<DOCUMENT><TYPE>10KSB<SEQUENCE>1<FILENAME>hybrid200310k.htm<DESCRIPTION>FORM 10-KSB  (12-31-2003)<TEXT> 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington DC 20549FORM 10 KSB**

(Mark One)

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**XX**ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003

___TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 For the transitional period from to_____

Commission File Number 333-33134  

**HYBRID FUEL SYSTEMS, INC.***formerly Save On Energy, Inc.*(Name of Small Business Issuer in its charter)

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

**12409 Telecom Drive, Tampa,Florida 33637**(Address of principal executive offices)(Zip Code)Issuer Telephone Number: **813-979-9222**

Securities registered under Section 12(g) of the Exchange Act   Title of each class                                                                                 Name of Exchange on which registered      Common                                                                                                                         None   Check whether the Issuer (i) has filed all reports required to be filed bySection 13 or 15d of the Exchange Act during the past twelve months (or for suchshorter period that the registrant was required to file such reports), and; (ii)and has been subject to such filing requirements for the past 90 days.  [ ] Yes [X] No     Check if there is no disclosure of delinquent filers inresponse to Item 405 of Regulation S-B contained in this form, and if nodisclosure will be contained, to the best of the Company's knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-KSB or any amendment to this Form 10-KSB.   [  ]    Revenues for the fiscal year ended December 31, 2002 totaled $123,702 and forfiscal year ended December 31, 2003 totaled $231,269   As of July 30, 2004, the aggregate market value of the voting stock held bynon-affiliates of the registrant (based upon the average of the closing bid andasked prices on such date) was approximately $737,889.     As of July 30, 2004, the registrant had outstanding12,163,646 shares of $.001 par value common stock

Transitional Small Business Disclosure format (check one) Yes  {  } No {X}  .

**DOCUMENTS INCORPORATED BY REFERENCE**

None. 

**Hybrid Fuel Systems, Inc.****Form 10KSB for the year ended December31, 2003Table of Contents**

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Part I           Item 1.   Description of Business                           Background                           Recent Developments                           Our ConversionSystem                           Key Features of our Digital Fuel Systems                           The Market                           Competition                           Technology Verification                                                  Item 2.   Description of Properties                                                    Item 3.   Legal Proceedings                                               Item 4.   Submission of Matters to a Vote of the Security Holders                              Part II           Item 5.   Market for Registrant's Common Stock and Related Shareholder Matters                              Item 6.    Management's Discussion and Analysis or Plan of Operations                           Risk Factors                         Item7.    Financial Statements and Supplementary Data                            Principal Accountant's Report                           Balance Sheets                          Statements of Operation                           Statement of Cash Flows                           Statement of Change in Stockholders' Equity                          Notes to Financial Statements                        Item 8.    Changes in and Disagreements with Independent Auditors                    Item8A.  Controls and ProceduresPart III           Item9     Directors and Executive Officers of the Registrant              Item 10.  Executive Compensation                                         Item 11.  Security Ownership of Certain Beneficial Owners and Management                           and Related Stockholder Matters                   Item 12.  Certain Relationships and Related Transactions                 Item 13.  Exhibits and Reports on Form 8-K                                        Item 14    Principal Accountant Fees and Services

                          Signatures                               

**PART I**

The information set forth in this Reporton Form 10-KSB contains "forward looking statements" within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended ("the Act"). The words "believes,""anticipates," "plans," "expects," "intends," "estimates," and similarexpressions are intended to identify forward-looking statements. In addition,any statements concerning future financial performance, ongoing businessstrategies or prospects, and possible future Company actions, which may beprovided by management, are also forward-looking statements as defined by theAct. Such forward-looking statements involve known and unknown risks,uncertainties, and other factors, which may cause actual results, performance,or achievements of the Company to materially differ from any future results,performance, or achievements expressed or implied by such forward-lookingstatements and to vary significantly from reporting period to reporting period.Actual results may materially differ from those projected in the forward  looking statements as a result of certain risks and uncertainties set forth inthis report.  Although management believesthat the assumptions made and expectations reflected in the forward  lookingstatements are reasonable, there is no assurance that the underlying assumptionswill, in fact, prove to be correct or that actual future results will not bedifferent from the expectations expressed in this report. The Company has nospecific intention to update these statements. 

**Item one - *Description of Our Business***

Hybrid Fuels Systems, Inc. formerly known as Save on Energy, Inc. and ElectronicFuel Control, Inc. was incorporated in the State of Georgia in 1996 tomanufacture and market retrofit systems for the conversion of gasoline anddiesel engines, stationary or vehicular, to non-petroleum based fuels such ascompressed natural gas and liquefied natural gas. Since 1998, we have dedicatedour research and development exclusively to conversion kits for diesel-poweredengines. 

We currently market alternative fuel conversion kits for diesel fuel engineswhich include a patented device. Our dual fuel conversion technology, utilizingeither compressed or liquefied natural gas, has demonstrated diesel vehicles canbe successfully and economically retrofitted to utilize natural gas dual fuel.No engine modifications are required and vehicles retain the diesel enginequalities of performance, torque, power, and efficiency. On-the-road resultsindicate diesel fuel consumption can be offset by as much as 85% with naturalgas. Along with this comes the benefit of significantly reduced CO2 greenhousegas, " smoke.", and NOx emissions. Since the system is generic, it can be appliedto various diesel engine vehicles in a fleet. Conversions can be performed inapproximately 2 days by two skilled technicians. A successful conversionrequires our Unit together with fuel storage tanks and linkage.  We providethe Unit and we do not provide the tanks and linkage.  See the section belowentitled "OurConversion Systems" and "Essential Components Not Supplied by the Company."  

Prior toJanuary 2001, we developed and marketed a patented, mechanical, dual fuelnatural gas and diesel system (the " Mechanical Fuel System.") which, wheninstalled on a diesel engine vehicle, permits the use of natural gas and dieselfuel together. Prior to January 2001, we had installed approximately 1,000 ofour Mechanical Fuel Systems. Our activities between January 2001 and December2003 are discussed in detail in the section below entitled " Background." and"Recent Developments."  

Between January and June of 2004, we completed the development of the softwareprogramming for the electric engines (the " Digital System.") and we are currentlyin the process of verifying such system with an Environmental Protection Agency(EPA)/California Air Resource Board (CARB) certified testing center. See thefollowing section entitled " Engine Verification". 

We believe our Digital System offers a number of advantages over the AnalogueSystem, the most important of which is performance improvement in the form oftighter control for both diesel fuel and natural gas (resulting in thedisplacement of more diesel fuel). The Digital System also allows for faster andeasier installation, set-up, and training, and enables the Company tocommunicate via email or a dedicated data-link line with customers/users of itssystems to assist with set-up and trouble-shooting. See the following sectionbelow entitled " Improvements in our technology." and " Key Features of our DigitalSystem.".

Sales of our technology are commensurate with the availability of Natural Gas.Natural gas has environmental benefits over diesel fuel. In certain cases,principally in foreign markets, Natural Gas is generally cheaper than dieselfuel and results in less pollutants when burned. See the section below entitled " The Market." and " Natural Gas.".

Previously, we have sought to market our technology exclusively as a means toreduce pollutants without regard to the economics of our prospective customer.We remain committed to improving our planet through an expanded use of ourtechnology. However, our commercialization strategy is now based on the economicadvantages in using Natural Gas versus Diesel. See the section below entitled " Sales and Marketing." and " The Market."  

We believe that our  advantage over current and future competitors isour technology leadership. Our patents are comprehensive with 99 claims coveringall unique technical aspects of the system. We will continue to develop newtechnologies and protect the technologies as the business evolves through patentapplications. Because our system meters diesel and natural gas fuels (the samemethod used for gasoline or diesel) we have the distinct competitive advantageof enhanced fuel economy and emissions performance. See the section belowentitled "Competition";. 

***Background***

We wereformed in 1996 to commercialize our dual-fuel technology.  We have to date been unsuccessful in achievingprofitability. Between the start of 2001 and December 2003, we sought to engagea foreign distributor in Hungary and we subsequently sought to acquire a gascompany in New York. Neither venture was successful. During this same period, wewere undercapitalized and unable to continue meaningful sales or development ofour technology. The following highlights major events during the period from ourinception through December 2003.

-  During 1996, we raised approximately $975,000 through the private placement ofour common stock. Subsequent to that date through December 31, 2003, we raisedapproximately $3.8 million through the sale of our common and preferred stock, theissuance of convertible Notes and Warrants and through certain bank creditlines.   
-  From 1996 through 2000 Mr. Robby Davis was our Chief Executive, Mr. RickyDavis was our Chief Financial Officer and Mr. Jeffrey Davis was our VicePresident and Secretary. Messrs. Davis, Davis and Davis also constituted ourBoard of Directors between 1996 and 2001.  Robby Davis currently serves asour Vice President for Research and Development and Ricky Davis serves as ourComptroller and as a Member of our Board of Directors.    
-  During 2001, Mr. Robert Stiles became our Chief Executive and Chairman of theBoard together with Directors Messrs. Erwin, Perry and Wacker. During 2001, Mr.Ricky Davis remained our Chief Financial Officer and a Director. During 2001 weengaged Alyce Schreiber to provide business and acquisition consulting and PeggyPress to provide shareholder relations consulting.  
-  During2001 we entereda transaction to acquire certain assets of New York State Electric and Gas (NYSEG). The issuanceof our Preferred Shares to foreign investors was also related to the proposedacquisition.. We previously announced that during December 2001 weconcluded the acquisition. Subsequently, we announced during the first quarterof 2002 that we would not be able to profitably acquire andoperate NYSEG. We rescinded our investments from NYSEG during 2001 and we havewritten off all related expenses.   
-  During 2002, Messrs. Stiles, Erwin, Perry and Wacker resigned from our Boardof Directors and Mr. Issa Al-Muzaini filled a vacancy created by theresignations cited above. A component of the Preferred Shares affords the ownerthereof the right to nominate members to our Board of Directors. The owners ofthese Preferred Shares have never exercised their right to nominate any memberto our Board of Directors.   
-  During 2003, we entered a series of agreements with 360 Degree Energy (360Energy) at which time Mr. Alex Edwards became our Chief Executive Officer and aMember of our Board of Directors. Through 360 Energy, Mr. Edwards providedvarious financial and marketing executives and consultants. We estimate 360Energy provided approximately $100,000 for our operations between July andDecember, 2003.   

***Recent Developments***

During 2003, we engaged 360 Degree Energy, Inc. (360 Energy) through a series ofagreements to provide for the finance and management of our Company. 360 DegreeEnergy proposed a strategy of combining our enterprise with various relatedcompanies. The principals of 360 Energy entered two letters of intent for theacquisition of related companies. Subsequently, 360 Energy was unsuccessful inproviding for any financing and was unsuccessful in enticing qualifiedacquisition candidates to merge with our enterprise.   We formally notified 360 Energy thatthey were in default of the series of agreements during November 2003. Ourattempts to induce previous investors to financially support our enterprise were likewiseunsuccessful. 

On December 23, 2003, we entered an agreement withWhite Knight SST, Inc. ("WhiteKnight"). Under the termsof the agreement, WhiteKnight was to provide up to $250,000 provided we electedtheir President as our Chief Executive Officer and appointed their Chairman andDirector as two of our three Directors. The WhiteKnight Agreement furtherrequired that all former agreements between the Company and 360 Energy becancelled and that we adopt WhiteKnight's operating plan. Under the terms of theagreement, White Knight may convert their financing into our common stock andthey will earn a fee of 5% of our capitalization at such point as they fulfillthe terms of the agreement. Essentially, the terms of the agreement provide wewill be a profitable enterprise positioned for growth with a healthy balancesheet and proven infrastructure. Since December 2003, WhiteKnight has providedapproximately $600,000 in direct operating capital. In addition to thefinancing, WhiteKnight provides for the salaries and expenses of our ChiefExecutive Officer and our Chief Operating Officer . 

Since the engagement of White Knight during December 2003 through the present(August 2004), we have:*Improvements to and verification of our technology*

-  Re-engineered and re-designed our technology.  
-  We have spent the period January through June 2004 in pre-verification testingwith a diesel engine in Texas. This period of time has been essential todeveloping the programming codes necessary to ensure a reliable, predictableoutcome.   
-  As a result of our advances in research and development, during June 2004, wetransferred our engine to an EPA/CARB verifying laboratory in California. If wedo not receive such verification of our technology, we cannot engage inmeaningful domestic sales. This was a corporate objective first described in previousfiling from 1996 through the present. We anticipate we willconclude our verification approximately during September 2004.  
-  We have developed a new software design relating to the electronic engineswith our dual fuel technology which could lead to new or expanded patents.  

*Salesand Market Positioning Stressing Economic Advantages*

-  We have adopted a strategy that depends exclusively upon the sale of our kitsas an economic advantage to our customer. We have sought to price our Units sothat the typical client can expect a payout in less than eighteen months.  If we are successful in our currenttesting and receive our anticipated EPA/CARB Verification, coupled with a new,realistic pricing, we believe our product will offer economic and environmentaladvantages over competing products and that our customer will enjoy greaterend-user satisfaction than could be achieved with an alternative dual-fueltechnology.   
-  We made afundamental shift in policy redirecting our sales target away from governmentgrants to the private sector. As discussed below, we have significantlyre-priced our kits. We believe our dual-fuel technology now provides an economicadvantage to the end user in that they could increase or decrease their use ofdiesel and/or natural gas depending upon the current market rate. In addition,we believe our dual-fuel technology provides a state-of-the-art solution toreducing harmful emissions. Previously, our marketing strategy depended entirelyupon the conditional sale of our conversion kits to governmental entitiesseeking to reduce air pollution.   
-  We have re-priced ourdual-fuel kits. Previously, our mechanical kits sold inthe range of $6,000 - $8,000 and our electronic kits have sold in the range of$7,000 - $9,000. The conventional market price for competitive products rangesin the $2,000 to $5,000 range. The extra costs associated with our formerpricing were necessary because of many one-time programming and design expensesthat we incurred in developing a particular engine family. However, we alsobelieve this former pricing structure has been a significant obstacle to sales,particularly any sales in quantity. We have now re-priced both our mechanicaland electronic kits in the $3,500 to $5,000 range. We believe this adjustmentexpands the universe of realistic selling opportunities.   
-  We are operating under an agreement with BAF Technologies which, among otheritems, requires the minimum sale of 100 kits during this calendar year to retainexclusivity. BAF Technologies has provided strong leadership and has handled ourproduct during some difficult periods. To date (August, 2004), BAF Technologieshas sold 15 of our kits.  
-  We are operating under a Distributorship Agreement with DRV Energy, Inc. ("DRV").Under the terms of the Distributorship Agreement, for a twelve month period, DRVshall be the sole distributor of our technologies in the states of Oklahoma,Kansas, Alabama, Arizona and Wisconsin and/or for vehicles that will be taggedin any of these states. DRV is entitled to a fixed price of $4,500 per kit FOBour facilities in Atlanta, Georgia. DRV is scheduled to purchase a minimum of 40kits during this twelve month period to retain their exclusivity within thedesignated territories. The twelve month period is to commence immediately uponreceipt of EPA/CARB verification. We anticipate we will receive our verificationreport approximately September, 2004.   
-  During June 2004, we launched the first in a series of Product Bulletinstargeting the South American market. Our internal research indicates that thecombination of cost and availability of Natural Gas as compared to diesel in most SouthAmerican markets coupled with the affordability of our new pricing structure andthe reasonable proximity of delivery combine to make South America an attractivearea for our Company to expand into exporting our technology beyond thecontinental United States. As a result of our testing the waters in SouthAmerica, we are now in discussions with a number of prospective purchasers andwe are scheduled to conduct two demonstrations of our technology in the countryof Bolivia during the fourth quarter of this year.  

***Our Conversion Systems***

Our conversions systems (Mechanical and Electronic) are operated by a centralcomputer controller, which makes it an electronically closed loop system. Whenthe hardware is installed and calibrated, the vehicle retains the desirablecharacteristics of efficiency and dependability normally associated with thediesel engine cycle. This is accomplished by retaining the high compressionratio of the diesel cycle and using the compression ignition of diesel fuel as apilot ignition for the natural gas. Through electronic control of natural gasand diesel fuel, the horsepower of the combined fuels matches that of the dieselalone without any temperature increase in the cooling or exhaust systems. 

While operating in the dual fuel mode, natural gas is supplied to the engine airinlet manifold through electronic natural gas injectors. Diesel fuel is reducedto a minimum by controlling the fuel shut off lever (the governor rack) on thediesel injection pump. Various sensors provide feedback to the centralcontroller regarding engine load, speed, exhaust temperature, and gas and dieseluse. The controller automatically adjusts the fuel supply and ratio based on abuilt in algorithm on engine performance to meet the changing speed and loadconditions of the vehicle. A ratio of 85% natural gas and 15% diesel is thetargeted blend ratio. The engine can be switched from dual fuel operation to100% diesel fuel operation in the event that the compressed natural gas supplyis depleted. No internal modifications are required to the basic four-cyclediesel engine. *The Hardware to our Conversion Systems*

The main items in the electronic engine conversion systemare the computercontroller, gas air mixer, natural gas injectors, injector manifold, pressureregulator, safety lockoff, pressure sensors, exhaust thermacoupling and wiringharness. Additional components for the mechanical engine are throttle positionsensor, motor drive unit, magnetic pickup and coolant temperature switch. Thedigital controller or ECU is required for vehicles with electronic engines ormechanical engines. The programming for the digital ECU is designed for eachengine family, electronic or mechanical. 

The entire process follows the pre-programmed power curve and torque curve ofthe engine, as designed by the engine original equipment manufacturer. Theinformation is contained in a programmable read only memory (PROM) chip in thecontroller. This feature makes the HFS generic dual fuel conversion systemstand-alone from other dual fuel conversion packagespresently on the market. 

The HFS system constantly adjusts the ratio and flow of natural gas and dieselaccording to the vehicle load and speed, thereby operating more efficientlythroughout the entire load curve. This mode of operation also results inimproved emissions reductions over the entire load curve. The central computercontrol unit is patented. Safety features are also built into the controllerthat will return the system to 100% diesel fuel operation if exhaust gastemperatures exceed recommended levels. This eliminates the unlikely possibilityof engine damage caused by natural gas fuel.*Essential Components Not Supplied by the Company*

The additional components required to convert a vehicle to utilize natural gasare provided by the company who completes the entire conversion. These are " offthe shelf." inventory items used in any vehicle to be converted, whether it has adiesel or a gasoline engine. By far, the most costly items are compressednatural gas cylinders, also referred to as tanks. They can range in price from$300 - $1500 US depending on size and type. The number of tanks installeddepends on the desired range before refueling, available space, and cost. Theleast expensive cylinders are made entirely of steel; they also weigh the most.Thin-walled steel or aluminum cylinders are available which are either partiallyor entirely wrapped in layers of polymers and epoxy or carbon fiber and epoxy.The most expensive cylinders are full carbon fiber composites offering a reducedweight advantage. No matter which cylinder type is selected, they must bemounted on special brackets that are then strategically installed in thevehicle.

If a liquefied natural gas fuel storage system is used in the conversion of aheavy-duty vehicle, this also has a high cost impact. Each vehicle requires afueling receptacle that allows either liquefied or compressed natural gas toenter the vehicle's fuel storage system. The connection for refueling willautomatically shut off the natural gas flow when the storage system is full.Stainless steel tubing carries compressed natural gas throughout the vehicle'sfuel system with connection points made with specific fittings for theapplication. For safety purposes, a main manual gas shutoff valve is alsoinstalled on the vehicle. ***Key Features of Our Digital Fuel System***

Our Digital Fuel System involves essentially two parts consisting of hardwareand an electronic control unit. The Digital Fuel System is capable of being usedwith various engine families made by different manufactures with only minormodification to the electronic control unit, which can be accomplished with a CDRom or floppy disk. 

-  Closed-Loop System. There are two types of dual fuel systems in use: open-loopand closed-loop. Our dual fuel system is a closed-loop system. This means thatthe fuel flow controller monitors engine operating parameters and, based on theinput it receives, it adjusts the gas/air and diesel fuel mixtures as necessaryto create the optimum engine performance for the load at the time. Since it is acomputer controlled system, it makes continuous changes to the percentages ofnatural gas and diesel entering the cylinder during the intake cycle. In anopen-loop system, as used by certain of our competitors, the natural gas todiesel fuel mixture is pre-set, usually at approximately 40% gas and 60% diesel.The engine receives this ratio at all times, without regard to engine speed orload. Incomplete combustion is very common with this type of system, whichcauses an overall increased fuel consumption, engine knocking, and reduced powerperformance.   
-  Compressed Natural Gas vs. Liquefied Natural Gas. Our Digital Fuel System isable to operate using either compressed natural gas or liquefied natural gas. Ingeneral, compressed and liquefied natural gas differ only in their method ofstorage. Once they leave their storage vessels and are presented for insertioninto the engine's fuel flow, both are in a gaseous state.  

Currently, liquefied natural gas is generally the preferred form of fuel inheavy-duty vehicles. In liquid form, the gas requires less space to hold and itstanks put less weight onto the vehicle than does compressed natural gas. Becausethe liquefied natural gas dealer brings the gas to the fleet site as frequentlyas needed, there is no supply constraint. It is possible, though, thatcompressed natural gas filling stations might proliferate making these moreeasily accessible than is presently the case. ***The Market***

Our Digital Fuel System can be applied to medium and heavy-duty diesel enginevehicles through an after-market conversion enabling the use of up to 80%natural gas (liquefied or compressed) as the primary fuel while retaining theremaining percentage of diesel fuel. Diesel engines have been in use worldwidefor many years. Previously, there was no economic incentive to utilize ourtechnology. Our marketing thrust was principally to governmental agencies whoreceive grants to reduce pollution. We now intend to vigorously pursue amarketing strategy that seeks to establish our footprint in population centerswhere the cost and availability of Natural Gas is substantially more inexpensivethan diesel. 

In our opinion, South America provides the best near-term opportunity to createsales through the economic advantages of our technology. We developed thisopinion based solely on our internal research and we do not have any formalfeasibility or marketing studies to confirm our opinions. According to ourmarketing analysis, the South American market has a large amount of inexpensivenatural gas in some cases as low as $.50/diesel-equivalent gallon. While we arecurrently seeking entry points throughout the South American market, Bolivia inparticular exemplifies the basis of our marketing strategy.

We intend to market our dual-fuel technology as an economic advantage to the enduser. In keeping with this fundamental position, we sought to identify thoseareas of the world where Natural Gas offered the best economic opportunity forengines dedicated to diesel fuel. In our marketing analysis, we alsoincorporated factors such as geographic proximity to our US facilities, importduties of targeted areas, local manufacturing capabilities, governmentwillingness and cooperation and private sector need. While there are many areasin Central and South America which fit within our criteria, the nation ofBolivia, at present, is a high-value target insertion point for our technology. 

We began during June 2003 to issue a product bulletin once a week announcing ourentry into the South American market place. While we received interest fromseveral points, parties in the nation of Bolivia were the most responsive. Weare currently in discussions with several private sector companies in Bolivia wehave been invited to place our technology on demonstration at a major University  in the nation of Bolivia. The college hasoffered to pay all of our expenses and we believe this demonstration will allowus to showcase our product in a local setting. We anticipate such ademonstration would occur in the fourth quarter of 2004. *Natural Gas*

Natural gas is one of several fuels that can help ease our dependence onimported petroleum for transportation. Extracted from underground reservoirs,natural gas is a fossil fuel composed primarily of methane, along with otherhydrocarbons such as ethane, propane, butane and inert gases such as carbondioxide, nitrogen and helium. 

Its composition varies and depends on its source. Natural gas is distributed inan extensive pipeline system after it is cleaned and purified and an odorant isadded. The United States is one of the world's largest producers and consumersof natural gas. The fuel accounts for about one quarter of the energy consumedin the United States, primarily in the industrial, residential, commercial andelectric utility sectors. The transportation sector consumes only three percentof our natural gas, primarily to power compressors on natural gas pipelines. 

Interest in using natural gas as a transportation fuel has increased in recentyears, particularly in urban areas, for two main reasons. First, natural gasburns cleanly, emitting little carbon monoxide or reactive gases that pollutethe air. Second, our nation has very large resources of natural gas, so thisfuel can help us reduce our dependence on foreign oil at a competitive cost.Converting as little as ten percent of America's 200 million cars and trucks tonatural gas can reduce oil imports by 570 million barrels each year or about 20percent of our imports. 

Most gasoline-powered cars and trucks can be converted to operate on compressednatural gas or liquefied natural gas in either a single-fuel natural gas only ora dual-fuel either gasoline or natural gas configuration. Modifications includechanges to the fuel delivery and carburetion systems. Diesel vehicles can alsobe converted to use either diesel fuel or natural gas in a dual-fuelconfiguration. 

The physical and chemical properties of natural gas provide good performance inthese modified vehicles. Natural gas has a higher octane number than gasoline.In addition, because it is introduced into the engine as a gas rather than as aliquid that must first be vaporized natural gas can provide quicker cold startswith lower emissions. 

Natural gas vehicles are refueled at stations specially designed to delivercompressed or liquefied natural gas. Compressed natural gas stations use eitherthe " slow-fill." or " fast-fill." methods. Slow-fill stations are simpler in designand less costly than fast-fill stations, but they take several hours to refuel avehicle in comparison to the two-five minutes associated with fast-fillstations. Liquefied natural gas stations require cryogenic storage vessels tomaintain the natural gas in a liquid state and refueling times are comparable tothose of conventional gasoline stations. Liquefied natural gas vehiclesgenerally provide a longer driving range between refuelings than compressednatural gas vehicles; however, the driving range of both is shorter than that ofgasoline-powered vehicles because of the lower energy density of natural gasfuels. 

Today, more than 30,000 natural gas vehicles are in use in the United States andnearly a million operate worldwide. Most of these are compressed natural gasdual-fuel vehicles. Public and private fleets are especially good candidates fornatural gas conversion because of their relatively short driving ranges andcentrally located refueling facilities. Transit authorities are also introducinghundreds of natural gas buses into their urban transportation systems. TheAmerican Gas Association projects that there will be 11 million natural gasvehicles on the road by 2010. 

Advantages of natural gas include that it can be used directly as it is takenfrom the ground, while other fuels must be refined. It has an octane rating ofabout 130 as compared to 90 for gasoline and costs less on a per-gallonequivalent basis than gasoline or diesel. Natural gas leads to reduced enginemaintenance and to longer engine life. In general, natural gas vehicles burn 80percent cleaner than conventional vehicles. 

However, there are several disadvantages to using natural gas as well. Naturalgas occupies about four times the space of an energy equivalent of gasolineresulting in added weight and space of fuel storage tanks. New fuel tanks andsome fuel system modifications are required on retrofits. At the present time,there is limited availability of refueling stations and natural gas vehiclesexperience a shorter driving range between fill-ups.*Application*

Due to the weight and size of the on-board gas tanks, larger diesel vehiclessuch as trucks, buses and heavy goods vehicles are best suited to a natural gasconversion. *Environmental benefits*

Natural gas is mainly comprised of methane (CH4). It can significantly reduceoxides of nitrogen (NOx) emissions and particulate matter (PM) compared withdiesel in certain applications. 

An additional advantage over the diesel engine is the very low enginecombustion noise. This feature makes natural gas particularly suitable forvehicles operating in noise-sensitive locations (refuse vehicles, night timedelivery vehicles). *How it works*

Natural gas vehicles either have a dedicated gas engine or they are dual-fuel,which means they burn diesel and natural gas simultaneously in the engine.Engines can operate on either compressed natural gas (CNG) or liquefied naturalgas (LNG), both of which are available road fuels in the UK. 

LNG requires different, insulated (cheaper) fuel tanks and can deliver betterrange. There is currently limited availability of refueling facilities foreither of the fuels, though the national gas infrastructure makes thedevelopment of depot-based refueling facilities a feasible option formedium-scale projects. 

Both stoichiometric and lean-burn combustion engines can run on natural gas. Theformer, in conjunction with a three-way catalyst, will deliver lower emissionsof NOx, while the latter will deliver better power, torque and fuel economy.Durable methane catalysts are also emerging which can give very low totalhydrocarbon emissions at the tailpipe.***Competition***

There are relatively few alternative systems for converting medium andheavy-duty diesel engines to natural gas. The competing systems offered by thecompetitors described below are more expensive than our technology or arelimited in their application to specific engine lines. 

-  *IMPCO Technologies, Inc.*  IMPCO,which has headquarters in Cerritos, California, is one of the largest and oldestdesigners and manufacturers of hardware for converting internal combustionengines to natural gas and propane. As of July, 2002, the company had 510employees, of which 354 were directly involved in the design, manufacture andsale of conversion technologies.  

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IMPCO has developed a system for converting diesel engines to natural gas whichit is marketing, principally in Europe, as " Eclipse.". This system differs fromour system in that the internal components of the engine are extensivelymodified and conversion systems are available for relatively few engines. The" Eclipse." system conversion costs for a typical truck are reported to exceed$50,000 US, a price which does not allow most customers to recover theconversion costs within 12 to 24 months.

-  *Clean Air Power*formerly " Clean Air Partners.", is a SanDiego, California-based joint venture, operating since 1991, which developssystems which enable diesel engines to use natural gas in a dual fuel mode. Thecompany has a " dual fuel." system which shares several features with ourtechnology. The Clean Air Power systems are marketed and services through thedistributorships and service facilities of Caterpillar, Inc.  

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Like the IMPCOEclipse technology, the Clean Air Power system technology has the advantages ofa capable corporate technological development effort and an extensive marketingand servicing network. However, these systems require extensive internal enginemodifications, are available only for certain Caterpillar engines series, andare more expensive than most customers can justify on the basis of immediatefuel savings. We believe the decision to change the entity name to Clean Air Power in partreflects a change in emphasis toward stationary engine power generation systems,where more expensive conversion systems are more easily justified.

-  *Westport Innovations Inc.*  Westport is a publicly traded company based inVancouver, British Columbia, which develops natural gas operating systems forCummins diesel engines. The company's " Westport-Cycle." engines are not designedfor retrofit markets and like the IMPCO and Clean Air Power systems, arecurrently out of the price range of most prospective customers  
-  *The Innovative Technology Group, Corp.* (ITG) located in Fort LauderdaleFlorida offers an open loop conversion system retrofit for all brands of diesel engines, anysize, at any location, without spark plugs, to fumigation natural gas/dieseldual fuel operation. Diesel fuel is reduced by as much as 80% to become a pilotignition source for low pressure natural gas which enters the engine withcombustion air. Diesel engines can be retrofitted, in the field. If gas is lost,the engine automatically reverts to full diesel fuel until gas is restored. ITGdoes not sell engines but converts engines sold by others. 

***Technology Verification***

In order to qualify for U.S. Federal and state grants and tax benefits, thereduction in polluting emissions that result from the Digital Fuel System mustbe verified by independent testing agencies, and approved by the EPA/CARB.Moreover, we will need to certify each engine family with respect to which weintend to market the Digital Fuel System. An " engine family." is generally onemanufacturer, displacement, or horsepower type of engine, and the same enginemodel may be considered a different " family." in different manufacturing years.We may also be required to obtain separate engine certification depending uponwhether an engine has an electric ignition or a compression ignition. 

We currently have CARB verification for our Mechanical Fuel System on oldermodel-year four-stroke heavy-duty vehicles 1993 and older excluding thoseequipped with self-compensating or electronic fuel pumps. We intend to verifyour Digital Fuel System with respect to as many engine families as our financialresources will permit, beginning with the most popular engines. We expect thatthe cost to certify an engine will generally be between $50,000 and $75,000.Testing requires about 30 days, including set up and tear down. TheEnvironmental Protection Agency typically issues reports of the results andcertifications within 60 days following the testing. *Status of Current Verification*

During the week of June 21, 2004 we completed a six-month intensive developmentproject in Texas and shipped our engine and equipment to an EPA/CARBverification facility in California, Essentially, testing protocol envisions aset-up phase followed by a series of measurements followed by a 1,000 houroperating period during which further measurements are taken. Following the1,000 hour period, the same measures taken initially are repeated and compared.We estimate this portion of the verification process will take approximatelyeight weeks. 

Upon completion of the eight week period, (approximately September 1, 2004), theraw data collected is compiled into a report which is then submitted to the EPA/CARB.Approximately four weeks following the delivery of the final report, the EPA/CARBwill issue a letter indicating the success or failure of our verification. *Manufacturing & Inventory*

We currently utilize contract manufacturers for key components of the Mechanicaland Digital Fuel Systems and assemble the components in-house. In order tooperate converted vehicles on natural gas, natural gas storage tanks must beinstalled on the converted vehicle. We do not include gas storage vessels in ourconversion kit. The customer purchases these separately from a number ofcompanies who manufacture them, or from us at the customer's request. 

Our present capacity would allow us to assemble up to 20 kits per month. We arecurrently interviewing ISO 9000 manufacturing facilities in anticipation of aramp up in demand following our verification. Our kits consists of essentiallytwo parts: The off the shelf components widely available and the computer chipthat is programmed to a particular engine family and specific conditions of theend user. As the programming of the chip is the brains of the technology, wewould continue to program all chips in house. *Regulatory Environment*Environmental Legislation Effecting the Demand for Natural Gas Vehicles

In addition to thefact that diesel gas is generally more expensive than natural gas, one of theprimary disadvantage of a diesel engine is that it emits far more pollutantsthan its gasoline-fueled counterpart. Diesel exhaust contains particulatematter, visible as soot that contains unburned and partially burned fuel. Thesehydrocarbon emissions are a significant contributor to air pollution and tohuman respiratory system difficulties. Also of significance is the fact thatdiesel fuel combustion produces Nitrogen Oxides (NOx), a toxin that is harmfulto humans and the environment. NOx is a major known contributor to greenhousegas formation resulting in global warming.

Increasingly, federal,state and local environmental legislation is being enacted which either require,or provide incentives, for the reduction of vehicle pollutants. For example, theFederal Clean Air Act was amended in 1990 (the "1990 Amendments") to, amongother things, set emissions standards for stationary and mobile pollutantsources and establish targets, standards and procedures for reducing human andenvironmental exposure to a range of pollutants generated by industry in generaland transportation in particular. Among other mandates, the 1990 Amendmentsrequire businesses that maintain centrally fueled fleets of 10 or more vehiclesin certain heavy smog locations to convert, either through new vehicle purchasesor by converting existing vehicles, a portion of their fleet to clean burningalternative fuels. These laws specifically include the diesel and natural gasdual fuel system as an alternative fuel and specify actions that fleet operatorsmust take in order to comply and timetables for doing so.

Similarly, the EnergyPolicy Act of 1992 (the "Energy Act") was created to accelerate the use ofalternative fuels in the transportation sector. The Energy Act mandates theschedule by which Federal, state and municipal vehicle fleets must incorporatealternative fueled vehicles into their overall vehicle mix. This has significantramifications for the military, which operates thousands of diesel vehicles, andfor the state departments of transportation, which operate tens of thousands ofdiesel powered dump trucks and related highway service and repair vehicles, plusthe tens of thousands of vehicles operated by the private contractors whosupport these agencies.

In addition to theforegoing, a variety of legislative and related incentive programs relating toalternative fuel vehicle programs have been created, including:

> -  Clean Cities Program.Created by the Department of Energy, the Clean Cities Program coordinatesvoluntary efforts between locally based government and industry to acceleratethe use of alternative fuels and expand the alternative fuel vehicle refuelinginfrastructure. Grants are available for natural gas fueling stations andvehicle conversions to natural gas. Typical grants offset the cost of conversionby as much as 80%.  
-  Alternative FuelVehicle Credits Program. Congress created this credits program to encouragefleets to increase the number of alternative fuel vehicles in their fleets earlyand aggressively. Credits are allocated to state fleet operators and coveralternative fuel provider fleet operators when alternative fuel vehicles areacquired over and above the amount required, or earlier than expected. Sincecredits can be traded and sold, fleets have the flexibility to acquirealternative fuel vehicles on the most cost-effective schedule.  
-  State Energy Program.States will promote the conservation of energy,reduce the rate of growth ofenergy consumption, and reduce dependence on imported oil through thedevelopment and implementation of a comprehensive State Energy Program. TheState Energy Program is the result of the consolidation of two Federalformula-based grant programs - the State Energy Conservation Program and theInstitutional Conservation Program. The State Energy Program includes provisionsfor financial assistance for a number of state-oriented special projectactivities. These activities specifically include programs to accelerate the useof alternative transportation fuels for government vehicles, fleet vehicles,taxis, mass transit, and individuals' privately owned vehicles. 

*Employees*

As of December 31, 2003, the Company employed 7 persons and one technicalconsultant on a full-time basis, of which 3 were engaged in research anddevelopment and 5 were engaged in administrative, clerical and accountingfunctions. WhiteKnight provides our Chief Executive Officer, Chief OperatingOfficer and certain marketing and internet support. We believe that ourrelationship with our employees is good and we are not a party to any collectivebargaining agreement. *Intellectual Property*

Our success depends to a great extent on our ability to protect our intellectualproperty. We license our core intellectual property pursuant to a licenseagreement. We rely primarily on a combination of copyright and trade secretprotection together with the protections under the Licensing Agreement andnondisclosure and confidentiality agreements to establish and protect ourproprietary rights. The patent protection afforded to our licensed intellectualproperty is uncertain and may involve complex legal and factual issues. We havefurther negotiated a Proposed License Agreement relating to our technology. (SeeRelated Transactions). *Reports to security holders*

We are required to deliver an annual report to security holders which report isto include audited financial statements. We are further to provide periodicquarterly reports which include our financial statements. You may read and copyany reports we filed with the Securities and Exchange Commission (SEC) throughthe SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.20549. You may obtain information on the operation of the Public Reference Roomby calling the SEC at 1-800-SEC-0330. We filed our reports with the SECelectronically and the SEC maintains an Internet site that contains reports,proxy and information statements, and other information regarding our company.You may visit the SEC site at http://www.sec.gov. You can visit our internetwebsite http://www.hybridfuelsystems.com.**Item two - *Description ofProperty***

We lease 1,500 square feet of manufacturing/office space from our SeniorTechnical Consultant at a rate of $1,500 per month on a month-to-month basis.**Item three - *Legal Proceedings***

On November 14, 2003, Ambac International Corporation (" Ambac.") filed a lawsuitseeking $109,915.60 together with interest at the rate of 15% per annum. Thesuits stems from a contract for delivery of certain parts for use in themanufacturing of our kits. We maintain the parts were delivered substantiallypast the date of anticipated delivery and that the parts when received weredefective. Subsequently we filed a response on December 22, 2003. Ambacsubsequently made a motion for default judgment because the statutory period tofile a response was 30 days and our response was filed in 35 days. Further, theresponse was submitted by a " non-attorney." which is alleged to be a furtherviolation of South Carolina civil procedure. Our CFO filed the response during2003 at the direction of our then-Chief Executive Officer. 

On August 3, 2004, we filed a Motion to Dismiss or, in the Alternative, Motionto Compel Arbitration. In our filing, we maintain the State of South Carolina,County of Richmond, lacks personal jurisdiction over this matter. We intend tovigorously defend our position and believe we will ultimately prevail. However,there can be no assurance that we will prevail and in the event we were to notprevail, we could be required to pay the amount of the suit, plus interest andassociated fees. We do not believe the loss of this litigation will have amaterial effect on our ability to execute our business mission. The full amountof the liability has been recorded as a payable in our financial statements asof December 31, 2003. 

There isno other pending litigation or other proceedings against the Company.  **Itemfour - *Submission of Matters to a Vote of Security Holders***

Since January 2001, there have been no matters submitted to a vote of securityholders.

**PART II**

**Itemfive - *Market for CommonEquity and Related Stockholder Matters***

Our securities are traded on the " pink sheets."  under the trading symbol " HYFS.".Previously our securities traded under the trading symbol " SOEI.".  BetweenApril 2001 and May 2002 our common stock was quoted on the OTC ElectronicBulletin Board maintained by the National Association for Securities Dealers,Inc. (the " OTC Bulletin Board."). Our securities were delisted from the OTCElectronic Bulletin Board on May 23, 2002 due to the Company's failure to filethis annual report on Form 10-KSB in a timely fashion. As a result the companycurrently trades on the Pink Sheets. With the filing of this Form 10KSB andour subsequent quarterly reports on Form 10QSB, we intend to seek a relisting onthe OTC Electronic Bulletin Board. 

The following table sets forth representative high and low bid prices bycalendar quarters as reported in either the OTC Bulletin Board or the PinkSheets during the last two fiscal years. The level of trading in the Company'scommon stock has been limited and the bid prices reported may not be indicativeof the value of the common stock or the existence of an active market. The OTCmarket quotations reflect inter-dealer prices without retail markup, mark-down,or other fees or commissions, and may not necessarily represent actualtransactions.

>    Ask Price  Bid Price **2002**    First Quarter $      0.06         $      0.08         Second Quarter $      0.06         $      0.08         Third Quarter $      0.04         $      0.09         Fourth Quarter $      0.06         $      0.09            **2003**    First Quarter $      0.03         $      0.09         Second Quarter $      0.06         $      0.09         Third Quarter $      0.05         $      0.08         Fourth Quarter $      0.06         $      0.08        

As of July 30, 2004, there were 12,163,646 shares of our common stockoutstanding, 42,216.15 shares of Series A Preferred Stock (which are convertibleinto an aggregate of 526,304 shares of common stock), and 195,209.52 shares ofSeries B Preferred Stock (which are convertible into 2,272,238 shares of commonstock).*Shareholders*

As of July 2004, the number of holders of record of our common stock was 76 withany shares held by persons or companies in street or nominee name counted onlyunder such street or nominee name. *Dividends*

We have not paid any cash dividends in the past and have no present intention ofdoing so. Payment of future cash dividends will be determined from time to timeby our Board of Directors, based upon its future earnings (if any), financialcondition, capital requirements and other factors, the company is not presentlysubject to any contractual or similar restriction on its present or futureability to pay such dividends, except that the Company cannot pay dividends onits common stock unless a dividend is paid on the outstanding Series A andSeries B preferred shares on an as-converted basis.*Recent Sales of Unregistered Securities*

During July 2003 we issued 100,000 of our common shares for conversion of aconvertible Note and 50,000 shares for an agreed upon settlement. Another 50,000of common stock was issued in August 2003 to complete the agreement. **Itemsix - *Management's Discussion and Analysis or Plan of Operation***

The following discussion and analysis provides information which managementbelieves is relevant to an assessment and understanding of the results ofour operations and financial condition. The discussion should be read in conjunctionwith the audited consolidated financial statements and notes thereto.

*2002 and 2003*

Since 1996, we have sought to commercialize our dual-fuel technology withlimited success. For the years ended December 31, 2002 and 2003, we experienceda substantial slow-down in our operational state due principally to undercapitalization. The following compares our performance during this two-yearperiod. However, we do not believe the following changes to our operatingposture are indicative of our future business.

For the years ended 2002 and 2003, our revenue from product sales increased by86.95% from $123,702 to $231,269 and our cost of product sales decreased 31.89%from $111,467 to $75,915, respectively. Overall, our total revenues during thisperiod increased 1,169% from $12,235 at December 31, 2002 to $155,354 atDecember 31, 2003.

During this period, our losses from operations decreased 23.04% from ($670,111)to ($515,689) which encompasses a 36.99% decrease in consulting fees, a 100%decrease in research and development and a 12.60% decrease in compensation aswell as a 3.43% increase in other expenses. 

During this period, we further incurred an 82.60% decrease in the value of ourinventory, and a 123.65% increase in our interest expense. 

Overall, our net loss decreased 44.19% from ($741,575) at December 31, 2002 to($418,820) at December 31, 2003. 

We have no off-balance sheet items connected with our Company or our operations.

*2004 and certain expectationsfor 2005*

We are encouraged  by our progress during the first six months of 2004 toget our technology back on track. We dedicated six months at a facility in Texascompleting the development cycle of our Digital System and we are currentlyengaged in verification of our technology at an EPA/CARB lab in California. Weare also encouraged by the market potential for our product in light of ourability to drastically lower our costs through more efficient manufacturing andto a greater extent, because we've finished the research cycle of the DigitalSystem. Prior to January 2004 we priced our kits in the $6,000 - $8,000 rangebecause we were incurring certain one-time development charges. We estimate thecosts of our kits following verification will range between $2,500 and $3,000.

We are further encouraged by the market potential for certain foreign markets,particularly South America. We have described in detail in other portions ofthis report our current marketing thrust in the nation of Bolivia. During thepast several years with improvements in technology, there have been discoveriesof large amounts of natural gas in the nation of Bolivia. According to ourinformation, the nation of Bolivia has deposits of natural gas estimated to besecond only to those found in Argentina. Also according to our information, thenation of Argentina accounts of in excess of 1 million converted vehicles whilethe nation of Bolivia accounts for slightly more than 15,000. The recentdiscoveries of natural gas in Bolivia price that commodity at approximately$0.50 per diesel gallon equivalent. Our information indicates that in-the-tankdiesel in Bolivia costs approximately $1.40 per gallon. Into this dynamic ofdrastically reduced costs of fuel coupled with an overabundant, local supply, weintend to introduce our new pricing. 

During 2002 and 2003, our liquidity was limited to small amounts of financingprovided on a sporadic basis principally from friends and family. 2003 we woulddescribe as a period of survival. During December 2003 we engaged White KnightSST, Inc. to manage our company and provide operating capital. As of July 302004, White Knight has provided $550,000 The President of White Knight has alsoserved as our Chief Executive Officer since December 2003. White Knight'soriginal agreement obligated that company to provide up to $250,000 in operatingcapital. That agreement was recently amended and White Knight has committed upto $800,000. However, White Knight has expressed their intent to further amendour agreement if necessary to provide up to $1,500,000. We believe that ourcurrent and anticipated sales together with financing provided by White Knightwill be sufficient to ensure we can continue our operations for the foreseeablefuture. 

**Risk Factors**

The Company's liquidity, capital resources, and results of operations indicatethat an investment in the Company remains speculative, involves a high degree ofrisk, and should not be made by persons who cannot afford the loss of theirentire investment. Prospective investors in the Company should carefullyconsider all of the information contained in this Report before deciding whetherto purchase securities of the Company, and, in particular, the factors set forthbelow.

*We Have A History Of Losses And May Never Achieve Profitability.*

We have incurred net losses since our inception. At December 31, 2003, ouraccumulated deficit was $5,808,933 We anticipate that we will continue to incuradditional operating losses in the near term. Our losses to date have resultedprincipally from expenses incurred in our research and development programs,including beta testing, and from general and administrative and sales andmarketing expenses. We cannot assure you that we will attain profitability or,if we do, that we will remain profitable on a quarterly or annual basis in thefuture.*Our Limited Success Makes It Difficult To Analyze Our Prospects For FutureSuccess.*

We were organized on April 1, 1996 and have conducted only limited operations todate, consisting of negotiating the license to use the patents, further researchand development, including beta testing, and limited sales efforts. Noassurances can be given that we will develop a marketing and sales program whichwill generate significant revenues from the sales of our dua l fuel conversionsystems. The likelihood of our success must be viewed in light of the delays,expenses, problems and difficulties frequently encountered by an enterprise inits development stage, many of which are beyond our control. We are subject toall the risks inherent in the development and marketing of new products.*Technological Change May Make Our Products Obsolete Or Difficult To Sell At AProfit.*

To date, the market for alternative fuel technology systems and equipment hasnot, to our knowledge, been characterized by rapid changes in technology.However, there can be no assurance that new products or technologies, presentlyunknown to management, will not, at any time in the future and without warning,render our dual fuel technology less competitive or even obsolete. Majorautomobile and truck companies, academic and research institutions, or others,for example, could develop new fuels or new devices which could be installed atthe original equipment manufacturer level and which could potentially render oursystems obsolete. Moreover, the technology upon which our dual fuel systems arebased could be susceptible to being analyzed and reconstructed by an existing orpotential competitor. Although the Company is the license holder of certainUnited States patents respecting its proprietary dual fuel system, we may nothave the financial resources to successfully defend such patent, were it tobecome necessary, by bringing patent infringement suits against parties thathave substantially greater resources than those available to us. 

In addition, competitors may develop technology and systems that can be sold andinstalled at a lower per unit cost. There can be no assurance that we will havethe capital resources available to undertake the research which may be necessaryto upgrade our equipment or develop new devices to meet the efficiencies ofchanging technologies. Our inability to adapt to technological change could havea materially adverse effect on our results of operations.*We license our proprietary technology from a related third party and suchtechnology may not be adequately protected from unauthorized use by others,which could increase our litigation costs.*

Oursuccess depends to a great extent on our ability to protect our intellectualproperty. Previously, we license our core intellectual property pursuant to alicense agreement between the Company and Electronic Controls Technology LLC ("ECT"). We continue to operate under the old License and have recently negotiated a newProposed License Agreement which is more fully described in the section marked"Related Party Transactions" else where in this report.   Our ability to compete effectively will depend in part on our ability to developand maintain proprietary aspects of our technology and either to operate withoutinfringing the proprietary rights of others or to obtain rights to technologyowned by third parties. Pursuant to the License Agreement and the ProposedLicense Agreement, we have licensedcertain patents from ECT. We cannot assure you that any of our licensedtechnology rights will offer protection against competitors with similartechnology. We cannot assure you that the patents covered by the LicenseAgreement or the Proposed License Agreement will not be challenged, invalidated or circumvented in the future orthat the rights created by those patents will provide a competitive advantage.We also rely on trade secrets, technical know-how and continuing invention todevelop and maintain our competitive position. We cannot assure you that otherswill not independently develop substantially equivalent proprietary informationand techniques or otherwise gain access to our trade secrets.

We cannot assure you that we will not become subject to patent infringementclaims and litigation in the United States or other countries or interferenceproceedings conducted in the United States Patent and Trademark Office todetermine the priority of inventions. The defense and prosecution ofintellectual property suits, interference proceedings, and related legaland administrative proceedings are costly, time-consuming and distracting. Wemay also need to pursue litigation to enforce any patents issued to us or ourcollaborative partners, to protect trade secrets or know-how owned by us or ourcollaborative partners, or to determine the enforceability, scope and validityof the proprietary rights of others. Any litigation or interference proceedingwill result in substantial expense to us and significant diversion of theefforts of our technical and management personnel. Any adverse determination inlitigation or interference proceedings could subject us to significantliabilities to third parties. Further, as a result of litigation or otherproceedings, we may be required to seek licenses from third parties which maynot be available on commercially reasonable terms, if at all.*We Have Limited Manufacturing Experience and Capacity and Will Rely Upon ThirdParty Contract Manufacturers Who Have Not Yet Been Contractually Secured*

To be successful, we must manufacture, or contract with a third party for themanufacture of, our current and future products in sufficient quantities and ona timely basis, while maintaining product quality and acceptable manufacturingcosts. Should we not timely secure a contractmanufacturer, or for some reason we are no longer able to obtain key elementsfrom a supplier, we will not be able to produce or will be delayed in producingconversion kits for sale or distribution, which could cause delays in ouroperation or sales or make continued operation orsales unprofitable.*The Nature of Our Products Subjects us to Product Liability Risks.*

Our product and services relate to fuel system components which handle or comeinto contact with natural gas which is highly combustible. A malfunction of ordesign defect in certain of our products or improper design, construction,installation or servicing of facility and equipment infrastructure could resultin liability, tort or warranty claims. Although we attempt to reduce the risk ofexposure from such claims through warranty disclaimers and liability limitationclauses in our sales agreements and by maintaining product liability insurance,we cannot assure you that these measures will be effective in limiting ourliability for any damages. Any liability for damages resulting from productmalfunctions or services provided could be substantial and could have a materialadverse effect on our business and operating results. In addition, awell-publicized actual or perceived malfunction or impropriety involving ourproducts or service could adversely affect the market's perception of ourproducts in general, regardless of whether any malfunction or impropriety isattributable to our products or services. This could result in a decline indemand for our products and services, which would have a material adverse effecton our business and operating results.*A Public Market For Our Shares May Not Be Sustained And The Price May Fluctuate.*

On May 23, 2002 our stock was delisted from the OTC Bulletin Board as a resultof our failure to file an annual report on form 10-KSB. Our stock is publiclytraded in the "pink sheets" under the symbol "HYFS". The closing bid price as ofJuly 30, 2004 was $0.13. There can be no guarantee that the current price can bemaintained or be expected to increase in value. Further, as a stock traded onthe "pink sheets", purchasers of the shares may have difficulty selling theircommon stock should they desire to do so. *Unless An Active Public Trading Market Develops For Our Securities, You May NotBe Able To Sell Your Shares*

To date, there has been a very limited public market for our Common Stock,.There can be no assurance that an active trading market will ever develop or, ifdeveloped, that it will be maintained. Failure to develop or maintain an activetrading market could negatively affect the price of our securities.*Our Common Stock May be Subject to Penny Stock Regulation.*

The Securities Enforcement and Penny Stock Reform Act of 1990 requires specialdisclosure relating to the market for penny stocks in connection with trades inany stock defined as a "penny stock". Securities Exchange Commission("Commission") regulations generally define a penny stock to be an equitysecurity that has a market price of less than $5.00 per share. These regulationssubject all broker-dealer transactions involving such securities to the special"Penny Stock Rules" set forth in Rule 15g-9 of the Securities Exchange Act of1934 (the "34 Act"). These Rules affect the ability of broker-dealers to sellthe Company's securities and also may affect the ability of purchasers of theCompany's common stock to sell their shares in the secondary market, if such amarket should ever develop. *We May Issue Preferred Stock With Certain Preferences which May Depress MarketPrice Of The Common Stock.*

The Board of Directors may designate additional series or classes of preferredshares without shareholder consent and those designations may give the holdersof the preferred stock, if previously issued, voting control and other preferredrights such as to liquidation and dividends. The authority of the Board ofDirectors to issue such stock without shareholder consent may have a depressiveeffect on the market price of our common stock even prior to any suchdesignation or issuance of preferred stock. 

*Competition From Companies With Already Established Marketing Links To OurPotential Customers May Adversely Effect Our Ability To Market Our Products.*

Current and potential competitors have longer operating histories, largercustomer bases, greater brand name recognition and significantly greaterfinancial, marketing and other resources than we have. Certain of ourcompetitors may be able to secure product from vendors on more favorable terms,devote greater resources to marketing and promotional campaigns, and adopt moreaggressive pricing or inventory availability policies, than we will. There canbe no assurance that we will be able to compete successfully against current andfuture competitors, and competitive pressures faced by us are likely to have amaterially adverse affect on our business, results of operations, financialcondition and prospects.*The Limited Availability Of Alternative Fueling Stations Can Hinder Our AbilityTo Market Our Products.*

Alternative fuel engines have been commercially available in the past; however,the most significant impediment to the growth in the market for alternative fuelvehicles traditionally has been the limited availability of alternative fuelfueling locations (stations) for natural gas and propane. The success of enginesbased on alternative fuels will  be directly affected by the developmentof the fueling infrastructure of the natural gas industry and the widespreadavailability of such fuel sources. In all events, our business and the marketfor alternative fuel vehicles would benefit substantially from the growth of theinfrastructure of the natural gas industry and the more widespread availabilityof alternative fuels. Conversely, our business and the market for alternativefuel vehicles would be substantially hurt by a diminished or lack of growth ofthe infrastructure of the natural gas industry and the less widespreadavailability of alternative fuels.**Item seven - *Financial Statements***

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of DirectorsHybrid Fuel Systems, Inc.

We have audited theaccompanying consolidated balance sheets of Hybrid Fuel Systems, Inc. as ofDecember 31, 2003 and 2002 and the related statements of operations, changes inshareholders' equity, and cash flows for the years ended December 31, 2003 and2002. These financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall consolidated financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all material respects,the financial position of Hybrid Fuel Systems, Inc. and as of December 31, 2003and 2002 and the results of operations and cash flows for the years endedDecember 31, 2003 and 2002, in conformity with accounting principles generallyaccepted in the United States of America./s/ BRIMMER, BUREK & KEELAN LLPBrimmer, Burek & Keelan LLPTampa, FloridaMay 25, 2004 

**HYBRIDFUEL SYSTEMS, INC.BALANCE SHEETSDECEMBER 31, 2003 AND 2002**

> ASSETS  20032002Current assets    Cash $                   6  $                147   Accounts receivable $           10,953  $           11,196   Other receivables $             5,395  $             1,639   Inventories $           12,584  $           19,535   Total Current Assets $           29,938  $           32,517     Property plant &        equipment, net $           15,577  $           25,381     Total assets $           44,515  $           57,898   LIABILITIES AND SHAREHOLDERS' DEFICIT    Current liabilities    Accounts payable $         398,558  $         373,706   Due to related parties $         157,528  $           61,384   Due to related parties,        convertible debt $         179,746  $                  -     Debt in default $         123,272  $         173,646   Convertible debt in        default $         283,200  $           50,000   Sales and payroll taxes        payable $         245,245  $         230,108   Convertible debt $                  -    $         143,200   Other current liabilities $           68,649  $           43,717   Total current liabilities $      1,456,198  $      1,075,761     Redeemable securities $         530,000  $         530,000   SHAREHOLDERS' DEFICIT    Shareholders' deficit  Preferred A stock ( .01        par value; 42,215 shares authorized; $                422  $                422   42,215 shares issued and        outstanding) (liquidation preference    $8,021)  Preferred B stock ( .01        par value; 954,563 shares authorized; $             1,952  $             1,952   195,209 shares issued and        outstanding) (liquidation preference    $1,002,291)  Common stock ($.001 par        value; 20,000,000 shares authorized; $           12,164  $           11,964   12,163,646 and 11,963,646        shares issued and outstanding,     respectively)  Additional paid-in capital $      3,852,712  $      3,832,912 Accumulated deficit $     (5,808,933) $     (5,395,113)  Total shareholders'        deficit $     (1,941,683) $     (1,547,863)  Total liabilities and        shareholders' deficit $           44,515  $           57,898 
 

**HYBRID FUEL SYSTEMS, INC.STATEMENT OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002**
 2003 2002
REVENUES       Product sales   Revenue from product sales $         231,269        $         123,702      Cost of product sales            (75,915)             (95,340)    Total revenues            155,354                     28,362          
EXPENSES       Operating expenses   Consulting fees203,859  317,283 Research and development                    -         33,540 Compensation110,013  146,471 Other operating expenses            201,817                   188,944          Total expenses            515,689                   686,238      Loss from operations          (360,335)           (657,876)    Other expenses (income)   Loss in investment in subsidiary                    -                     303,432      Inventory obsolescence              11,186                     64,306      Settlements               9,227                     15,000      Forgiveness of debt                    -                   (312,369)Interest expense              34,448                     15,402      Other income              (1,376)               (2,072)   Loss from other expenses              53,485                     83,699         Net loss          (413,820)           (741,575)   Basic and diluted loss per share $             (0.03)  $             (0.06)   Basic and diluted weighted average number of          common shares outstanding12,054,742  11,741,317 
**HYBRIDFUEL SYSTEMS, INC.STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002**
 2003 2002 CASH FLOWS FROM OPERATING        ACTIVITIES:     Net loss  $        (413,820)  $        (741,575) Adjustments to reconcile        net income to net     cash provided (used) by        operating activities:     Depreciation                9,804                10,900  Forgiveness of debt                            -              (312,369) Common stock issued for        settlement of debt               10,000                      -    Change in operating        assets and liabilities     Accounts receivable                          243                13,514  Inventory                6,951                93,890  Accounts payable               24,852              122,773  Accrued expenses               29,295                28,699  Related party payable                    106,144              (35,826)      Net cash provided (used)        by operating activities           (226,531)           (819,994)    CASH FLOWS FROM INVESTING        ACTIVITIES:                        -                        -       Net cash provided (used)        by investing activities                     -                        -       CASH FLOWS FROM FINANCING        ACTIVITIES:     Loans to employees               (3,756)               (1,639) Loans from related        parties             179,746                61,384  Payments on notes payable                    (49,600)             (36,338) Payments on litigation        liability                     -                (25,025) Proceeds from convertible        debt             100,000              193,200  Proceeds from the sale of        preferred stock                     -                304,955  Proceeds from the sale of        common stock                     -                118,000  Proceeds from payment of        stock subscription receivable                     -                200,000     Net cash provided (used)        by financing activities             226,390              814,537     Net decrease in cash and        cash equivalents                  (141)               (5,457)    Beginning cash and cash        equivalents                   147                 5,604     Ending cash and cash        equivalents  $                   6   $               147     SUPPLEMENTAL DISCLOSURE        OF CASH FLOW INFORMATION         Cash paid during the year        for interest  $             9,517   $           12,144     Non-Cash investing and        financing activities:       Common stock issued for        settlement of debt $           10,000  0     Common stock issued for        conversion of convertible note $           10,000  0 
**HYBRIDFUEL SYSTEMS, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYFOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002**
 PreferredStock Common Stock  StockTotal** Shares**** Amount**** Shares**** Amount**** **** **** Paid-In****Accumulated****Subscription****Shareholders'****Series A****Series A****Series B****Series B****Shares****Amount****Capital****deficit****receivable****deficit** Balance at     11,313,646 $11,314 $3,412,981 $(4,653,538)     (200,000) $     (1,429,243)  Deceber 31.      2001                     Sale of      Preferred A     45,215       422           99,563  99,985 Sale of      Preferred B   195,209   1,952        203,018  204,970 Payment of      stock                    subscription recvbl              200,000200,000 Sale of common          650,000       650      117,350  118,000  stock for      cash           Net loss                    (741,575) (741,575)           Balance at     45,215 $    422 195,209 $ 1,952 11,963,646 $11,964 $3,832,912 $(5,395,113) $           -   $            (1,547,863))  December 31,      2002                     Stock issued      for          100,000       100         9,900  10,000  legal      settlement           Issuance of      stock              for      conversion of note         100,000       100         9,900  10,000 Net loss             (413,820)            (413,820)           Balance at       45,215 $    422 195,209 $ 1,952 12,163,646 $12,164 $3,852,712 $(5,808,933) $           -   $(1,941,683)  December 31,      2003          
**HYBRID FUEL SYSTEMS, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER 31, 2002 AND 2003**

**NOTE 1 SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

HybridFuel Systems, Inc. (the " Company.") manufactures retrofit systems for theconversion of gasoline and diesel engines to non-petroleum based fuels such ascompressed natural gas. The Company manufactures and sells its systems tocustomers pursuant to a license agreement acquired on June 1, 1996 with arelated party. The Company has exclusive rights to North America, Mexico, Egyptand South America. The license agreement applies to the analog version of thesystem and is being amended to include newer digital versions.*Cash and Cash Equivalents*

Forpurposes of the statement of cash flows, the Company considers all highly liquiddebt instruments purchased with a maturity of three months or less to be cashequivalents.*Accounts Receivable*

Accountsreceivable, are stated at estimated net realizable value. Accounts receivableare comprised of balances due from customers. In determining collectibility,historical trends are evaluated and specific customer issues are reviewed toarrive at appropriate allowances.*Inventories*

Inventories, are stated at the lower of cost or market. Cost is determined usingthe first-in, first-out method. Inventories consist of component parts used inthe manufacture and assembly of retrofit systems for the conversion of gasolineand diesel engines to non-petroleum based fuels such as compressed natural gas.*Property, Plant and Equipment*

Depreciation is provided for using the straight-line method, in amountssufficient to relate the cost of depreciable assets to operations over theirestimated service lives (asset categories range from three to seven years).Leasehold improvements are amortized using the straight-line method over thelives of the respective leases or the service lives of the improvements,whichever is shorter. Leased equipment under capital leases is amortized usingthe straight-line method over the lives of the respective leases or over theservice lives of the assets for those leases that substantially transferownership. Accelerated methods are used for tax depreciation. *Impairment of Assets*

TheCompany's policy is to evaluate whether there has been a permanent impairment inthe value of long-lived assets, certain identifiable intangibles and goodwillwhen certain events have taken place that indicate that the remaining balancemay not be recoverable. When factors indicate that the intangible assets shouldbe evaluated for possible impairment, the Company uses an estimate of relatedundiscounted cash flows. A deficiency in these cash flows relative to thecarrying amounts is an indication of the need for a write-down due toimpairment. The impairment write-down would be the difference between thecarrying amounts and the fair value of these assets. Losses on impairment arerecognized by a charge to earnings. Factors considered in the valuation includecurrent operating results, trends and anticipated undiscounted future cashflows. 

InDecember 2001, the Company, through its wholly owned subsidiary AlternativeEnergy Technologies, Inc. (AET) completed the acquisition of certain assets ofNew York State Electric & Gas Corporation (NYSEG) for approximately $355,000.The transaction was accounted for as a purchase transaction. The aggregatepurchase price consisted of $30,000 in cash, a seller note payable in the amountof $307,800 and expenses of $17,500. The purchase price was allocated to the netassets acquired based upon their respective fair values. An amount of $191,000was allocated to inventories and $146,000 was allocated to equipment with thebalance of $18,300 allocated to goodwill.

Shortlyafter the acquisition, the acquired business required substantial unexpectedoperational funding. As a result of the additional unexpected funding need, theCompany decided to rescind the acquisition and in May 2002 the Company gave backthe assets previously acquired in exchange for cancellation of the unpaidbalance of the acquisition note payable except for $30,000. The net assets ofthe acquired business were charged to expense in 2001 and the additional fundsadvanced in 2002 net of forgiveness of the note payable were charged tooperations in 2002 as an impairment. The subsidiary (AET) formed to make theacquisition was also disbanded in May 2002 with no further activity. In 2001 thebalance on the acquisition note was reflected as a note in default. Upon returnof the assets the parties exchanged mutual releases.*Income Taxes*

TheCompany utilizes the guidance provided by Statement of Financial AccountingStandards No. 109, " Accounting for Income Taxes." (SFAS 109). Under the liabilitymethod specified by SFAS 109, deferred tax assets and liabilities are determinedbased on the difference between the financial statement and tax bases of assetsand liabilities as measured by the enacted tax rates which will be in effectwhen these differences reverse. Deferred tax expense is the result of changes indeferred tax assets and liabilities. Valuation allowances are provided ifnecessary to reduce deferred tax assets to the amount expected to be realized.*Earnings (Loss) Per Common Share*

Earnings(loss) per share are computed using the basic and diluted calculations on theface of the statement of operations. Basic earnings (loss) per share arecalculated by dividing net income (loss) by the weighted average number ofshares of common stock outstanding for the period. Diluted earnings (loss) pershare is calculated by dividing net income (loss) by the weighted average numberof shares of common stock outstanding for the period, adjusted for the dilutiveeffect of common stock equivalents, using the treasury stock method. Thewarrants outstanding were determined to be antidilutive and therefore do notaffect earnings per share.*Use of Estimates*

Thepreparation of financial statements in conformity with generally acceptedaccounting principles, requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at December 31, 2003 and 2002, as well as thereported amounts of revenues and expenses for the years then ended. The actualoutcome of the estimates could differ from the estimates made in the preparationof the financial statements.*Revenue Recognition*

Revenuesare recognized when the merchandise is shipped to the customer, which is whentitle and risk of loss has passed to the customer. *Stock Based Compensation*

TheCompany has adopted the disclosure-only provisions of SFAS No. 123, " Accountingfor Stock Based Compensation.", but applies Accounting Principles Board OpinionNo. 25 and related interpretations in accounting for options issued toemployees. Under Opinion No. 25, the intrinsic method is used to determinecompensation expense when the fair market value of the stock exceeds theexercise price on the date of grant. As of December 31, 2002 and 2003, nooptions had been granted under the plan and therefore no compensation expensehas been recognized.*Research and Development Costs*

TheCompany charges research and development costs to expense as incurred.*Fair Value of Financial Instruments*

TheCompany, in estimating its fair value disclosures for financial instruments,uses the following methods and assumptions:*Cash, Accounts Receivable, Accounts Payable and Accrued Expenses*: Thecarrying amounts reported in the balance sheet for cash, accounts receivable,accounts payable and accrued expenses approximate their fair value due to theirrelatively short maturity.*Long-Term Obligations*: The fair value of the Company's fixed-ratelong-term obligations is estimated using discounted cash flow analyses, based onthe Company's current incremental borrowing rates for similar types of borrowingarrangements. At December 31, 2003 and 2002, the Company did not have anylong-term obligations.*Going Concern*

Theaccompanying financial statements have been prepared assuming the Company willcontinue as a going concern for a reasonable period, not to exceed one year. Asreflected in the financial statements, the Company has incurred significantlosses from operations during the years ended December 31, 2003 and 2002 and hasa significant working capital deficiency as of December 31, 2003 and 2002. Theseconditions raise substantial doubt about the Company's ability to continue as agoing concern. The Company's ability to continue is dependent on increasingsales from existing products and new versions being tested for acceptance in themarketplace. In addition, the Company has been receiving funding from aninvestment source (White Knight SST. Inc.) that has committed to continuefunding its operations through the end of December 31, 2004. That funding hasbeen in the form of loans that is anticipated to be converted into common stockduring the year 2004.

Theaccompanying financial statements do not include any adjustments that mightarise as a result of this uncertainty. Management feels that the possibility ofincrease sales and the continued funding from White Knight SST, Inc. will enableit to continue in business for the next twelve months.**NOTE 2  RELATED PARTY TRANSACTIONS***License Agreement*

TheCompany entered into a licensing agreement collectively with Frank Davis (asignificant stockholder and consultant) and the Davis Family Trust and EngineControl Technology LLC (ECT). The license gives the Company the exclusiverights, to utilize and exploit six patents including marketing and sellingproducts. In addition, the Company has the first option to acquire the licensefor the same patents in other countries where it has not yet been granted. Theunderlying patents were developed by Frank Davis and other family members whoare employees of the Company and have since been assigned to ECT, the owners ofwhich is Patricia Davis.  Patricia Davis is the wife of Frank Davis ourChief Technical Consultant.  

Inconsideration for the license (as amended in 2000), the company issued 250,000shares of common stock and are to pay a royalty based upon the number of theretrofit systems sold. The amount of the royalty has been minimal for the years2003 and 2002 due to the limited amount of sales of the units. 

Inaddition, the Company has a consulting agreement with ECT, whereby ECT is toprovide various technical consulting services for a monthly fee of $13,000.*Leases*

TheCompany currently subleases a building from ECT on a month to monthbasis on the same terms and amount as the primary lease. The monthly leaseamount is $1,500.

TheCompany had a two year, $500 per month, lease agreement with Ricky Davis, (amember of the Davis family, who collectively are significant shareholders) fortwo cargo vans. The lease expired on March 1, 2003 and has not been renewed.**NOTE 3  PROPERTY, PLANT AND EQUIPMENT, NET**

AtDecember 31, 2003 and 2002, property, plant and equipment, net consist of thefollowing:
20032002Machinery and equipment $        63,651       $       63,651  Furniture, fixtures and equipment $          7,461       $         7,461       Vehicles $        46,336       $       46,336  Leasehold improvements $          5,775       $     123,223  Less accumulated depreciation and amortization $     (107,646) $     (97,842)   Total $               16       $       25,381
Depreciation expense charged to operations was $9,804 and $10,900 for the yearsended December 31, 2003 and 2002, respectively.**NOTE 4 - INCOME TAXES**

Incometax expense (benefit) for the years ended December 31, 2003 and 2002 are asfollows: 
20032002  Current income tax expense (benefit) $            -           $           -          Deferred income tax expense (benefit)   net operating              loss carryforward         168,720                   287,490            Change in valuation allowance        (168,720)        (287,490)       Income tax expense (benefit)   $           -           $          -          
Incometaxes for the years ended December 31, 2003 and 2002 differ from the amountscomputed by applying the effective income tax rate of 37% to income beforeincome taxes as a result of the change in the valuation allowance.

Temporarydifferences and carryforwards that give rise to deferred tax assets andliabilities as of December 31, 2003 and 2002 are as follows:

As ofDecember 31, 2003, the Company has a net operating loss carryforwards ofapproximately $4,600,000 that is available to offset taxable income through2023.
          2003          2002            Net operating loss carryforwards           $     2,014,594            $     1,845,874             Valuation allowance           $     2,014,594            $     1,845,874 
**NOTE 5  DEBT IN DEFAULT**

TheCompany did not meet the payment terms on the note payable to Peachtree NationalBank during the years ended December 31, 2003 and 2002. The note is secured byall assets of the Company. The provisions of the note allow for the note tobecome immediately and fully payable upon default of payments. While the bankhad not initiated any remedy actions for the default as of December 31, 2003 or2002, the full balance of the note has been reclassified as a current liabilityfor both years.

TheCompany did not meet the security agreement with Associates CommercialCorporation (Association) for the year ended December 31, 2002. The agreement issecured by a Company vehicle. The provisions of the agreement allow for theliability to become immediately and fully payable upon default of payments.While the Association has not initiated any remedy actions as of December 31,2002, the full balance of the agreement was reclassified as a current liability.During the year ended December 31, 2003, the Company paid the liability in full.

In 1999an independent consultant filed suit against the Company to recover fees anddamages of $125,000 inclusive of interest to December 31, 1999. The consultant'scomplaint originated from a contract to provide personal services and expertise,in the field of diesel and gasoline to natural gas conversions, on a projectthat occurred in 1997 and 1998 in the country of Uzbekistan. The Companycontracted with the consultant at the direction and benefit of another party whowas the primary contractor of the project. Although the Company had defensesagainst the plaintiff and had a recovery claim against the primary contractor,it was management's opinion, supported by counsel, that a loss had beensustained in the period. Accordingly, the Company accrued the loss as prescribedby Statement of Financial Accounting Standards No. 5, Accounting forContingencies. During the fourth quarter of 2001, the Company settled with theindependent consultant for $55,000. The accrued litigation loss was adjusted tothis amount with the credit made to professional and outside services expense.Both parties agreed to a payment schedule for the remaining $55,000. The Companywas to make payments of $5,000 per month until the balance was paid in full infiscal year 2002.

TheCompany paid approximately $45,000 before defaulting on the payments during theyear ended December 31, 2002. As of December 31, 2003 and 2002, the Company owedapproximately $10,000. No actions have been initiated by the creditor for thedefault of payments.

Duringthe years ended December 31, 2003 and 2002 the Company issued convertiblepromissory notes to various individuals and to a corporation. The note to thecorporation was issued at a rate of 6% per annum, payable in a single lump sumof combined principal and interest on October 23, 2002. Any overdue principalbears interest at the rate of 18% per annum and shall be payable on demand. Asof December 31, 2003 and 2002 this note was in default of payment. 

Theconvertible promissory notes to the individuals were issued at various dates ata rate of 6% per annum, payable in a single lump sum of combined principal andinterest on December 31, 2003. Any overdue principal bears interest at the rateof 12% per annum and shall be payable on demand. During the year ended December31, 2003, one of the notes was converted into common shares of the Company. Asof December 31, 2003, the balance of these notes was $233,200. This balance wasnot paid on December 31, 2003 and became in default of payment on January 1,2004. **NOTE 6  COMMITMENTS AND CONTINGENCIES***Operating Leases*

TheCompany has operating leases for certain equipment and vehicles that expire atvarious dates through 2003. Certain leases provided for payment, by the Company,for property taxes and assessments, insurance and maintenance. 

As of theyear ended December 31, 2003, there were no future minimum lease payments due onthese leases. The Company's remaining lease is paid on a year to year basis.

For theyears ended December 31, 2003 and 2002, the Company had a lease agreement with arelated party for two cargo vans. The terms of the lease expired on March 1,2003 As of December 31, 2003, the lease has not been renewed.

TheCompany currently rents its facility from a related party on a month to monthbasis. As of December 31, 2003, rent was $1,500 per month. Prior to October2003, the Company leased another facility, on a month to month basis, from anon-related party. Rent under that agreement was $2,352 per month, plus cost ofliving increases, property taxes and water charges.

Totalrent expense for the years ended December 31, 2003 and 2002 was approximately$33,508 and $44,532, respectively.

TheCompany is delinquent in the payment of payroll and state sales taxes. TheCompany is currently following payment schedules, developed after negotiationswith the taxing authorities. Amounts in arrears for delinquent taxes, along withestimated penalties and interest assessed by the taxing authorities are asfollows, as of December 31, 2003 and 2002
          2003          2002                 Payroll and sales taxes           $        162,739            $        162,739                Penalties and interest           $          82,506            $          67,369              $        245,245            $        230,108 
*Litigation*

TheCompany is, from time to time, involved in litigation relating to claims arisingout of its operations in the ordinary course of business. The Company believesthat none of the claims that were outstanding as of December 31, 2003 shouldhave a material adverse impact on its financial condition or results ofoperations.**NOTE 7  STOCK OPTIONS**

TheCompany's Stock Option Plan (" SOP.") was adopted in 2001 to provide for the grantto employees up to 2,000,000 incentive stock options within the meaning ofSection 422 of the Internal Revenue Code. The SOP, which is administered by theCompany's Board of Directors, is intended to provide incentives to directors,officers, and other key employees and enhance the Company's ability to attractand retain qualified employees. Stock options are granted for the purchase ofcommon stock at a price not less than the 100% of fair market value of theCompany's common stock on the date of the grant (110% for holders of more than10% of the total combined voting power of all classes of capital stock thenoutstanding). As of December 31, 2003 and 2002, no options had been grantedunder the plan.

*Warrants*

TheCompany has issued warrants to purchase shares of common stock to consultantsand other non employees. The company uses the Black Scholes option pricing modelto value warrants issued to non employees. The following table summarizes the Company's warrant activity:
          Number of          Weighted Average           Warrants              Exercise Price              Balance as of January 1, 2002           $         1,935,000            $                 0.70           Additions           -            Exercised           -            Expirations                        -            $                    -               Balance as of December 31, 2002          1,935,000          0.7          Additions          -           Exercised          -           Expirations          -352,500          -0.94            Balance as of December 31, 2003          1,582,500          $0.58 
 
          Warrants          Outstanding           Warrants          Exercisable           Weighted          Weighted             Average          Average           Weighted          Range          Number          Remaining          Exercise          Warrants          Average          of Exercise          Outstanding          Contractual Life          Price          Exercisable at          Exercise          Prices          12/31/2003          (years)          12/31/2003          12/31/2003          Price          $.01 - $.50          1,370,000          2.24          $0.50           1,370,000          $0.50                $.75-$1.00          212,500          1.39          $0.84           212,500          $0.84                $.01-$1.00          1,582,500          2.12          $0.58           1,582,500          $0.58 
**NOTE 8   SHAREHOLDERS' EQUITY**

OnDecember 10, 2001, the Company completed a private placement of 2,600,000 sharesof common stock and warrants to purchase 250,000 shares of common stock for $.50each, to SWI Holdings, Limited (SWI) a Bermuda company for an aggregate purchaseprice of $500,000. Pursuant to the Company's Stock Purchase Agreement with SWI,SWI has the right during the period between December 31, 2003 and June 30, 2004to require the Company to purchase up to 2,500,000 of these shares at a price of$.20 per share ( the Put Option). The Put Option will automatically terminate inthe event that the Company (i) completes a financing of in excess of $2 millionin gross proceeds at an offering price per share of not less than $.40 or (ii)completes a merger or other business combination pursuant to which the commonstock is valued at a price per share of not less than $.40. The company'sobligations under the Put Option are secured by a lien in favor of SWI on all ofthe Company's assets. The value associated with the put option, amounting to$530,000 has been classified as redeemable securities. As of June 30, 2004, thisput option had not been exercised and has therefore become void.*Preferred Stock*

EffectiveFebruary 1, 2002, the Company designated 999,779 shares of previouslyundesignated preferred stock as Series A Preferred Stock, for which 45,216shares are authorized and Series B Preferred Stock, for 954,563 shares areauthorized.

Series APreferred Stock is convertible, at the option of the holder, at any time, intoshares of the Company's common stock as determined by dividing $.19 by aconversion price determined on the date the related certificate is surrendered.The conversion price is subject to periodic adjustment and is initiallyestablished at $.01632. Series A Preferred Stock is automatically convertibleinto shares of the Company's common stock upon (i) the date specified by vote orwritten consent or agreement of holders of at least three quarters of the sharesof Series A Preferred outstanding, or (ii) upon the closing of the sale of thecompany's common stock in a firm commitment, underwritten public offeringregistered under the Securities Act in which the Company receives gross proceedsof no less than $20 million. Series A Preferred Stock has a liquidationpreference of the greater of $.19 per share or the amount that such share wouldbe entitled to upon liquidation or distribution. The Series A Preferred Stockhas voting rights, except as to the election of debtors, equal to the number ofshares of common stock into which the Series A Preferred Stock is convertible.The Series A preferred Stockholders have the right to elect one director of theCompany.

Series BPreferred Stock is convertible, at the option of the holder at any time, intoshares of the Company's common stock as determined by dividing the lower of $.09or the price per share paid by the holder of the Series B Preferred Stock by aconversion price determined on the date the related certificate is surrendered.The conversion price is subject to periodic adjustment and is initiallyestablished at $.00773. Series B Preferred Stock is automatically convertibleinto shares of the Company's common stock upon (i) the date specified by vote orwritten consent or agreement of holders of at least three quarters of the sharesof Series B Preferred Stock outstanding, or (ii) upon the closing of the sale ofCompany's common stock in a firm commitment, underwritten public offeringregistered under the Securities Act in which the Company receives gross proceedsof no less than $20 Million. Series B Preferred Stock has a liquidationpreference of the greater of $.09 per share or the amount that such share wouldbe entitled to upon liquidation or distribution. The Series B Preferred Stockhas voting rights, except as to the election of directors, equal to the numberof shares of common stock into which the Series B Preferred Stock isconvertible. The Series B Preferred Stockholders have the right to elect onedirector of the Company.**NOTE 9 - CONCENTRATION OF CREDIT RISK**

TheCompany has reduced its sales of conversion units during 2003 and 2002 while itconducted research on the new digital based units. It primarily has sold alimited number of units through one sales representative. This represents aconcentration of credit risk since most sales are through that one source. Ifthat source were to be lost, it would have a significant detrimental affect onthe Company. The Company is currently cultivating other markets andrepresentatives for its old and new products which they anticipate beingsuccessful to mitigate this concentration.**NOTE 10   SUBSEQUENT EVENT**In 2003, the Company received funds as a convertible loan from an unrelatedinvestment company of approximately $250,000. The source of those funds advancedadditional amounts in the year 2004 and has provided various management andconsulting services to the Company.**Itemeight - *Changes In and Disagreements With Accountants on Accounting andFinancial Disclosure***

As reported on a Form 8-k filed March 26, 2004 on March 16, 2004, the Companydismissed its former independent accountant and engaged Brimmer, Burek andKeelan, LLP as our independent accountants. We have never had a disagreementwith our accountants on accounting and financial disclosure. **Item 8A - *Controls and Procedures***

All the Company's former officers and Directors with the exception of Mr. RickyDavis resigned prior to December 31, 2003. Since January 2004 we have worked todevelop systems and procedures which:

Under the supervisionand with the participation of our management, including our principal executiveofficer and principal financial officer, we have evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures within 90days of the filing date of this report, and, based on their evaluation, ourprincipal executive officer and principal financial officer have concluded thatthese controls and procedures are effective. Changes we are making in ourcontrol procedures include a consolidation of our administration at ourexecutives offices in Tampa, Florida.  

Disclosure controlsand procedures are our controls and other procedures that are designed to ensurethat information required to be disclosed by us in the reports we file or submitunder the Exchange Act are recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission's rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byus in the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

Changes in InternalControls. There were no significant changes in our internal controls or in otherfactors that could significantly affect these controls subsequent to the date ofour evaluation, nor were there any significant deficiencies or materialweaknesses in our internal controls. Accordingly, no corrective actions wererequired or undertaken. 

**PART III**

**Itemnine - *Directors,Executive Officers, Promoters and Control Persons;             Compliance With Section 16(a) of the Exchange Act***
NameAgePosition/Office HeldJohn Stanton          55          Chairman of the Board of DirectorsMark Clancy          48          Chief Executive Officer, DirectorPeter Calvert          44          Chief Operating OfficerFrank Davis          67          Chief Technical ConsultantRicky Davis          43          Comptroller, DirectorRobby Davis          41          Vice President, Research and Development
*John Stanton - Chairman of the Board ofDirectors*

SinceDecember 23, 2003, *John Stanton* has served as our *Chairman of the Boardof Directors*. Mr. Stanton is also the Chief Executive Officer and Chairman ofthe Board of Directors of White Knight. From 1987 through the present, Mr.Stanton has served as the President and Chief Executive Officer of FloridaEngineered Construction Products Corporation. Mr. Stanton has served as Chairmanand President of several public and private companies. Since the early 1990's,Mr. Stanton has been, and continues to be, involved in turn-around managementfor financially distressed companies, providing both management guidance andfinancing. Mr. Stanton worked with the international professional services firmthat is now known as Ernst & Young, LLP from 1973 through 1981. Mr. Stanton, aVietnam veteran of the United States Army, graduated from the University ofSouth Florida with a Bachelors Degree in Marketing and Accounting in 1972, andwith an MBA in 1973. Mr. Stanton earned the designation of Certified PublicAccountant in 1974 and was a Sells Award winner in the CPA examination. Mr.Stanton is a lifetime resident of Tampa, Florida.

*Mark Clancy - Chief ExecutiveOfficer and Director*

Since December 23, 2003,*Mark Clancy* has served as our *Chief Executive Officer*and as a *Director*. Mr. Clancy is also the President of White Knight SST, Inc., apublicly-traded company and the Chief Executive Officer of White KnightStrategies, Inc. Mr. Clancy founded White Knight Strategies during December 2001and merged into White Knight SST during December 2003 . Since April 2000, Mr.Clancy has participated in turn-around management for financially distressedcompanies. From November 1997 through April 2000, Mr. Clancy was co-founder,Director and Executive Vice President of publicly-traded EarthFirstTechnologies, Inc.. Mr. Clancy has been an advisor to the Chairman of the Boardof EarthFirst since that company's sale in May 2000. From 1992 through 1997, Mr.Clancy served as the Chief Compliance Officer for a Largo, Florida basedboutique investment banking firm. Mr. Clancy was honorably discharged after sixyears of service with the United States Marine Corps. Mr. Clancy was born inMassachusetts and has resided in Florida since 1982.

*Peter Calvert - ChiefOperating Officer*

Since February 2004*Peter Calvert* has served as our *Chief Operating Officer*.Previously, Mr. Calvert served as Technology Implementation Officer for Earthfirst Technologies since August of 2001. Mr Calvert has directeddevelopment of solid and liquid waste processing technologies including tirepyrolysis systems, plasma-arc liquid waste processing for PCB's and hazardousliquids and activated carbon manufacture. Prior to joining EarthFirst Mr.Calvert developed technologies for processing high-carbon waste coal ash intocommercial concrete products, successfully placing over 300,000 tons of coal ashproducts into the Boston Central Artery/Terminal project. Mr. Calvert alsodeveloped new sources of fuel for 2000 MW electric power company. Mr Calvert hasa degree in Life Sciences from Drew University in 1973.

*Ricky Davis - Comptroller, Director*

Since December 23, 2003,*Ricky Davis*has served as our *Comptroller* and as a*Director*. Mr. Davis joined our Company during 1996 and has served in variouscapacities including Chief Financial Officer and Treasurer. Prior to joiningHybrid, Mr. Davis was employed by Combustion Labs, Inc. for three years as atechnician working with gasoline to natural gas conversions, for four years asthe Office Manager of a large mechanical contractor and ran his ownmechanical/electrical contracting business for 6 years. Mr. Davis studiedBusiness Management and Marketing at Griffin Area Tech, Atlanta Georgia.

*Frank Davis - Chief Technical Consultant*

Since theformation of our Company during 1996, *Frank Davis* has served as our *Chief Technical Consultant*.  Since 1980, Frank Davis has developedvarious dual-fuel technologies relating to both gasoline and diesel engines. Mr. Davis is the author of the patents underlying our technology.  Mr. Davis presently serves in a consulting capacity and isresponsible for  technical development, including the drive-by-wireengine conversion kits, as well as many general business and strategic matters.In 1980, he founded, and until 1996 served, as Chief Executive Officer ofCombustion Labs, Inc., where he conducted research and development related toconverting gasoline and diesel engines to run on natural gas or bifuel. FrankDavis is the father of Robby F. Davis, Jeffrey Davis and Ricky Davis.

*Rule 406 Code Of Ethics*

TheCompany has adopted a Code of Ethics which is included as a part of this Form10KSB and attached hereto as Exhibit 3.4.  Our Code of Ethics applies toall our employees and those doing business with our Company and specificallyapplies to our Chief Executive Officer, Chief Financial Officer and all personsserving in similar capacities.**Item 10 - *Executive Compensation****Executive Compensation*

None of the Company's employees have earned $100,000 per year during 2002 and2003. Our current Chief Executive Officer and Chief Operating Officer areprovided by White Knight. We did not issue any equity compensation to anyofficer or director during 2002 or 2003. 
     **Name and      Principal      Position****Year**  **Other annual      compensation      ($)**Longtermcompensation   Securities All other      Annual Compensation      Restricted      Stock Awardsunderlying      options      LTIPcompensationSalaryBonus SARsPayouts ($)($)
(**$)**(#)($)($)         Edwards,2002      $0      $0      $0$0$0$0$0Alexander1CEO          Davis, Ricky2002      $27,300      $0      $0$0 $0 $0 $0 CFO 2003      $49,935      $0      $0$0 $0 $0 $0          Davis, Robby2002      $0      $0      $0$0 $0 $0 $0 President1         Davis, Jeffrey2002      $0      $0      $0$0 $0 $0 $0 Sec & Treas1         Styles,2002      $0      $0      $0$0 $0 $0 $0 Robert2President          Wacker,2002      $0      $0      $0$0 $0 $0 $0 Wolfgang4CEO          Matthews,2002      $0      $0      $0$0 $0 $0 $0 Wayne4CFO          Ganatra,2002      $0      $0      $0$0 $0 $0 $0 Anil5CFO          Gibbs, 2002      $0      $0      $0$0 $0 $0 $0 Michel5COO 
1) Mr. Alexander Edwards, III served as our Chief Executive Officer from Marchthrough December 2003.  Mr. Edwards compensation was provided by 360 DegreeEnergy.  

2) Mr. Robby Davis served as our President and a Member of the Board ofDirectors from April 1996 through March 2002. Mr. Jeffrey Davis served as ourCorporate Secretary and Treasurer from April 1996 through March 2002. 

3) Mr.Robert Styles served as our President from August 2001 through March 2002.  

4) Mr. Wolfgang Wacker served as our Chief Executive Officer from Februarythrough June 2002. Mr. Wayne Matthews served as our Chief Financial Officer fromFebruary through March 2002. 

5) Mr. Anil Ganatra served as our Chief Financial Officer during March and June2002. Mr. Michel Gibbs served as our Chief Operating Officer during March andJune 2002. 

Since January 2004 the salaries and expenses of our Chief Executive Officer andour Chief Operational Officer are paid by White Knight. The compensation of ourfuture executives will be established by our Board of Directors and will becommensurate with similar positions within our industry. 

Our Directors are not compensated for their participation with our Company. Twoof our three Directors are principals of White Knight. See the section markedCertain Relationships and Related Transactions for a description of WhiteKnight. **Item 11 - *Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters***

The following table sets forth, as of August 2004, the beneficial ownership ofthe Company's Securities by (i) each current member of the Board of Directors ofthe Company, (ii) the executive officer named in the Section entitled "ExecutiveCompensation," above and (iii) all current directors and executive officers ofthe Company as a group. On August 9, 2004, the Company had 12,163,646 shares ofcommon stock issued and outstanding. 

**Name and Address                        Number of                          Percent of Beneficial Owner                          Shares                            of Class**Ricky Davis                                   357,000                                2.9%Officers & Directors as a group       357,000                               2.9%

**Item 12 - *CertainRelationships and Related Transactions***

The following summarizes pertinent agreements relating to our operationsincluding our agreement with White Knight, our Proposed Technology LicenseAgreement and our Proposed Chief Technical Consultant Agreement. *Our Agreement with White Knight SST, Inc. (White Knight)*

Since December 2003 we have operated under an Agreement with White Knight SST,Inc., (White Knight). Under the terms of our Agreement, White Knight was to:provide up to $250,000 working capital and the President of White Knight was toserve as our Chief Executive Officer. Further, the President and Chief ExecutiveOfficers of White Knight are to be nominated to fill vacancies on our Board ofDirectors until the next annual meeting of shareholders. The Agreement furtherrequired the resignation of certain former Officers and consultants and adoptionof White Knight's proposed operating plan. The Agreement requires that we issue5% of our common stock as compensation for White Knight's participation. 

To date, White Knight has provided approximately $880,000 in direct investments.White Knight has expressed their intent to convert their debt into shares of ourcommon stock at prevalent prices on the date their funds were invested. For thepast six month, White Knight has provided our Chief Executive Officer, ChiefOperating Officer and certain marketing support. Since January 2004 we haveoperated under White Knight's operating plan. 

As a part of signing the following Proposed Technology License Agreement, ourcurrent Chief Executive Officer Mark Clancy has agreed to continue in this rolefor a minimum of the twelve months following the execution of the ProposedLicense Agreement. The terms and conditions of Mr. Clancy's continued employmentwill be subject to the approval of our Board of Directors and will be consistentwith industry standards. *Our Technology License*

All of the technology, know-how, devices and apparatus embodied in the patentsand incorporated into the various products sold by us were developed andpatented by Frank Davis or Frank Davis and Robby E. Davis. Previously welicensed the worldwide rights to commercialize the Dual-Fuel Technology from aTrust established for the Davis family. Previously, the Company sought to crafta second license relating to other portions of the technology. In the course ofreorganizing our enterprise, we have negotiated a new Proposed License Agreementto embody all of our technology and know how into one comprehensive, world-wideexclusive agreement (the "e; Proposed License Agreement."). We intend to completethe legal review of the Proposed License during August 2004. The followingdetails the Proposed License Agreement.

Under the terms of the Proposed License Agreement, Hybrid will have theworldwide exclusive right to use, manufacture, lease and/or sell products and/orsystems embodying the following patents and related technical know-how:

1) U.S. Patent Serial No. 5,083,547, dated January 28, 1992 for a natural gasand air mixing device, as assigned to Licensor; any divisions or continuationsin whole or in part thereof; any U.S. patents or applications that are lateradded to this license; any patents issuing on any of such applications; anyreissues or extensions or reexaminations of any such patents; and

2) U.S. Patent Serial No. 5,408,978, dated April 25, 1995, for a natural gas andair mixing device, as assigned to Licensor; any divisions or continuations inwhole or in part thereof; any U.S. patent or applications that are later addedto this license; any patents issuing on any of such applications; any reissuesor extensions or reexaminations 'of any such patents; and

3) U.S. Patent Serial No. 5,370,097, dated December 6, 1994, for adual fuelcontrol system which controls the flow of liquid fuel alone or in combinationwith a gaseous fuel, as assigned to Licensor; any divisions or continuations inwhole or in part thereof; any U.S. patent or applications that are later addedto this license; any patents issuing on any of such applications; any reissuesor extensions or reexaminations of any such patents; and

4) U.S. Patent Serial No. 5,103,795, dated April 14, 1992 for a natural gas andair mixing device, as assigned to Licensor; any divisions or continuations inwhole or in part thereof; any U.S. patent or applications that are later addedto this license; any patents issuing on any of such applications; any reissuesor extensions or reexaminations of any such patents; and

5) U.S. Patent Serial No. 4,479,466, dated October 30, 1984 for a natural gasand air mixing device, as as signed to Licensor; any divisions or continuationsin whole or in part thereof.; any U.S. patent or applications that are lateradded to this license; any patents issuing on any of such applications; anyreissues or extensions or reexaminations. of any such patents;

6) U.S. Non-Provisional Application No. 10/668,589, METHODS AND APPARATUS FOROPERATION OF MULTIPLE FUEL ENGINES, Filed September 23, 2003, Priority based onU.S. Provisional Application No. 60/413,269, ELECTRONIC FUEL CONTROL SYSTEMS,Filed September 24, 2002 PCT Application No. PCT/US03/29914, METHODS ANDAPPARATUS FOR OPERATION OF MULTIPLE FUEL ENGINES, Filed September 23, 2003,Priority based on U.S. Provisional Application No. 60/413,269, ELECTRONIC FUELCONTROL SYSTEMS, Filed September 24, 2002.

The term of the license shall expire upon the later of (i) the expiration of thelast-expiring patent covered, including any extensions, or (ii) ten (10) yearsfrom the date of execution of the Proposed License Agreement. In exchange forthe worldwide exclusive rights described above, we are required to make aone-time license acquisition payment of $250,000 (two hundred and fifty thousanddollars which amount would be due and payable (i) the first anniversary of theexecution of the Proposed License Agreement, (ii) the Company's closing on anequity or debt financing, or a combination thereof, following the date of theProposed License in which we receive gross aggregate proceeds in an amount noless than USD$1 million, or (iii) the sale of the 100th Unit. Following theone-time fee, we are required to pay $250.00 per Unit sold (we estimate at thistime our Units will range in price from $3,500 to $4,500 each) with a minimumroyalty of $250.00 and maximum royalty of $1,000 for Unit. We are furtherobligated to pay a royalty rate of 3.5% for any items which are not included inthe per kit royalty calculation such as spare parts and consulting services.Under the terms of the Proposed License Agreement, we are obligated to sell aminimum of 750 Units during 2005 and 2,500 Units during 2006 and for eachsubsequent year during the term of the Proposed License. 

Engine Control Technoligies shall have the right to immediately terminate theProposed License Agreement by giving written notice to the Company in the eventHybrid:

1) is adjudicated bankrupt or insolvent, enters into a composition withcreditors, makes an assignment of all or substantially all of its assets for thebenefit of its creditors, or if a receiver is appointed for its assets;

2) fails to produce, manufacture, sell, market, or distribute or cause to beproduced, manufactured, sold, marketed, or distributed the Units;

3) or its Affiliates, agents, distributors or sublicensees is in material breachor default of any provision of the Proposed License Agreement which default orbreach is not cured within the applicable time period;

4) fails to pay the royalty when and as it becomes due and payable;

5) or its Affiliates, agents, distributors or sublicensees pledge, lien,mortgage, secure or otherwise encumber the Licensed Patents in any manner,whether arising by contract, as a matter of law, by judicial process orotherwise;

6) experiences a material adverse effect in the financial condition, operations,assets, business, properties or prospects of the Company. " Material adverseeffect." means any event, change, violation, inaccuracy, circumstance or effectthat is or is reasonably likely to be, individually or in the aggregate,materially adverse to the condition (financial or otherwise), capitalization,operations or business of the Company;

7) fails to maintain its status as a public company.

*Our Proposed Chief Technology Consulting Agreement*

In order to ensure ourselves of the continuation of the technology inventor Mr.Frank Davis, we have proposed a Consulting Agreement between the Company andElectronic Controls Technology LLC (the " Proposed Consulting Agreement."). Underthe terms of the Proposed Consulting Agreement, we are to compensate ElectronicFuel Technology LLC $7,000 per month until we complete our current verificationafter which we are to remit $12,000 per month. In exchange for suchcompensation, Electronic Controls Technology LLC shall:

1) provide general advice, guidance and counsel to, and consult with, seniormanagement of Hybrid with respect to all aspects of Hybrid's business; and

2) shall explain to senior management of Hybrid, in such detail as may bereasonably requested by Hybrid, the current condition, history and prospects ofHybrid and its predecessors, including with respect to operating, financial andorganizational matters; manufacturing, marketing, planning and other activities;inventions, patents, patent applications, and other intellectual property rightsand interests; relationships with stockholders, subsidiaries, affiliates,employees, suppliers, customers, advisers, consultants and others; transactions;and other matters as may be reasonably requested by Hybrid; and

3) deliver to Hybrid, in good condition, all Confidential Information and allfiles, documents and other books and records, in whatever form or media,relating to Hybrid's business or its history, prospects, financial condition orresults of operations; and

4) shall maintain a regular, ongoing and routine physical presence at theAtlanta area research, development, and distribution center of Hybrid . 

**Item 13 - *Exhibits andReports on Form 8-K****Reports on Form 8-K*

We fileda Form 8-k on March 26, 2004 reporting that March 16, 2004, the Companydismissed its former independent accountant and engaged Brimmer, Burek andKeelan, LLP as our independent accountants.

*Exhibits*

Thefollowing exhibits are filed as a part of, or are incorporated by referenceinto, this Report on Form 10-K:

No.   Description of Exhibit
2.1  Asset Purchase Agreement between the Company and New York State Electric & GasCorporation, dated as of October 29, 2001, incorporated by reference to Exhibit2.1 of the 8-K filed on December 26, 2001.

2.2  Secured Promissory Note in favor of New York State Electric & Gas Corporation,dated as of December 11, 2001, incorporated by reference to Exhibit 2.2 of the8-K filed on December 26, 2001.

2.3 Security Agreement between the Company and New York State Electric & GasCorporation, dated as of December 11, 2001, incorporated by reference to Exhibit2.3 of the 8-K filed on December 26, 2001.

2.4  Guaranty from the Company in favor of New York State Electric & Gas Corporation,dated as of December 11, 2001, incorporated by reference to Exhibit 2.4 of the8-K filed on December 26, 2001.

3.1  Articles of Incorporation of Save On Energy , Inc., incorporated by reference toExhibit 3.1 to the SB-2 filed on March 23, 2000.

3.2 Amendment to Articles of Incorporation of Save On Energy, Inc., incorporated byreference to Exhibit 3.2 to the SB-2 filed on March 23, 2000.

3.3  By-laws of Save On Energy, Inc., incorporated by reference to Exhibit 3.3 to theSB-2 filed on March 23, 2000.

3.4  Hybrid Fuel Systems, Inc. Code of Ethics

4.1  Certificate of Designation of Series A Preferred Stock filed with the Secretaryof State on February 19th, 2002.*

4.2  Certificate of Designation of Series B Preferred Stock filed with the Secretaryof State on May 7th, 2002.*

10.1License Agreement by and between the Davis Family Trust and Electronic FuelControl, Inc. dated May 13, 1996, incorporated by reference to Exhibit 10.1 tothe SB-2 filed on March 23, 2000.

10.2Amendment to License Agreement by and between the Davis Family Trust andElectronic Fuel Control, Inc, dated June 18, 1998, incorporated by reference toExhibit 10.2 to the SB-2 filed on March 23, 2000.

10.3Amendment to License Agreement by and between the Davis Family Trust andElectronic Fuel Control, Inc. dated January 3, 2000, incorporated by referenceto Exhibit 10.3 to the SB-2 filed on March 23, 2000.

10.4Consulting Agreement between Save on Energy, Inc. and MBO, Inc. dated November23, 1999, Trust and Electronic Fuel Control, Inc, incorporated by reference toExhibit 10.4 to the SB-2 filed on March 23, 2000.

10.5Exclusive Supply Agreement between Ambac International Corporation andElectronic Fuel Control, Inc. dated April 29, 1996, incorporated by reference toExhibit 10.5 to the SB-2 filed on March 23, 2000.

10.6Agreement re: International Fuel Systems, Inc. and Davenport, dated January 7,2000, incorporated by reference to Exhibit 10.6 to the SB-2 filed on March 23,2000.

10.7Employment Agreement with Robert Stiles, dated July 17, 2001, incorporated byreference to Exhibit 10.1 of the 10-QSB filed on November 19, 2001.

10.82001 Stock Option Plan - Incorporated by reference to the 2001 Annual ProxyStatement filed October 1, 2001. 10.9 Stock Purchase Agreement between theCompany and SWI Holdings, Limited, dated as of December 10, 2001 (CompositeVersion), incorporated by reference to Exhibit 10.1 of the 8-K filed on December26, 2001.

10.10Security Agreement between the Company and SWI Holdings, Limited, dated as ofDecember 10, 2001, incorporated by reference to Exhibit 10.2 of the 8-K filed onDecember 26, 2001.

10.11Convertible Secured Promissory Note issued to SWI Holdings, Limited, dated April23, 2002.*

10.12Security Agreement between the Company and SWI Holdings, Limited, dated as ofApril 23, 2002.*

10.13Agreement re: White Knight SST, Inc. and Hybrid Fuel Systems, Inc. (formerlySave On Energy, Inc.) dated December 22, 2003. 

31.a  Chief Financial Officer Section 302 Certification 

31.b  Chief Executive Officer Section 302 Certification

**Item 14 - *Principal Accountant Fees and Services****Audit Fees:* The aggregate fees billed by BBK for professional services renderedfor the audits of the Company's annual financial statements for the years endedDecember 31, 2003 and 2002 were approximately $30,000. The aggregate fees billedby Aidman Piser for the audit of the Company's annual financial statements forthe year ended December 31, 2001 and for the reviews of the financial statementsincluded in the Company's Quarter Reports on Form 10QSB during the 2001 was$50,000.*Audit Related Fees.* The Company did not engage BBK nor Aidman Piser to provideprofessional services to the Company regarding audit related matters during theyears ended December 31, 2003 and 2002.*Tax Fees.* The Company did not engaged BBK nor Aidman Piser for professionalservices regarding tax advice or return preparation.*All Other Fees.*There were no fees bile3d by BBK or Aidman Piser for servicesrendered to the Company, other than the services covered above for the yearsended December 31, 2003 and 2002. 

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned; thereunto duly authorized, on this 13th day of August, 2004.

**HybridFuel Systems, Inc.**By: /s/ Mark ClancyMark ClancyChief Executive Officer

Pursuantto the requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of Registrant and in thecapacities indicated on August 13, 2004.

 

/s/ John StantonJohn      Stanton
Chairman of the Board of Directors
 
 
/s/ Mark ClancyMark Clancy
Chief Executive Officer (Principal Executive Officer) and Chief Financial      Officer (Principal Financial Officer) and Director
 
 
/s/ Ricky DavisRicky Davis
Director
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