallons) on site until it is collected and delivered to a mixing plant to
be further blended into the final ratio.

In June of 1998, the Company contracted with The British Columbia Institute of
Technology (BCIT) to test the hybrid fuel. The tests were conducted using a 1994
Dodge diesel truck with 215,717 kilometers (134,176 miles) on the odometer. The
truck was first tested using regular diesel fuel, then run on the hybrid fuel
for 2 days and re-tested. The tests of this fuel showed opacity (black smoke)
readings reduced by 65.5% and NOx emissions by 22.2%. These tests indicated that
this fuel is more effective in reducing particulate and nitrogen oxide emissions
from diesel fuel than any other diesel fuel mixture of which the Company is
aware.

In addition to reducing pollution from diesel engines, this hybrid fuel helps to
extend our known reserves of fossil fuels. The tests that were conducted at BCIT
used a mixture of 80% diesel fuel, 10% emulsifier and 10% ethanol. Further tests
are planned using various ratios. The end ratio is expected to be 70% to 80%
diesel fuel, 10% to 15% ethanol, and 10% to 15% emulsifier. This is consistent
with the University of Illinois E-Diesel research referred to below.

In the beginning, with the small quantities of the fuel from the first plant,
the plan is to blend locally and use the fuel for testing purposes. Handling and
blending costs are expected to be minimal, in the range of 5 to 7 cents per
gallon.

After the first facility is operating, subsequent facilities are expected to be
built in the vicinity of commercial blending plants that have the capacity to
handle the production on a contract basis. The plan is for the Company to

                                       11
<PAGE>

transport the resulting chemical mixture from each plant to blending plants for
further blending to achieve the appropriate ratio. This is designed to ensure
control over all of the ethanol produced.

When a larger number of facilities are operating and producing sufficient
quantities, the Company intends to sell the blended fuel to end users and diesel
fuel distributors encompassing all industries. Ultimately the Company may
consider building and operating its own blending facilities, if that becomes
economically feasible.

Because the hybrid fuel can be used in an unaltered diesel engine, it can be
used economically where it is available and the engine needs no modifications to
switch back to regular diesel fuel if the hybrid fuel is not available.

There are research studies available pertaining to environmental and other
benefits of ethanol-diesel blends similar to the Company's. For example, there
was a report written by the University of Illinois Agricultural Engineering
Department for the 2001 ASEA Annual International Meeting in Sacramento on July
30 & August 1, 2001. This report reviews in detail the findings of scientists
working with diesel-ethanol blends starting in 1980, and indicates that there is
generally a small loss of power, in the order of 3.5% to 5%, using these blends.

Our fuel is different because it contains a small amount of water, and it will
therefore require separate evaluation. The Company believes that the small
amount of water in the blend will reduce the power loss from using the blend.
The testing that was done at BCIT in June 1996, did not disclose any significant
power loss, but further evaluation will be conducted with the ethanol produced
by the test facility in Oyama, BC, Canada.

As regulators work to decrease engine emissions and users look for cleaner
burning, less expensive fuels, the Company believes it will be able to attract
users for the hybrid fuel.

EMPLOYEES

At present, the Company does not have any employees. Until resources allow, the
Company will continue to use consultants or independent contractors for the
various tasks required to be performed on a quarter-to-quarter basis.

SIGNIFICANT CONSULTANTS

Sir Donald Craig is the individual who is most responsible for the development
of the concepts and invention of much of the equipment or improvements to the
equipment. A test facility is being constructed on a 12-acre parcel of land in
Oyama, BC, Canada. A group of Hybrid Fuels, Inc. shareholders is bearing the
financial burden of construction and retains legal ownership of the facility. It
is expected that once the facility has been completed for the Company's intended
operations, the Company will negotiate with this group to acquire the facility
on mutually agreeable terms. Mr. Craig has agreed to supervise construction of
this facility without remuneration until the facility is generating cash flow.
The Company does not have a written employment contract with Mr. Craig.

SUPPLIERS

The Company is not dependent on a limited number of suppliers as most of the
equipment and materials required for the facilities are readily available in all
areas where the Company expects to be operating. The Company plans to obtain its
raw materials from local suppliers. In addition, we expect to arrange with
independent contractors to manufacture the columns and separators as necessary.

The Company intends to seek quotes from independent contractors to construct the
buildings and to supply and install the flooring materials, pumps, tanks and
other items required for each facility. As the Company develops a history of
operations and experience with particular sources of supply, the Company may

                                       12
<PAGE>

enter into exclusive supply contracts in the future if it is advantageous to the
Company and its operators.

GOVERNMENTAL REGULATION

Governmental regulation will affect the Company most in the areas of compliance
with environmental regulations and those regarding the production of ethanol.
Each jurisdiction will require the Company to obtain the appropriate permits to
comply with its specific set of regulations. The Company plans to initially
build in those jurisdictions where the process for obtaining the necessary
permits to produce the hybrid fuel and to operate in accordance with these
regulations, are the easiest and least expensive to comply with. The Company
anticipates it will have little difficulty in complying with environmental
regulations as the process does not create any pollution. The Company does not
anticipate any significant delays in obtaining the necessary permits for the
production of the hybrid fuel in the Province of British Columbia and in most
states of the US.

The Company believes that the impact of the cost and effects of the Company's
compliance with environmental laws should be minimal as the Company's process is
believed to be very environmentally friendly.

NEWS RELEASES, MARKETING AND ADVERTISING

The Company's target market for the construction of the facilities are the
domestic and international farming communities from which there appears to be a
strong and growing interest.

Upon the acquisition of the Oyama facility from the aforementioned shareholder
group the Company intends to market their technology through such means as their
website, press releases, trade journals, local newspapers and trade shows. The
Company is also in contact with agencies and industry organizations whose role
it is to locate and promote new opportunities for the economic benefit of
farmers.

The Company plans to promote the beef produced using its process as being free
of antibiotics and added hormones. The Company also intends to "brand" the
finished product with a name, trade marks and logos to make the product more
easily recognizable in order to generate consumer loyalty and capitalize on
brand quality.

COMPETITION

Oil and petroleum companies as well as alternative energy companies may be
potential competitors of the Company. The Company is not aware of any
competitors who offer farm-scale feedlot-fuel plants, although there are several
competitors who produce ethanol on a very large-scale basis. Generally speaking,
they produce dry ethanol for the gasohol market.

The Company believes it has a competitive advantage because of the quality of
its hybrid fuel combined with the potential of significantly reduced
environmental impact in both producing and using the hybrid fuel.

TRENDS THAT MAY AFFECT THE COMPANY'S BUSINESS

The Company has identified the following trends as potentially having an impact
on the business of the Company.

Fuel prices have been extremely volatile over the past year. Ethanol prices are
closely correlated with the price of gasoline, diesel fuel and blending
components associated with these fuels. In a typical ethanol facility, natural
gas accounts for approximately 15 percent of ethanol production costs. However,
our process does not depend on the use of fossil fuels to produce the ethanol.

                                       13
<PAGE>

We believe rising fuel prices would be a net benefit to the Company's
profitability.

Businesses that have a positive environmental impact have received an increasing
amount of support. The Company seeks to take advantage of this trend by
providing technology that produces a hybrid fuel that reduces diesel engine
emissions. In addition, the animal finishing operation will be promoted as
having an environmentally positive impact in that it produces no groundwater
pollution and virtually no odor.

We believe that consumers will pay more for beef that is guaranteed good
quality. The Company believes that cattle which are fed distillers grains,
without added hormones, antibiotics or protein from animal sources, will draw a
positive response from health-conscious consumers looking for healthier food
sources.

Management is of the view that if overall beef consumption declines, it should
have little or no adverse effect on the Company's business as our process is
expected to produce exceptional quality beef which we anticipate marketing as
guaranteed quality beef that is free of added hormones and antibiotics.

Canada, and many other countries are signatories to the Kyoto Emission Standards
Agreement that requires them to adhere to the Kyoto Protocol commitments to
reduce pollution by the year 2010. In addition, many states, such as California,
have or are considering legislation to eliminate the use of MTBE as an octane
enhancer and "clean air" additive. This should work to the advantage of the
Company, as most media reports indicate that ethanol appears to have the edge as
the product to reduce the use of fossil fuels and the "clean air" additive of
choice to replace MTBE. Also, the Company expects to be able to produce ethanol
relatively inexpensively, as the proprietary emulsifier allows the blending of
wet ethanol and diesel fuel which reduces emissions, without incurring drying
costs.

RESEARCH AND DEVELOPMENT

During the next twelve months, the Company anticipates conducting further
research and development with respect to the following:

1. Researching efficiencies in facility construction and operation;
2. Researching new technologies; consulting with various technical researchers
and agriculture officials.

If resources permit, the amount we anticipate spending on research and
development for the fiscal year ending June 30, 2007 is approximately $250,000.

PRODUCT PROTECTION

The Company has not patented any of its proprietary technologies, on the advice
of legal counsel. Their reasoning is that obtaining patents tends to publish the
discoveries that others can then copy and a small company will have difficulty
protecting itself from infringement. As a consequence, the Company has
determined that in the near term it will protect its trade secrets and
proprietary technologies by careful screening of potential operators and then
having them sign non-disclosure agreements. All operators will be well briefed
on protecting the proprietary information in their own best interests and all
reasonable steps will be taken to ensure that they take all reasonable
precautions. Also, the column and the spinner will be manufactured elsewhere,
delivered and installed, without the operators knowing how they are constructed.

                                       14
<PAGE>

RISK FACTORS

The following factors have affected or could affect the Company's actual results
and could cause such results to differ materially from those expressed in any
forward-looking statements made by the Company. Investors should consider
carefully the following risks and speculative factors inherent in and affecting
the business of the Company and an investment in the Company's common stock.

1. Our cash reserves are not adequate to cover our costs of operations. To date,
we have covered our operating losses by loans from shareholders or privately
placing securities. We expect to fund our general operations and
marketing activities in the near term with current cash plus cash that may be
obtained from loans from shareholders and/or the sale of securities. However,
our cost estimates may not include enough provisions for any contingency,
unexpected expenses or increases in costs that may arise.

2.  We will need to raise additional capital to develop operations and to pay
ongoing expenses. If additional funds are raised through the issuance of equity,
our shareholders' ownership will be diluted. There can be no assurance that
additional financing will be available on terms favorable to us or at all. If
funds are not available on terms acceptable to us, we may not be able to
continue our business.

3.  We have not sought protection of our intellectual property through any
patents, but have elected to protect it through non-disclosure agreements. Our
intended business may be adversely affected if we are unable to adequately
protect our intellectual property. Because our intellectual property is not
protected by patents, others may seek to discover and use our intellectual
property. We cannot provide assurance that our intellectual property rights will
not be invalidated, circumvented or challenged. If we are found to infringe on
the intellectual property rights of others, we may not be able to continue to
market our process, or we may have to enter into costly license or settlement
agreements. Third parties may allege infringement by us with respect to past,
current or future intellectual property rights. Any claim of infringement,
regardless of merit, could be costly, time consuming and require us to develop
non-infringing technology or enter into royalty, licensing or settlement
agreements. These agreements could be on terms unfavorable or unacceptable to us
and could significantly harm the development of our business. In the future, we
may also have to enforce our intellectual property rights through litigation.
Any such enforcement could also result in additional costs and could materially
affect our financial condition and our business.

4.  We have a history of operating losses and an accumulated deficit, as of June
30, 2006, of $2,449,493.

5.  Our ability to begin operations and to generate revenues and profits is
subject to the risks and uncertainties encountered by development stage
companies. Our future revenues and profitability are unpredictable. We currently
have no operating activities that will produce revenue. Furthermore, we cannot
provide assurance that we will be successful in raising the money necessary to
begin or expand operations.

6.  The production of ethanol is being strongly encouraged by governments and
private parties as a way to reduce water and air pollution that could lead to
rapidly changing technology. If we are unable to adapt to rapidly changing
technologies, our intended business could be adversely affected.

7. We have no operating history which makes an evaluation of our future
prospects very difficult. Once we succeed in completing the construction of the
first operating facility, there can be no assurances that we will be able to
develop operations that are profitable or will operate as intended. If the
market for our facilities fails to develop, or develops more slowly than
anticipated, we may not be able to meet our expenses and may not achieve
profitable results.

                                       15
<PAGE>

8.  Our common stock is not widely traded, and, as a result, the prices quoted
for our stock may not reflect its fair market value. Because of the low volume
of trading in our common stock, our stockholders may find it difficult to sell
their shares.

9.  We currently have no insurance covering our operations, potential products,
services or directors and officers.

10. Future performance depends on the ability to attract, train, and retain
management, technical and marketing personnel. In the future, loss of one or
more key employees could negatively impact us, and there is no "key man" life
insurance in force at this time. Competition for qualified personnel is intense,
and there can be no assurance that we will attract or maintain key employees or
other needed personnel.

11. The production of beef and fuel are both highly competitive. Giant companies
compete in both markets with significant competitive advantages. Many
competitors of the Company have significantly greater resources and experience
than the Company. Additionally, competitors of the Company may have better
access to financial and marketing resources superior to those available to the
Company. With the resources and name recognition that competitors possess, the
Company may face severe adversity entering the markets it is pursuing. There is
no assurance the Company will be able to overcome the competitive disadvantages
it will face as a small, start-up company with limited capital.

12. The continual shift in supply and demand factors create volatility in cattle
pricing that could result in a loss on cattle finishing.

13. A test facility is being constructed on a 12-acre parcel of land in Oyama,
BC, Canada. A group of Hybrid Fuels, Inc. shareholders is bearing the financial
burden of construction and retains legal ownership of the facility. It is
expected that once the facility has been completed for the Company's intended
operations, the Company will negotiate with this group to acquire the facility
on mutually agreeable terms although there is no guarantee that an acquisition
agreement will be finalized.

14. Since May 2003, the Canadian beef market has suffered as a consequence of
the United States limiting imports from Canada because of an isolated case of
Bovine Spongiform Encephalopathy (BSE). A recurrence of BSE in Canada could
potentially have an adverse effect on the Company even though the age of
finished cattle raised within our controlled facilities are planned to be under
the current 30-month age restriction on beef imported into the U.S.

Item 2.  DESCRIPTION OF PROPERTY
--------------------------------

The Company does not have any offices at the present time but maintains a
mailing address in Niverville, Manitoba, Canada.

A test facility is being constructed on a 12-acre parcel of land in Oyama, BC,
Canada. A group of Hybrid Fuels, Inc. shareholders is bearing the financial
burden of construction and retains legal ownership of the facility. It is
expected that once the facility has been completed for the Company's intended
operations, the Company will negotiate with this group to acquire the facility
on mutually agreeable terms. The owner of the land is not related to the
Company.

It is expected that the Company will acquire the facility from the shareholder
group in the quarter ending December 31, 2006.

                                       16
<PAGE>

Item 3.  LEGAL PROCEEDINGS
--------------------------

No legal proceedings are threatened or pending against the Company or any of its
officers or directors. Further, none of the Company's officers or directors or
affiliates of the Company are parties against the Company or have any material
interest in actions that are adverse to the Company's interests.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

On June 19, 2006, the Company filed a Proxy Statement pursuant to Section 14(a)
of the Securities Exchange Act of 1934 on Schedule 14A with the Securities and
Exchange Commission. This Proxy Statement indicated that Douglas Dickie
(incumbent Director), Rolly Hein (incumbent Director) and Edward Melenka were
nominated for election to the Board of Directors at the annual meeting to be
held July 12, 2006 in Winfield, BC, Canada.

                                     PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------------------

The Company has authorized capital of 50,000,000 share of common stock with a
par value of $0.001, of which 26,332,933 were issued and outstanding as at June
30, 2006 and the Company had 273 shareholders of record.

The Company's common stock is traded on the OTC Bulletin Board under the symbol
"HRID."

The following table sets forth the high and low closing bid prices for the
periods indicated, as reported by the National Quotation Bureau:


                                               2004
                                       High             Low
                                       ----             ----
                   1st Quarter         0.25             0.13
                   2nd Quarter         0.25             0.09
                   3rd Quarter         0.24             0.07
                   4th Quarter         0.25             0.12
                                               2005
                                       High             Low
                                       ----             ----
                   1st Quarter         0.21             0.12
                   2nd Quarter         0.40             0.15
                   3rd  Quarter        0.35             0.15
                   4th Quarter         0.34             0.17
                                               2006
                                       High             Low
                                       ----             ----
                   1st Quarter         0.40             0.20
                   2nd Quarter         0.86             0.30


The Company has never paid cash dividends.  The Directors of the Company
currently anticipate that in the near term it will retain all available funds
for use in the operation of the business.

                                       17
<PAGE>

RECENT SALES OF UNREGISTERED SECURITIES.

Set forth below is information regarding the issuance and sales of our
securities without registration during the past three fiscal years. No such
sales involved an underwriter and no commissions were paid in connection with
the sale of any securities.

As outlined below, on August 16, 2005, shares of common stock were issued to one
person to settle an outstanding debt. This issuance of common stock was made in
reliance upon the exemption from registration set forth in Section 4 (2) of the
Securities Act of 1933.

The remaining shares that were issued during the past three fiscal years
involved purchasers/share recipients that are residents of Canada, ie. non-U.S.
persons. Therefore, these shares issued are exempt from registration under
Regulation S of the Securities Act.

Shares issued in fiscal 2004 (July 1, 2003 to June 30, 2004 inclusive):
-----------------------------------------------------------------------

On January 23, 2003, the Company issued 600,000 shares of restricted common
stock to three directors, to settle debt of $78,000 owing for management, legal
and accounting services rendered to the Company.

On September 10, 2003, the Company issued 40,000 shares of restricted common
stock to a consultant for services valued at $10,000.

On September 10, 2003, the Company issued 7,500 shares of restricted common
stock to a consultant for services valued at $1,875.

On September 23, 2003, the Company issued 7,500 shares of restricted common
stock to a consultant for services valued at $1,875.

On October 23, 2003, the Company issued 7,500 shares of restricted common stock
to a consultant for services valued at $1,050.

On March 29, 2004, the Company issued 600,000 shares of restricted common stock
to two directors for management/consulting services valued at $81,896.

On March 29, 2004, the Company issued 431,106 shares of restricted common stock
to eleven investors for cash, at a price of $0.14 per share.

On March 29, 2004, the Company issued 27,778 shares of restricted common stock
to an investor to settle an outstanding debt, at a price of $ .14 per share.

On April 1, 2004, the Company issued 100,000 shares of restricted common stock
to a consultant, at a price of $0.23 for services provided to the Company.

On April 1, 2004, the Company issued 33,333 shares of restricted common stock to
a former director for consulting services valued at $7,667.

On April 1, 2004, the Company issued 166,663 shares of restricted common stock
to five investors for cash, at a price of $0.14 per share.

Shares issued in fiscal 2005 (July 1, 2004 to June 30, 2005 inclusive):
-----------------------------------------------------------------------

On September 23, 2004, 75,000 shares of restricted common stock were issued to
two investors for cash at a price of $0.08 per share for total proceeds of
$5,697 (CAD$7,500).

On October 20, 2004, 30,000 shares of restricted common stock were issued to an
investor for cash at a price of $0.08 per share for total proceeds of $2,387
(CAD$3,000).

                                       18
<PAGE>

On October 28, 2004, 120,000 shares of common stock were issued to one investor
for cash at a price of $0.08 per share for total proceeds of $9,788
(CAD$12,000).

On January 24, 2005, 300,000 shares of common stock were issued to six investors
for cash at a price of $0.08 per share for total proceeds of $24,606
(CAD$30,000).

On January 25, 2005, 700,000 shares of common stock were issued to three
Directors at a price of $0.15 per share in consideration for consulting services
valued at $105,000 to be rendered up to December, 2006.

On March 30, 2005, 400,000 shares of common stock were issued to six consultants
at a price of $0.15 per share in consideration for consulting services rendered
and valued at $60,000.

On March 31, 2005, 50,000 shares of common stock were issued to one investor for
cash at a price of $0.08 per share for total proceeds of $4,144 (CAD$5,000).

On April 1, 2005, 100,000 shares of common stock were issued to one investor for
cash at a price of $0.08 per share for total proceeds of $8,269 (CAD$10,000).

On June 16, 2005, 28,000 shares of common stock were issued to one investor for
cash at a price of $0.12 per share for total proceeds of $3,394 (CAD$4,200).

Shares issued in fiscal 2006 (July 1, 2005 to June 30, 2006 inclusive):
-----------------------------------------------------------------------

On August 16, 2005, 375,000 shares of common stock were to one person to settle
an outstanding debt of $93,000. This issuance of common stock was made in
reliance upon the exemption from registration set forth in Section 4 (2) of the
Securities Act of 1933.

On October 5, 2005, 30,000 shares of restricted common stock were issued to one
investor for cash received September 16, 2005 at a price of $0.08 per share for
total proceeds of $2,532 (CAD$3,000).

On October 5, 2005, 56,700 shares of restricted common stock were issued to one
investor for cash received September 23, 2005 at a price of $0.10 per share for
total proceeds of $5,631 (CAD$6,590).

On December 9, 2005, 21,000 shares of restricted common stock were issued to one
investor for cash received November 9, 2005 at a price of $0.10 per share for
total proceeds of $2,100 (CAD$2,490).

On December 9, 2005, 21,000 shares of restricted common stock were issued to one
investor for cash received November 10, 2005 at a price of $0.10 per share for
total proceeds of $2,108 (CAD$2,500).

On December 9, 2005, 8,400 shares of restricted common stock were issued to one
investor for cash received November 10, 2005 at a price of $0.10 per share for
total proceeds of $843 (CAD$1,000).

On December 13, 2005, 30,000 shares of restricted common stock were issued to
one investor for cash received November 4, 2005 at a price of $0.08 per share
for total proceeds of $2,539 (CAD$3,000).

On December 13, 2005, 20,000 shares of restricted common stock were issued to
one investor for cash received December 7, 2005 at a price of $0.13 per share
for total proceeds of $2,585 (CAD$3,000).

On January 6, 2006, 15,500 shares of restricted common stock were issued to one
investor for cash received January 5, 2006 at a price of $0.14 per share for
total proceeds of $2,153 (CAD$2,500).

                                       19
<PAGE>

On January 6, 2006, 6,600 shares of restricted common stock were issued to one
investor for cash received December 9, 2005 at a price of $0.13 per share for
total proceeds of $863 (CAD$1,000).

On January 31, 2006, 12,000 shares of restricted common stock were issued to one
investor for cash received January 31, 2006 at a price of $0.14 per share for
total proceeds of $1,734 (CAD$1,990).

On February 13, 2006, 30,000 shares of restricted common stock were issued to
one investor for cash received February 13, 2006 at a price of $0.15 per share
for total proceeds of $4,506 (CAD$5,192).

On April 18, 2006, 299,000 shares of restricted common stock were issued to
eight investors for cash at a price of $0.17 per share for total proceeds of
$50,487(CAD $58.486).

Item 6.  PLAN OF OPERATION
--------------------------

As at June 30, 2006, our independent auditors raised a substantial doubt about
our ability to continue as a going concern because we have not generated any
revenues, have conducted operations at a loss since inception and have a working
capital deficit of $646,051.

Although our cash reserves at June 30, 2006 were limited to $3,533, related
parties have indicated a willingness at the present time to continue to pay
operating expenses and advance funds to pay legal, accounting and investor
relations expenses. These related parties are not obligated to pay Company
operating costs, and therefore, no assurances can be given that they will
continue to do so.

Management recognizes that to generate long-term cash flow, we need to develop
operating activities. An integral part of the Company's plan involves completing
and operating the first beef and ethanol facility to demonstrate to potential
operators, lenders and investors that the technology works as described.

A test facility is being constructed on a 12-acre parcel of land in Oyama, BC,
Canada. A group of Hybrid Fuels, Inc. shareholders is bearing the financial
burden of construction and retains legal ownership of the facility. It is
expected that once the facility has been completed for the Company's intended
operations, the Company will negotiate with this group to acquire the facility
on mutually agreeable terms. The owner of the land is not related to the
Company. The Company has not incurred any costs pertaining to the facility to
date and will not be obligated financially until the Company enters into a
formal agreement to either acquire the facility on mutually agreeable terms. It
is expected that the Company will acquire the facility from the shareholder
group in the quarter ending December 31, 2006.

Estimated operating costs to the end of the second quarter (December 31, 2006)
total $250,000. This estimate includes $120,000 for cattle and feed, $60,000 for
payables (excluding related party loans and accrued executive salaries), $40,000
for technical support and labor and $30,000 for contingencies and other
operating expenses. These estimates are subject to change based on conditions
outside of management's control and actual experience with operating the first
facility.

The operating cost estimate of $250,000 would not adequately cover the cost of
acquiring an operating facility if the Company chooses and enters into a
purchase agreement as opposed to a lease agreement.

The commercial facility being built by the shareholder group is to include all
items necessary for a fully operational facility utilizing the Company's Hybrid
Fuels technology.

                                       20
<PAGE>

Operations are expected to commence once the initial testing of the facility's
gasifier/burner, air exchange and feed system are completed and ready for the
first delivery of cattle. Management currently anticipates that this will be
completed in the quarter ending December 31, 2006. However, any delay in the
completion of these tasks will also delay commencement of our operations. It is
difficult to establish the start date of operations since we are relying on
third parties to complete the facility which includes work by testing
consultants and timely provision of equipment and installation. Therefore,
completion of these tasks is not entirely under our control.

PURPOSE OF TEST FACILITY

The facility will not be run at full capacity until approximately four months
have passed from the facility becoming operational. We believe that at the end
of the fourth month of operations, when we sell the first group of finished
cattle, we will have sufficient data from which to prepare information for
purposes of estimating revenue streams and expenses to establish a more
comprehensive business plan.

It is intended that future facilities will be constructed for the Company by
independent contractors on privately-owned farms after a written, contractual
agreement is made between the Company and the operator (s).

The key purpose of placing the first facility in service is to demonstrate the
economic feasibility of the system. Once this first facility is operating, we
plan to use it as a demonstration and training facility and to earn revenue from
its operation. Our projections indicate that the facility should generate
sufficient revenue to pay all of our operating costs, plus a surplus that may be
used toward development of operating activities. We expect that the facility
will show sufficient cash flow to make it possible for us to get approval for
financing subsequent facilities.

The proposed facilities are planned to consist of a cattle barn, an
ethanol-producing plant, a gasifier/burner (manure & straw burning unit and a
hydroponic barley-grass growing system.

Current estimates have the final cost of building this facility to be
approximately $1,000,000. An estimated $670,000 of this cost is for foundations
and flooring, buildings, the gasifier/burner, the ethanol-producing equipment,
the hydroponics unit, tanks and machinery. Soft costs, for such items as
permits, engineering and other professional fees, survey and layout costs, site
preparation, delivery of buildings and materials, equipment rentals, tools and
miscellaneous items, are estimated to cost $165,000. Approximately $165,000 is
expected to cover construction labour and supervision expenses.

The aforementioned shareholder group is bearing the financial burden of
constructing this commercial facility and retains legal ownership. The Company
has not incurred any costs pertaining to the facility to date and will not be
obligated financially until the Company enters into a formal agreement to either
acquire the facility on mutually agreeable terms. It is expected that the
Company will acquire the facility from the shareholder group in the quarter
ending December 31, 2006.

The cattle barn being constructed in Oyama, BC, Canada has been designed to
accommodate 200 head of cattle and the hydroponics barley-grass growing system.
Once the facility is operational, it is expected that the cattle will be fed
starting with 50 head and adding another 50 approximately every four weeks until
the barn is at full capacity. As we gain experience with the facility, we intend
to operate the barn continuously at full capacity during the subsequent 100-day
feeding cycles. At the end of each feeding cycle, the cattle will be sold at
auction.

                                       21
<PAGE>

The cattle will begin the finishing operation in quieting pens where they spend
approximately two weeks being transitioned from their prior diet to the wet
distillers grains diet. After completing the diet transition, the cattle are
moved into the barn, where, on average, they will spend approximately 100 days
being fed the finishing diet.

At the end of the finishing operation, our plans for this demonstration facility
call for the cattle to be sold at auction. As one group of cattle is sold,
another takes its place, as both the finishing operation and our staggered plan
of acquisition are scheduled to take approximately three to four months,
depending on how long the finishing takes. As a result of using this plan of
acquisition, we will not run the facility at full capacity until approximately
four months have passed from the facility becoming operational.

We plan to add, on average, between 400 and 500 pounds per head during the
finishing operation. The weight per head when we acquire the cattle will vary,
principally due to the time of year when the cattle are acquired (most calves
are born in the spring and are ready to be sold as feeder cattle seven months to
a year later). Generally in the cattle industry feeder cattle sell at a higher
price per pound than finished cattle. The increase in weight during the
finishing operation is a key element for the initial set of data from which to
prepare information for purposes of estimating cash flows and generating a more
comprehensive business plan.

Ethanol produced by the first facility in the first two to three months of its
operation is expected to be used for testing purposes. Once the facility is
operating at full capacity, we project that the ethanol production will be
approximately 200 US gallons per day.

If our assumptions prove wrong or we encounter unforeseen obstacles, our ability
to demonstrate the facility's economic feasibility may be delayed, or, in the
worst case, we may not be able to establish the economic feasibility of the
facility.

Once we have a fully operational facility, and have proven the technology and
processes, it is intended that our subsidiary, Hybrid Fuels (Canada) Inc., will
operate it and will earn revenue from the sale of the finished cattle and
denatured wet ethanol.

OPERATING RESULTS FOR THE YEAR ENDED JUNE 30, 2006

During the fiscal year ended June 30, 2006 the Company had no revenue and
incurred losses of $256,816 compared to $401,431 for the comparable period the
previous year.

The difference of $144,615 is partially attributable to a $93,000 charge to
operations that was made in fiscal 2005. In April 1998, a creditor advanced
$50,000, bearing interest at 1% per month. However, as the Company did not
receive the cash, as an agent of the Company unknowingly kept it, no liability
was previously recognized in the financial statements. During the year ended
June 30, 2005, the Company was notified of the debt and recognized the full
amount and accrued interest of $43,000, resulting in a charge to operations of
$93,000.

Another contributing factor to the decrease in expenses was a reduction in
stock-based compensation of $60,799. Stock-based compensation was $53,000
compared with $113,799 in the previous fiscal year. The Company incurred
non-cash financing activities by issuing 700,000 shares in January, 2005 to

                                       22
<PAGE>

three Directors in consideration for consulting services to be rendered up to
December, 2006. The Company also issued 400,000 shares in March, 2005 to six
consultants for services.

Former President, Paul Warkentin, donated services valued at $25,000 during the
period from July 1, 2005 to April 12,2006 inclusive. Current President, Douglas
Dickie, donated services valued at $5,000 during the period from April 13, 2006
to June 30, 2006 inclusive.

Imputed interest for the year in the amount of $78,911 was comparable to the
previous fiscal year and included $49,005 attributed to former President Clay
Larson. Imputed interest of $29,906 is attributed to a shareholder as a result
of an amount owing for payment of rent, office expenses and professional fees on
behalf of the Company. Imputed interest is interest that is imputed on
non-interest bearing amounts such as deferred executive compensation or amounts
that are advanced to, or paid on behalf of the Company.

LIQUIDITY AND CAPITAL RESOURCES

During the fiscal year ended June 30, 2006 the Company received $83,353
including:

    a) $78,081 from issuing restricted common stock
    b) $5,272 from related parties. These advances are non-interest bearing,
       unsecured and due on demand.

A total of $84,947 was used in operating activities.

Related parties have indicated a willingness at the present time to continue to
pay operating expenses and advance funds to pay legal, accounting and investor
relations expenses. These related parties are not obligated to pay Company
operating costs, and therefore, no assurances can be given that they will
continue to do so.

For the Company to emerge from the development stage with respect to any planned
principal business activity is dependent upon our successful efforts to raise
additional equity, financing and/or attain profitable operations. There is no
guarantee that we will be able to complete any of the above objectives. At June
30, 2006 we had a working capital deficit of $646,051 and an accumulated deficit
from inception of $2,449,493.

Operations are expected to commence once the initial testing of the facility's
gasifier/burner, air exchange and feed system are completed and ready for the
first delivery of cattle. Management currently anticipates that this will be
completed in the quarter ending December 31, 2006. At that time, the Company
will need to enter into either an acquisition or lease agreement so it can begin
its commercial operations. However, any delay in the completion of these tasks
will also delay commencement of our operations. It is difficult to establish the
start date of operations since we are relying on third parties to complete the
facility which includes work by testing consultants and timely provision of
equipment and installation. Therefore, completion of these tasks is not entirely
under our control.

Once we have a fully operational facility available for our use and have proven
the technology and processes, we expect that our subsidiary, Hybrid Fuels
(Canada) Inc., will operate it and revenue will be generated from the sale of
the finished cattle and wet ethanol.

The facility will not be run at full capacity until approximately four months
have passed from the facility becoming operational. We believe that at the end
of the fourth month of operations, we will be in a position to generate revenue
by selling the first group of finished cattle.

We expect to incur the costs associated with operating the facility once the
Company has entered into an agreement to acquire the facility from the

                                       23
<PAGE>

aforementioned shareholder group. This is expected to occur during the quarter
ending December 31, 2006.

As the facility will be fully operational upon completion of testing the feed
system, the Company will only be required to incur capital expenditures at that
time.

The Company expects that, in the near term, capital requirements for developing
and expanding technologies will be met through stock offerings by way of private
placements. The amount we anticipate spending on research and development for
the fiscal year ending June 30, 2007 is approximately $250,000.

Item 7.  Financial Statements
-----------------------------


Hybrid Fuels, Inc.
(A Development Stage Company)

June 30, 2006


                                                                           Index


Report of Independent Registered Public Accounting Firm......................F-1

Consolidated Balance Sheets..................................................F-2

Consolidated Statements of Operations........................................F-3

Consolidated Statements of Cash Flows........................................F-4

Consolidated Statement of Stockholders' Deficit..............................F-5

Notes to the Consolidated Financial Statements...............................F-7


                                       24

<PAGE>


                             [MANNING ELLIOTT LOGO]

MANNING ELLIOTT               11th floor, 1050 West Pender Street,
                              Vancouver BC, Canada V6E 3S7
CHARTERED ACCOUNTANTS         Phone: 604.714.3600  Fax: 604.714.3669
                              Web: manningelliott.com


             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------


To the Stockholders and Board of Directors
of Hybrid Fuels, Inc.
(A Development Stage Company)

We have audited the accompanying consolidated balance sheets of Hybrid Fuels,
Inc. (A Development Stage Company) as of June 30, 2006 and 2005 and the related
statements of operations, cash flows and stockholders' deficit for the years
then ended and accumulated for the period from January 28, 1998 (Date of
Inception) to June 30, 2006. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hybrid Fuels, Inc.
(A Development Stage Company), as of June 30, 2006 and 2005, and the results of
its operations and its cash flows for the years then ended and accumulated for
the period from January 28, 1998 (Date of Inception) to June 30, 2006 in
conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has not generated any revenues
and has accumulated losses since inception. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 1. These
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.


MANNING ELLIOTT LLP
-------------------


CHARTERED ACCOUNTANTS

Vancouver, Canada

September 25, 2006


                                      F-1

<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
(expressed in U.S. dollars)

<TABLE>
<CAPTION>
                                                                                       June 30,        June 30,
                                                                                         2006            2005
                                                                                          $               $
<S>                                                                                        <C>                <C>
ASSETS

Current Assets

  Cash                                                                                      3,533             946
  Prepaid expenses (Note 8)                                                                25,500               -
--------------------------------------------------------------------------------------------------------------------

Total Assets                                                                               29,033             946
====================================================================================================================

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities

  Accounts payable                                                                         62,804          52,084
  Accrued liabilities                                                                      28,874          62,136
  Note payable and other advances (Note 3)                                                 47,334          93,153
  Due to related parties (Note 4)                                                         209,371         204,099
  Due to a former director (Note 5)                                                       326,701         326,701
--------------------------------------------------------------------------------------------------------------------

Total Current Liabilities                                                                 675,084         738,173

Redeemable and Restricted Common Shares (Note 7(b))                                       222,767         223,000
--------------------------------------------------------------------------------------------------------------------

Total Liabilities                                                                         897,851         961,173
--------------------------------------------------------------------------------------------------------------------

Commitments and Contingencies (Notes 1 and 7)

Stockholders' Deficit

Common Stock: 50,000,000 shares authorized, $0.001 par value;
26,332,933 and 25,174,980 shares issued and outstanding, respectively                      26,333          25,175

Additional Paid-in Capital                                                              1,006,967         847,311

Donated Capital                                                                           547,375         438,464

Deferred Compensation                                                                           -        (78,500)

Deficit Accumulated During the Development Stage                                       (2,449,493)     (2,192,677)
--------------------------------------------------------------------------------------------------------------------

Total Stockholders' Deficit                                                              (868,818)       (960,227)
--------------------------------------------------------------------------------------------------------------------

Total Liabilities and Stockholders' Deficit                                                29,033             946
====================================================================================================================
</TABLE>


   (The Accompanying Notes are an Integral Part of the Consolidated Financial
                                  Statements)

                                      F-2
<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(expressed in U.S. dollars)

<TABLE>
<CAPTION>
                                                                    Accumulated from
                                                                    January 28, 1998         For the Year
                                                                   (Date of Inception)          Ended
                                                                       to June 30,             June 30,
                                                                           2006           2006          2005
                                                                            $              $             $
<S>                                                                     <C>               <C>           <C>
Revenue                                                                         -               -             -
------------------------------------------------------------------------------------------------------------------

Expenses

  Deposits and advances written-off                                       305,512               -        50,000
  Foreign exchange loss                                                    20,814          11,568         4,515
  General and administrative (Note 4)                                   1,636,867         176,837       268,006
  Imputed interest (Notes 4 and 5)                                        479,875          78,911        78,910
  Research and development                                                 16,925               -             -
------------------------------------------------------------------------------------------------------------------

Total Operating Expenses                                                2,459,993         267,316       401,431
------------------------------------------------------------------------------------------------------------------

Operating Loss                                                        (2,459,993)        (267,316)     (401,431)

Other Income

  Gain on settlement of debt                                               10,500          10,500             -
------------------------------------------------------------------------------------------------------------------

Net Loss                                                              (2,449,493)        (256,816)     (401,431)
==================================================================================================================

Net Loss Per Share - Basic and Diluted                                                      (0.01)        (0.02)
==================================================================================================================

Weighted Average Shares Outstanding                                                    25,939,000    24,332,000
==================================================================================================================
</TABLE>


   (The Accompanying Notes are an Integral Part of the Consolidated Financial
                                  Statements)

                                      F-3
<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)

<TABLE>
<CAPTION>
                                                                   Accumulated from
                                                                   January 28, 1998          For the Year
                                                                  (Date of Inception)           Ended
                                                                      to June 30,              June 30,
                                                                         2006             2006          2005
                                                                           $               $             $
<S>                                                                     <C>               <C>           <C>
Operating Activities

  Net loss                                                              (2,449,493)       (256,816)     (401,431)

  Adjustments to reconcile net loss to net cash used in operating
  activities
    Accrued executive compensation                                         324,000               -             -
    Amortization of deferred compensation and other stock-based
    compensation                                                           351,837          53,000       113,799
    Deposits and advances written-off                                      305,512               -        50,000
    Donated services                                                        67,500          30,000        30,000
    Imputed interest                                                       479,875          78,911        78,910
    Foreign exchange translation loss                                        7,189               -         3,721
    Gain on settlement of debt                                             (10,500)        (10,500)            -
    Other adjustment                                                          (502)              -             -

  Change in operating assets and liabilities
    Accounts payable and accrued liabilities                               146,579          20,458        60,705
------------------------------------------------------------------------------------------------------------------

Net Cash Used In Operating Activities                                     (778,003)        (84,947)      (64,296)
------------------------------------------------------------------------------------------------------------------

Investing Activities

  Deposits and advances                                                   (255,512)              -             -
------------------------------------------------------------------------------------------------------------------

Net Cash Used In Investing Activities                                     (255,512)              -             -
------------------------------------------------------------------------------------------------------------------

Financing Activities

  Proceeds from issuance of note payable                                    33,732               -             -
  Proceeds from advances                                                   136,700               -             -
  Advances from a former director                                            2,701               -             -
  Advances from (to) related parties                                       211,261           5,272          (951)
  Proceeds from issuance of restricted common stock                        223,000               -             -
  Proceeds from issuance of common stock                                   425,473          78,081        58,286
------------------------------------------------------------------------------------------------------------------

Net Cash Provided By Financing Activities                                1,032,867          83,353        57,335
------------------------------------------------------------------------------------------------------------------

Effect of Exchange Rate on Changes on Cash                                   4,181           4,181             -
------------------------------------------------------------------------------------------------------------------

Increase (Decrease) in Cash                                                  3,533           2,587        (6,961)

Cash - Beginning of Period                                                       -             946         7,907
------------------------------------------------------------------------------------------------------------------

Cash - End of Period                                                         3,533           3,533           946
==================================================================================================================

Non-cash Investing and Financing Activities

  Common shares issued to settle debt                                      308,759          82,500             -
==================================================================================================================

Supplemental Disclosures

  Interest paid                                                                  -               -             -
  Income taxes paid                                                              -               -             -
==================================================================================================================
</TABLE>


   (The Accompanying Notes are an Integral Part of the Consolidated Financial
                                  Statements)

                                      F-4
<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Deficit
Accumulated from January 28, 1998 (Date of Inception) to June 30, 2006
(expressed in U.S. dollars)

<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                        # of                  Additional                             During the      Total
                                       Shares                  Paid-in    Donated     Deferred      Development   Stockholders'
                                      Issued and   Par Value   Capital    Capital   Compensation       Stage         Deficit
                                     Outstanding       $          $          $           $               $             $
<S>                                   <C>           <C>          <C>        <C>      <C>              <C>          <C>
Balance at January 28, 1998 (Date
of Inception)                                  -         -           -          -            -               -            -
Shares issued to effect a reverse
  merger                              15,000,000    15,000       3,398          -            -         (18,398)           -
Net loss for the period                        -         -           -          -            -         (93,633)     (93,633)
-----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998              15,000,000    15,000       3,398          -            -        (112,031)     (93,633)
Issuance of 1,900,000 shares           1,900,000     1,900      (1,900)         -            -               -            -
Issuance of shares for cash               23,600        24      13,576          -            -               -       13,600
Imputed Interest                               -         -           -     26,000            -               -       26,000
Net loss for the year                          -         -           -          -            -        (308,377)    (308,377)
-----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999              16,923,600    16,924      15,074     26,000            -        (420,408)    (362,410)
Cancellation of shares previously
  issued                              (1,900,000)   (1,900)      1,900          -            -               -            -
Issuance of shares for no
  consideration                        3,000,000     3,000      (3,000)         -            -               -            -
Issuance of shares pursuant to a
  subscription agreement               1,500,000     1,500     148,500          -            -               -      150,000
Imputed Interest                                 -       -           -     30,735            -               -       30,735
Net loss for the year                            -       -           -          -            -        (324,144)    (324,144)
-----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000              19,523,600    19,524     162,474     56,735            -        (744,552)    (505,819)
Issuance of shares to settle debt      1,100,000     1,100     123,368          -            -               -      124,468
Imputed interest                               -         -           -     59,202            -               -       59,202
Net loss for the year                          -         -           -          -            -        (312,660)    (312,660)
-----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001              20,623,600    20,624     285,242    115,937            -      (1,057,212)    (634,809)
Issuance of shares to settle debt        200,000       200       9,800          -            -               -       10,000
Issuance of shares for services          100,000       100       4,900          -            -               -        5,000
Issuance of shares for cash              377,000       376      30,810          -            -               -       31,186
Imputed interest                               -         -           -     58,932            -               -       58,932
Net loss for the year                          -         -           -          -            -        (167,850)    (167,850)
-----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002              21,300,600    21,300     331,352    174,869            -      (1,225,062)    (697,541)
Issuance of shares to settle debt        600,000       600      77,400         -             -               -       78,000
Issuance of shares for cash               50,000        50       5,633         -             -               -        5,683
Imputed interest                               -         -           -    68,733             -               -       68,733
Net loss for the year                          -         -           -         -             -        (253,935)    (253,935)
-----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003              21,950,600    21,950     414,385    243,602            -      (1,478,997)    (799,060)
Issuance of shares to settle debt         67,778        68      13,723          -            -               -       13,791
Issuance of shares for services          755,833       756     116,581          -            -               -      117,337
Issuance of shares for cash              597,769       598      81,139          -            -               -       81,737
Imputed interest                               -         -           -     78,452            -               -       78,452
Donated services                               -         -           -      7,500            -               -        7,500
Deferred compensation                          -         -           -         -       (27,299)              -      (27,299)
Net loss for the year                          -         -           -         -             -        (312,249)    (312,249)
-----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004              23,371,980    23,372     625,828    329,554      (27,299)     (1,791,246)    (839,791)
=============================================================================================================================
</TABLE>



   (The Accompanying Notes are an Integral Part of the Consolidated Financial
                                  Statements)

                                      F-5
<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Deficit
Accumulated from January 28, 1998 (Date of Inception) to June 30, 2006
(expressed in U.S. dollars)

<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                        # of                  Additional                             During the      Total
                                       Shares                  Paid-in    Donated     Deferred      Development   Stockholders'
                                      Issued and   Par Value   Capital    Capital   Compensation       Stage         Deficit
                                     Outstanding       $            $         $           $              $              $
<S>                                   <C>           <C>        <C>        <C>          <C>          <C>            <C>
Balance at June 30, 2004              23,371,980    23,372     625,828    329,554      (27,299)     (1,791,246)    (839,791)
Issuance of shares for services        1,100,000     1,100     163,900          -            -               -      165,000
Issuance of shares for cash              703,000       703      57,583          -            -               -       58,286
Imputed interest                               -         -           -     78,910            -               -       78,910
Donated services                               -         -           -     30,000            -               -       30,000
Deferred compensation                          -         -           -          -      (51,201)              -      (51,201)
Net loss for the year                          -         -           -          -            -        (401,431)    (401,431)
-----------------------------------------------------------------------------------------------------------------------------

Balance at June 30, 2005              25,174,980    25,175     847,311    438,464      (78,500)     (2,192,677)    (960,227)
Reallocation of par value of
   redeemable and restricted
   shares (Note 7(b))                    232,753       233           -          -            -               -          233
Issuance of shares to settle debt        375,000       375      82,125          -            -               -       82,500
Issuance of shares for cash              550,200       550      77,531          -            -               -       78,081
Imputed interest                               -         -           -     78,911            -               -       78,911
Donated services                               -         -           -     30,000            -               -       30,000
Deferred compensation                          -         -           -         -        78,500               -       78,500
Net loss for the year                          -         -           -          -            -        (256,816)    (256,816)
-----------------------------------------------------------------------------------------------------------------------------

Balance at June 30, 2006              26,332,933    26,333   1,006,967    547,375            -      (2,449,493)    (868,818)
=============================================================================================================================
</TABLE>



   (The Accompanying Notes are an Integral Part of the Consolidated Financial
                                  Statements)

                                      F-6
<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)

1.   Nature of Operations and Continuance of Business

     In May 1998, the Company caused a Nevada corporation to be formed under the
     name Polo Equities, Inc. The two companies then merged pursuant to Articles
     of Merger adopted May 28, 1998 and filed with the State of Nevada on June
     10, 1998.

     On May 28, 1998, the Company acquired, by issuing 12,000,000 shares, Hybrid
     Fuels, USA, Inc., with an inception date of January 28, 1998, and 330420
     B.C. Ltd., which changed its name to Hybrid Fuels (Canada) Inc. This
     acquisition was accounted for as a reverse merger whereby the shareholder
     of Hybrid Fuels, USA, Inc. and Hybrid Fuels (Canada) Inc. gained control of
     Polo Equities Inc., which changed its name to Hybrid Fuels, Inc. All
     historical financial statements are those of Hybrid Fuels, USA, Inc. and
     Hybrid Fuels (Canada) Inc. As part of the acquisition, three shareholders
     holding 12,000,000 previously issued shares returned their shares for
     cancellation. For accounting purposes, the acquisition was treated as a
     reverse merger business purchase of Polo Equities Inc. by Hybrid Fuels,
     USA, Inc. and Hybrid Fuels (Canada) Inc. No amount was allocated to the
     intellectual asset as it was acquired from a related party and the transfer
     had no cost basis associated with it. There was no public market for the
     shares of Polo Equities, Inc. at the time of the reverse merger.

     On May 29, 1998 the Company changed its name to Hybrid Fuels, Inc., herein
     "the Company". The Company trades on the OTC Bulletin Board under the
     symbol HRID.

     Pursuant to the above acquisition, the Company acquired a number of
     proprietary technologies with the primary objective of the business being
     to build small farm-scale ethanol facilities that involve a number of
     proprietary technologies exclusively owned by the Company. Other
     proprietary technology involves the use of a bio-gas burner that burns
     manure and bedding straw. This technology eliminates ground and
     ground-water contamination and produces most of the energy required for the
     facility by supplying heat for fermentation and vaporization and for the
     operation of a greenhouse, if desired. Another exclusive proprietary
     technology is a vegetable-based formula that allows diesel and ethanol to
     emulsify. This hybrid fuel reduces particulate emissions without reduction
     in power when used in an unaltered diesel engine.

     The Company is a development stage company with management devoting most of
     its activities in investigating business opportunities and further
     advancing its technologies. The ability of the Company to emerge from the
     development stage with respect to any planned principal business activity
     is dependent upon its successful efforts to raise additional equity
     financing and/or generate significant revenue. There is no guarantee that
     the Company will be able to complete any of the above objectives. At June
     30, 2006, the Company had a working capital deficit of $646,051 and an
     accumulated deficit of $2,449,493. These factors, among others, cause
     substantial doubt about the continuance of the Company as a going concern.

     The Company expects that future capital requirements for developing and
     expanding technologies will be met through stock offerings by way of
     private placements.

2.   Summary of Significant Accounting Policies

     (a)  Consolidated Financial Statements and Basis of Presentation

          These consolidated financial statements represent the consolidation of
          the Company and its wholly owned subsidiary, Hybrid Fuels (Canada)
          Inc. The Company's subsidiary is currently inactive and has no assets,
          liabilities or operations. The Company's fiscal year end is June 30.

     (b)  Cash and Cash Equivalents

          The Company considers all highly liquid instruments with a maturity of
          three months or less at the time of issuance to be cash equivalents.

     (c)  Use of Estimates

          The preparation of financial statements in conformity with accounting
          principles generally accepted in the United States requires management
          to make estimates and assumptions that affect the reported amounts of
          assets and liabilities and disclosure of contingent assets and
          liabilities at the date of the financial statements and the reported
          amounts of revenues and expenses during the periods. Actual results
          could differ from those estimates.

                                      F-7

<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)

2.   Summary of Significant Accounting Policies (continued)

     (d)  Basic and Diluted Net Income (Loss) per Share

          The Company computes net income (loss) per share in accordance with
          SFAS No. 128, "Earnings per Share" (SFAS 128) which requires
          presentation of both basic and diluted earnings per shares (EPS) on
          the face of the income statement. Basic EPS is computed by dividing
          net income (loss) available to common shareholders (numerator) by the
          weighted average number of common shares outstanding (denominator)
          during the period. Diluted EPS gives effect to all dilutive potential
          common shares outstanding during the period including stock options,
          using the treasury stock method, and convertible preferred stock,
          using the if-converted method. In computing diluted EPS, the average
          stock price for the period is used in determining the number of shares
          assumed to be purchased from the exercise of stock options or
          warrants. Diluted EPS excludes all dilutive potential common shares if
          their effect is anti-dilutive.

     (e)  Foreign Currency Translation

          The Company's functional and reporting currency is the United States
          dollar. Monetary assets and liabilities denominated in foreign
          currencies are translated in accordance with SFAS No. 52 "Foreign
          Currency Translation", using the exchange rate prevailing at the
          balance sheet date. Gains and losses arising on settlement of foreign
          currency denominated transactions or balances are included in the
          determination of income. Foreign currency transactions are primarily
          undertaken in Canadian dollars. The Company has not, to the date of
          these financials statements, entered into derivative instruments to
          offset the impact of foreign currency fluctuations.

     (f)  Comprehensive Loss

          SFAS No. 130, "Reporting Comprehensive Income," establishes standards
          for the reporting and display of comprehensive loss and its components
          in the financial statements. As at June 30, 2006 and 2005, the Company
          has no items that represent a comprehensive loss and, therefore, has
          not included a schedule of comprehensive loss in the financial
          statements.

     (g)  Financial Instruments

          The fair values of financial instruments, which include cash, accounts
          payable, accrued liabilities, notes and advances payable, due to
          related parties and due to a former director approximate their
          carrying values due to the immediate or short-term maturity of these
          financial instruments. The Company's operations are in Canada which
          results in exposure to market risks from changes in foreign currency
          rates. The financial risk is the risk to the Company's operations that
          arise from fluctuations in foreign exchange rates and the degree of
          volatility of these rates. Currently, the Company does not use
          derivative instruments to reduce its exposure to foreign currency
          risk.

     (h)  Income Taxes

          The Company has adopted SFAS No. 109 "Accounting for Income Taxes" as
          of its inception. Pursuant to SFAS No. 109 the Company is required to
          compute tax asset benefits for net operating losses carried forward.
          The potential benefits of net operating losses have not been
          recognized in these financial statements because the Company cannot be
          assured it is more likely than not it will utilize the net operating
          losses carried forward in future years.

     (i)  Stock-based Compensation

          Prior to January 1, 2006, the Company accounted for stock-based awards
          under the recognition and measurement provisions of Accounting
          Principles Board Opinion No. 25, "Accounting for Stock Issued to
          Employees" using the intrinsic value method of accounting, under which
          compensation expense was only recognized if the exercise price of the
          Company's employee stock options was less than the market price of the
          underlying common stock on the date of grant. Effective January 1,
          2006, the Company adopted the fair value recognition provisions of
          SFAS No. 123R "Share Based Payments", using the modified retrospective
          transition method. The Company has not issued any stock options or
          share based payments since its inception. Accordingly, there was no
          effect on the Company's reported loss from operations, cash flows or
          loss per share as a result of adopting SFAS No 123R.

                                      F-8

<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)

2.   Summary of Significant Accounting Policies (continued)

     (j)  Recent Accounting Pronouncements

          In February, 2006, the Financial Accounting Standards Board ("FASB")
          issued SFAS No. 155 "Accounting for Certain Hybrid Financial
          Instruments" and in March 2006, the FASB issued SFAS No. 156
          "Accounting for Servicing of Financial Assets", but they will not have
          any relationship to the operations of the Company. Therefore a
          description and its impact for each on the Company's operations and
          financial position have not been disclosed.

          In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
          Corrections - A Replacement of APB Opinion No. 20 and SFAS No. 3".
          SFAS 154 changes the requirements for the accounting for and reporting
          of a change in accounting principle and applies to all voluntary
          changes in accounting principle. It also applies to changes required
          by an accounting pronouncement in the unusual instance that the
          pronouncement does not include specific transition provisions. SFAS
          154 requires retrospective application to prior periods' financial
          statements of changes in accounting principle, unless it is
          impracticable to determine either the period-specific effects or the
          cumulative effect of the change. The provisions of SFAS No. 154 are
          effective for accounting changes and correction of errors made in
          fiscal years beginning after December 15, 2005. The adoption of this
          standard is not expected to have a material effect on the Company's
          results of operations or financial position.

          In December 2004, the FASB issued SFAS No. 153, "Exchanges of
          Nonmonetary Assets - An Amendment of APB Opinion No. 29". The guidance
          in APB Opinion No. 29, "Accounting for Nonmonetary Transactions", is
          based on the principle that exchanges of nonmonetary assets should be
          measured based on the fair value of the assets exchanged. The guidance
          in that Opinion, however, included certain exceptions to that
          principle. SFAS No. 153 amends Opinion No. 29 to eliminate the
          exception for nonmonetary exchanges of similar productive assets and
          replaces it with a general exception for exchanges of nonmonetary
          assets that do not have commercial substance. A nonmonetary exchange
          has commercial substance if the future cash flows of the entity are
          expected to change significantly as a result of the exchange. The
          provisions of SFAS No. 153 are effective for nonmonetary asset
          exchanges occurring in fiscal periods beginning after June 15, 2005.
          Early application is permitted and companies must apply the standard
          prospectively. The adoption of this standard did not have a material
          effect on the Company's results of operations or financial position.

     (k)  Reclassifications

          Certain reclassifications have been made to the prior period's
          financial statements to conform to the current period's presentation.


3.   Note Payable and Other Advances

     (a)  On September 15, 2000, the Company issued a note for CDN$50,000
          (US$33,638) payable on or before September 15, 2001 plus 8% interest.
          The Company extended repayment of the note until the completion of a
          financing arrangement. Interest expense of $4,021 has been accrued for
          the year ended June 30, 2006 (2005 - $3,714). The note payable was
          $44,655 after translation into U.S. dollars at June 30, 2006. For the
          year ended June 30, 2006, the Company incurred a foreign currency
          translation loss of $3,945 that was charged to operations.

     (b)  Cash advances totalling $2,679 (CDN$3,000) from unrelated parties are
          non-interest bearing, unsecured and due on demand.

4.   Related Party Transactions

     (a)  A shareholder is owed $199,371 (June 30, 2005 - $199,371) for payment
          of rent, office expenses and professional fees on behalf of the
          Company. Imputed interest of $29,906 (2005 - $29,905), calculated at a
          rate of 15% per annum, was charged to operations and treated as
          donated capital. Amounts owing are unsecured, non-interest bearing and
          due on demand.

     (b)  During the year ended June 30, 2006, the Company recognized a total of
          $30,000 (2005 - $30,000) for donated services provided by the
          President of the Company.

     (c)  At June 30, 2006, the President of the Company is owed $10,000 (June
          30, 2005 - $4,728 was owed to the Vice President of the Company) for
          advances and expenses paid on behalf of the Company. This amount is
          unsecured, non-interest bearing and due on demand.

                                      F-9

<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)

5.   Amount Owing to a Former Director

     The former President, who was also a director of the Company, is owed
     $326,701 as at June 30, 2006. This amount is unsecured, non-interest
     bearing and due on demand. During the year, imputed interest of $49,005
     (2005 - $49,005), calculated at a rate of 15% per annum, was charged to
     operations and treated as donated capital.

6.   Common Shares

     (a)  Private Placements

          (i)    On April 18, 2006, the Company issued 299,000 shares of
                 common stock at a price of $0.17 per share for proceeds of
                 $50,487 (CDN$58,486).

          (ii)   On February 13, 2006, the Company issued 30,000 shares of
                 common stock at a price of $0.15 per share for cash
                 proceeds of $4,506 (CDN$5,192).

          (iii)  On January 31, 2006, the Company issued 12,000 shares of
                 common stock at a price of $0.14 per share for cash
                 proceeds of $1,734 (CDN$1,990).

          (iv)   On January 6, 2006, the Company issued 6,600 shares of
                 common stock at a price of $0.13 per share for cash
                 proceeds of $863 (CDN$1,000).

          (v)    On January 5, 2006, the Company issued 15,500 shares of
                 common stock at a price of $0.14 per share for cash
                 proceeds of $2,153 (CDN$2,500).

          (vi)   On December 13, 2005, the Company issued 30,000 shares of
                 common stock at a price of $0.08 per share for cash
                 proceeds of $2,539 (CDN$3,000), and 20,000 shares of common
                 stock at a price of $0.13 per share for cash proceeds of
                 $2,585 (CDN$3,000).

          (vii)  On December 9, 2005, the Company issued 50,400 shares of
                 common stock at a price of $0.10 per share for cash
                 proceeds of $5,051 (CDN$5,990).

          (viii) On October 5, 2005, the Company issued 30,000 shares of
                 common stock at a price of $0.08 per share for cash
                 proceeds of $2,532 (CDN$3,000), and 56,700 shares of common
                 stock at a price of $0.10 per share for cash proceeds of
                 $5,631 (CDN$6,590).

          (ix)   On June 16, 2005, 28,000 shares of common stock were issued
                 for cash at a price of $0.12 per share for total proceeds
                 of $3,394 (CDN$4,200).

          (x)    On April 1, 2005, 100,000 shares of common stock were
                 issued for cash at a price of $0.08 per share for total
                 proceeds of $8,269 (CDN$10,000).

          (xi)   On March 31, 2005, 50,000 shares of common stock were
                 issued for cash at a price of $0.08 per share for total
                 proceeds of $4,144 (CDN$5,000).

          (xii)  On January 24, 2005, 300,000 shares of common stock were
                 issued for cash at a price of $0.08 per share for total
                 proceeds of $24,606 (CDN$30,000).

          (xiii) On October 28, 2004, 120,000 shares of common stock were
                 issued for cash at a price of $0.08 per share for total
                 proceeds of $9,788 (CDN$12,000).

          (xiv)  On October 20, 2004, 30,000 shares of common stock were
                 issued for cash at a price of $0.08 per share for total
                 proceeds of $2,387 (CDN$3,000).

          (xv)   On September 1, 2004, 25,000 shares of common stock were
                 issued for cash at a price of $0.08 per share for total
                 proceeds of $1,905 (CDN$2,500).

          (xvi)  On August 31, 2004, 50,000 shares of common stock were
                 issued for cash at a price of $0.08 per share for total
                 proceeds of $3,792 (CDN$5,000).

                                      F-10

<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)

6.   Common Shares (continued)

     (b)  Non-cash Consideration

          All transactions in which goods or services are the consideration
          received for the issuance of equity instruments are accounted for
          based on the fair value of the consideration received or the fair
          value of the equity instrument issued, whichever is more reliably
          measurable. Equity instruments issued to employees and the cost of the
          services received as consideration are measured and recognized based
          on the fair value of the equity instruments issued.

          (i)  On August 16, 2005, the Company issued 375,000 shares of common
               stock at a fair value of $82,500 to settle an outstanding debt of
               $50,000 and accrued interest of $43,000, resulting in a gain on
               debt settlement of $10,500.

          (ii) On March 30, 2005, 400,000 shares of common stock were issued at
               a price of $0.15 per share for a fair value of $60,000 in
               consideration for consulting services rendered.

          (iii) On January 25, 2005, 700,000 shares of common stock were issued
               at a price of $0.15 per share for a fair value of $105,000 in
               consideration for consulting services to be rendered up to
               December 2006. During the year ended June 30, 2005, the Company
               charged $26,500 to operations, and the balance of $78,500 is
               recognized as deferred compensation at June 30, 2005.

7.   Commitments and Contingencies

     Although the Company is not involved in any legal proceedings, several
     issues may eventually lead to the Company instituting legal action as
     follows:

     (a)  On August 4, 1998 and March 23, 1999, the Company's former Board of
          Directors authorized the issuance of 1,000,000 and 900,000 shares
          respectively to individuals without consideration. On August 21, 1999,
          the current Board of Directors resolved that share certificates
          representing ownership of these 1,900,000 shares were issued without
          adequate consideration being paid to the Company and were therefore
          not fully paid and non-assessable. The Company cancelled the share
          certificates and indemnified the transfer agent, for any costs or
          liability that may incur arising out of the cancellation of such
          shares. The transfer agent removed the 1,900,000 shares from the
          stockholder list effectively reversing the issuance. Six of the
          cancelled certificates, totaling 550,000 shares, have been endorsed
          and returned to the Company for cancellation. The contingencies
          regarding the cancelled shares relate to anyone who may have
          subsequent holder rights, and possibly the individuals who were issued
          those shares who may claim that they were issued for due
          consideration. The Company has determined that there is no amount to
          be accrued for future liabilities associated with claims by subsequent
          shareholders. To date when these shares have been delivered to a
          broker for possible resale, the broker has informed the Company or the
          transfer agent and the shares are kept and cancelled. The Company will
          continue to monitor this issue. No other contingent liabilities have
          been included, as some of the previous directors have been informed
          verbally of the cancellation. No formal legal demand has been made as
          former management has failed to provide addresses despite a number of
          requests.

     (b)  Between October 1998 and June 1999, the management at that time sold a
          total of 361,120 common shares of the Company to 34 subscribers on the
          basis of an Offering Memorandum ("Offering") that contained a
          significant number of inaccuracies. A total of $223,000 was raised
          pursuant to this Offering. Management had concerns regarding possible
          misstatements, omissions and misleading statements. On the advice of
          legal counsel, the Company offered these 34 subscribers the option of
          receiving restricted stock as the Company did not and does not have
          the funds to repay these subscribers. Restricted shares must be owned
          and fully paid for at least one year. After the one-year holding
          period, the number of shares non-affiliates may sell during any
          three-month period cannot exceed 1% of the outstanding shares of the
          same class being sold. If the shares have been owned for two years or
          more, no volume restrictions apply to non-affiliates. Those who opted
          to receive restricted stock were also given an undertaking that they
          would receive a rescission offer when the Company was in a position to
          repay their money plus appropriate interest, in return for a return of
          the restricted stock, or they could elect to retain the stock. To
          date, 23 subscribers, have, pursuant to this offer received 232,753
          shares, representing $158,000. The remaining 11 subscribers, who paid
          $65,000 for 128,367 shares, have not responded to the offer. These
          subscriptions are recorded as redeemable and restricted common shares
          until rescission rights have been revoked.

                                      F-11

<PAGE>

Hybrid Fuels, Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)

8.   Prepaid Expenses

     Prepaid expenses consists of consulting fees.


9.   Income Taxes

     Potential benefits of income tax losses are not recognized in the accounts
     until realization is more likely than not. The Company has incurred net
     operating losses of $1,168,000 since inception on January 28, 1998.
     Pursuant to SFAS No. 109 the Company is required to compute tax asset
     benefits for net operating losses carried forward. The potential benefits
     of net operating losses have not been recognized in these financial
     statements because the Company cannot be assured it is more likely than not
     it will utilize the net operating losses carried forward in future years.
     For the years ended June 30, 2006 and 2005, the valuation allowance
     established against the deferred tax assets increased by $33,000 and
     $72,000, respectively.

     The components of the net deferred tax asset at June 30, 2006 and 2005, and
     the statutory tax rate, the effective tax rate and the elected amount of
     the valuation allowance are indicated below:

                                               2006                 2005
                                                 $                    $

Cumulative Net Operating Losses             1,168,000            1,073,000

Statutory Tax Rate                             35%                  35%

Effective Tax Rate                              -                    -

Deferred Tax Asset                           409,000              376,000

Valuation Allowance                         (409,000)            (376,000)
-------------------------------------------------------------------------------
Net Deferred Tax Asset                          -                    -
===============================================================================


                                      F-12

<PAGE>


Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

N/A

Item 8A. CONTROLS AND PROCEDURES
--------------------------------

Based on an evaluation as of the end of the period, the Company's Principal
Executive Officer and Principal Financial Officer has concluded that the
Company's disclosure controls and procedures as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act 1934 (the "Exchange
Act") are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.

There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. There were no significant deficiencies or material weakness,
and therefore there were no corrective actions taken.

CODE OF ETHICS

The Company has adopted a code of ethics that applies to our executive officers
and directors. This code of ethics is posted the Company's website at
www.hybrid-fuels.com. The Code of Ethics is filed as Exhibit 14.1 to this
report.

Item 8B. OTHER INFORMATION
--------------------------

N/A

                                    PART III

Item 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
--------------------------------------------------


As of June 30, 2005, the Board had a membership of four Directors: Paul
Warkentin (President/CEO and Acting CFO), Gordon Colledge (Vice President),
David Krahn (Secretary-Treasurer) and Dale Johnson.

On April 12, 2006, Douglas Dickie and Rolly Hein were appointed to the Board
following the resignations of Paul Warkentin, Gordon Colledge and David Krahn
(incorporated by reference to Form 8K filed April 12, 2006).

                                       25
<PAGE>

The following table sets forth the name, age, and position of each of the
persons who were serving as executive officers of Hybrid Fuels Inc. as of June
30, 2006:

NAME            AGE            POSITION               DIRECTOR OR OFFICER SINCE

Douglas Dickie   59     Acting President/Director          April 12, 2006

Rolly Hein       61     Acting Secretary-Treasurer/        April 12, 2006
                        Director

Dale Johnson     54     Director                           September 15, 2004

On June 19, 2006, Dale Johnson (Director) informed the Company that he is
declining to stand for election to the Board of Directors at the Company's
Annual Meeting July 12, 2006 in order to honor other personal and business
commitments (incorporated by reference to Form 8K filed June 19, 2006).

On July 12, 2006, Douglas Dickie (incumbent Director), Rolly Hein (incumbent
Director) and Edward Melenka were elected to the Board of Directors at the
annual shareholder meeting held July 12, 2006 in Winfield, BC, Canada.

The present and principal occupations of our directors and executive officers
during the last five years are set forth below:

Douglas Dickie
--------------
Mr. Dickie (59) has been the Acting President/CEO/CFO and Director for Hybrid
Fuels since April 12, 2006. Mr. Dickie has a farming background in eastern
Saskatchewan. He earned a Bachelor of Science Degree in Pharmacy from the
University of Saskatchewan in 1968; practiced pharmacy in Saskatchewan, the
Yukon and Vernon, BC, where he currently resides. Mr. Dickie has owned and
operated various pharmacies; served as a Director of Peoples Drug Mart (BC) Ltd.
and numerous private companies, and is currently a member of the College of
Pharmacists of BC.

Rolly Hein
----------
Rolly Hein (61) has been the Acting Vice President/Secretary-Treasurer and
Director since April 12, 2006. Mr. Hein is a former two-term Mayor of the
District of Lake Country, BC, Canada and has been engaged in the cattle and meat
processing business for 40 years. Mr. Hein has been very active in protecting
watersheds and in creating more opportunities on agricultural lands,
specifically in the creation of the Mayor's Task Force on Agriculture and the
resolution of Council for the creation of an Agricultural Advisory Commission
within the District.

Edward Melenka
--------------
Edward Melenka (64) was born and raised in Trail, BC. Mr. Melenka graduated from
the University of British Columbia in 1966 with a Bachelor of Science in
Pharmacy. Upon graduation he joined Woodwards Stores Ltd as a practicing
pharmacist. Shortly thereafter he moved into the management sector leading to
several upper management positions during 15 years of service with the company.
In 1984, Mr. Melenka began a new career in Vancouver as the General Manager of
Peoples Drug Mart Ltd., a retail pharmacy group of 55 stores. Early in 1993 he
became the General Manager of a sister company, Unipharm Wholesale Drugs Ltd., a
major pharmaceutical distribution company in BC servicing 170 retail pharmacies
throughout BC and the Yukon. In 1996 he was appointed CEO for the company,
servicing Unipharm until his retirement in 2004. Thereafter, he relocated to the
Okanagan Valley to become owner and manager of Aurora Orchard, a 15-acre parcel.

                                       26
<PAGE>

Dale Johnson
------------
Mr. Johnson (54) of Lethbridge, Alberta, Canada, is the President of Wind Power
Inc. based in Pincher Creek, Alberta, Canada. Mr. Johnson has over 20 years
experience in the independent power business including all aspects of regulatory
application, electrical interconnection requirements, wind power plant
construction, operation and maintenance.

TERMS OF OFFICE

All officers hold their positions at the will of the Board of Directors. All
directors hold their positions for one year or until their successors are
qualified and elected or appointed.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
the Company's outstanding Common Stock to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock. Such persons are required by SEC regulation to
furnish the Company with copies of all such reports they file.

The Company believes that all Section 16(a) Securities and Exchange Commission
filing requirements applicable to our directors and executive officers for the
fiscal year ended June 30, 2006 were timely met.

AUDIT COMMITTEE

Pursuant to the footnote by regulation S-B Item 401(f) and SEC Release 33-8220,
the Company is not subject to the audit committee disclosures at this time.


Item 10. EXECUTIVE COMPENSATION
-------------------------------

Former President, Paul Warkentin, donated services valued at $25,000 during the
period from July 1, 2005 to April 12,2006 inclusive. Current President, Douglas
Dickie, donated services valued at $5,000 during the period from April 12, 2006
to June 30, 2006 inclusive.

<TABLE>
                           SUMMARY COMPENSATION TABLE
                   Annual compensation         Long term compensation
----------------------------------------------------------------------------------
<S>            <C>  <C>    <C>   <C>       <C>        <C>          <C>     <C>
                                 Other     Restricted Securities   LTIP    All
                                 Annual      stock    underlying   payouts other
Name &          Yr  Salary Bonus Compen-     awards   options/SARs  ($)    Compen-
Principal            ($)    ($)  sation($)    ($)        (#)               sation
Position
----------------------------------------------------------------------------------
Douglas Dickie 2006   nil   -0-     -0-      -0-         -0-        -0-     -0-
Paul Warkentin 2006   nil   -0-     -0-      -0-         -0-        -0-     -0-
Paul Warkentin 2005   nil   -0-  11,358      -0-         -0-        -0-     -0-
Paul Warkentin 2004   nil   -0-     -0-      -0-         -0-        -0-     -0-
Clay Larson    2004   nil   -0-     -0-      -0-         -0-        -0-     -0-
Pres./CEO      2003 72,000  -0-     -0-      -0-         -0-        -0-     -0-
Alan Urschel   2004 13,670  -0-     -0-      -0-         -0-        -0-     -0-
Pres./CEO
----------------------------------------------------------------------------------
</TABLE>

At the present time, the Company does not have any other compensation agreements
or plans with any officers and/or directors of the Company. The Company does
intend to enter into such agreements in the future when resources allow. There
are no compensatory plans or arrangements, including payments to be received

                                       27
<PAGE>

from the Company, with respect to any person named in Cash Compensation set out
above that would in any way result in payments to any such person upon
termination of their employment with the company or its subsidiaries, or any
change in control of the Company, or a change in the person's responsibilities
following a change in control of the Company.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
---------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------

The following table sets forth as of October 11, 2006, the name and the number
of shares of the Registrant's Common Stock, par value $.001 per share, held of
record or beneficially by each person who held of record, or was known by the
Registrant to own beneficially, more than 5% of the 26,332,933 issued and
outstanding shares (see Consolidated Statement of Shareholders Equity in
Financial Statements) of the Registrant's Common Stock, and the name and
shareholdings of each director and of all officers and directors as a group.


Title  of   Name and Address of     Amount and Nature of     Percentage of
Class       Beneficial Owner        Beneficial Ownership     Class
--------------------------------------------------------------------------
Common      Donald  Craig                 1,690,000             6.42%
            12650 Ponderosa Road
            Winfield, B.C. V4V 2G8

Common      Douglas Dickie (1)              447,700             1.70%
            237 Main Street
            Box 880
            Niverville, MB
            R0A 1E0

Common      Rolly Hein (1)                  100,000             0.38%
            237 Main Street
            Box 880
            Niverville, MB
            R0A 1E0

Common      Edward Melenka (1)              144,215             0.55%
            237 Main Street
            Box 880
            Niverville, MB
            R0A 1E0

Common      Auchengrey Ltd.               1,500,000             5.70%
            Diane Smith,
            PO Box 3321,
            Tortula, BVI.

Common      Killaloe Ltd.                 2,000,000             7.60%
            Don Murray,
            Drake Chambers,
            Tortula, BVI


--------------------------------------------------------------------------------
Common      Total Officers and Directors
            as a  Group (3 Persons)         691,915             2.63%
--------------------------------------------------------------------------------

(1)      Officer and/or director. Elected to Board of Directors July 12, 2006 at
         annual shareholder meeting.

                                       28
<PAGE>

There are no contracts or other arrangements that could result in a change of
control of the Company.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

Donald Craig, who owns more that 5% of the issued shares of the
Company, is owed $199,371 (June 30, 2005 - $199,371) for payment of rent, office
expenses and professional fees on behalf of the Company. Imputed interest of
$29,906 (2005 - $29,905), calculated at a rate of 15% per annum, was charged to
operations and treated as donated capital. This amount owing is unsecured,
non-interest bearing and due on demand.

Former President, Paul Warkentin, donated services valued at $25,000 during the
period from July 1, 2005 to April 12, 2006 inclusive. Current President, Douglas
Dickie, donated services valued at $5,000 during the period from April 13, 2006
to June 30, 2006 inclusive.

The Company does not expect to have any significant dealings with affiliates.
Presently, other than as described above, none of the officers and directors
have any transactions that they contemplate entering into with the Company.

Item 13. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------

a. EXHIBITS:

Exhibit 3.1  Articles of Incorporation (1)

Exhibit 3.2  Bylaws (1)

Exhibit 4.1  Specimen stock certificate (2)

Exhibit 14.1 Code of Ethics

Exhibit 31.1 Principal Executive Officer Certification (section 302 of the
Sarbanes-Oxley Act of 2002)

Exhibit 31.2 Principal Financial Officer Certification (section 302 of the
Sarbanes-Oxley Act of 2002)

Exhibit 32.1 Principal Executive Officer Certification (section 906 of the
Sarbanes-Oxley Act of 2002)

Exhibit 32.2 Principal Financial Officer Certification (section 906 of the
Sarbanes-Oxley Act of 2002)

(1) Incorporated by reference to Form 10-SB filed February 7, 2000.

(2) Incorporated by reference to Form 10-QSB filed May 15, 2001.

b. REPORTS ON FORM 8-K:

On April 12, 2006, Hybrid Fuels Inc., issued a press release announcing a change
in its Directors and Officers (incorporated by reference to Form 8K filed April
12, 2006).

On June 19, 2006, Dale Johnson (Director) informed the Company that he is
declining to stand for election to the Board of Directors at the Company's
Annual Meeting July 12, 2006 in order to honor other personal and business
commitments (incorporated by reference to Form 8K filed June 19, 2006).

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<PAGE>

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------

The following table discloses accounting fees and services that we paid to our
auditor, Manning Elliott:

Type Of Services Rendered           Fiscal Yr 2006     Fiscal Yr 2005

Audit Fees                              $8,900             $9,850
Audit-Related Fees                      nil                nil
Tax Fees                                nil                nil
All Other Fees                          nil                nil


                                   SIGNATURES
                                   ----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


Hybrid Fuels, Inc.

Date: October 18, 2006

By: /s/ Douglas Dickie                        By: /s/ Rolly Hein
    --------------------                          -------------------
    Name: Douglas Dickie                          Name: Rolly Hein
    Title: President/CEO/CFO                      Title: Secretary-Treasurer






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