**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington
DC 20549**
 
 **FORM
10 KSB**
 
 (Mark
One)
 **XX** ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
fiscal year ended **December
31, 2004**
 
 ___TRANSITIONAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
transitional period from to_____
 
 **Commission
File Number 333-33134**
 
 **HYBRID
FUEL SYSTEMS, 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(b) of the Exchange Act: None
 
 Securities
registered under Section 12(g) of the Exchange Act: None
 
 Check whether the Issuer (i) has filed all reports required to be filed by
Section 13 or 15d of the Exchange Act during the past twelve months (or for such
shorter 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.   [X] Yes [  ] No
 
 Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and if no disclosure will be contained,
to the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.   [  ]
 
 Revenues for the fiscal year ended December 31, 2004 totaled $138,724 and for
fiscal year ended December 31, 2003 totaled $231,269
 
 As of March 24, 2005, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based upon the average of the closing bid and
asked prices on such date) was approximately $18,812,367.
 
 At March 24, 2005, the registrant had outstanding 42,215 Series A Preferred
Shares and 195,209 Series B Preferred Shares.  At March 24, 2005, the
Company had 80,921,230 shares of its $0.001 par value common stock
outstanding.
 
 Transitional
Small Business Disclosure format (check one) Yes  {  }  No
{X}.
 **1**
  **Hybrid
Fuel Systems, Inc.**
 **Form
10KSB for the year ended December 31, 2003**
 **Table
of Contents**
 
  
 **Part
      I**Item
      1
    Description
      of BusinessItem
      2
    Description
      of PropertyItem
      3
    Legal
      ProceedingsItem
      4
    Submission
      of Matters to a Vote of Security Holders**Part
      II**Item
      5
    Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity SecuritiesItem
      6
    Management's
      Discussion and Analysis or Plan of Operations Risk
  FactorsItem
      7
    Financial
      StatementsItem
      8
    Changes
      in and Disagreements with Accountants on Accounting and Financial
      DisclosureItem
      8A
    Controls
      and ProceduresItem
      8B
    Other
      Information**Part
      III**Item
      9
    Directors,
      Executive Officers, Promoters and Control Persons; Compliance With Section
      16(a) of the Exchange ActItem
      10
    Executive
      CompensationItem
      11
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder MattersItem
      12
    Certain
      Relationships and Related TransactionsItem
      13
    ExhibitsItem
      14
    Principal
      Accountant Fees and ServicesSignatures
  ****
 **2**
 **PART
I**
 
 The
information set forth in this Report on Form 10-KSB contains "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
("the Act"). The words "believes," "anticipates," "plans," "expects," "intends,"
"estimates," and similar expressions are intended to identify forward-looking
statements. In addition, any statements concerning future financial performance,
ongoing business strategies or prospects, and possible future Company actions,
which may be provided by management, are also forward-looking statements as
defined by the Act. 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-looking statements 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 in this report.  Although management believes that the
assumptions made and expectations reflected in the forward looking statements
are reasonable, there is no assurance that the underlying assumptions will, in
fact, prove to be correct or that actual future results will not be different
from the expectations expressed in this report. The Company has no specific
intention to update these statements.
 
 **Item
one -** ***Description
of Our Business***
 
 Throughout
this report, terms such as "we", "our", the "Company" or "Hybrid" mean Hybrid
Fuel Systems, Inc., a Georgia company.
 
 *General*
 
 We were
incorporated in the State of Georgia in 1996 and since that date have been in the
business of manufacturing
and marketing retrofit systems for the conversion of gasoline and diesel
engines, stationary or vehicular, to non-petroleum based fuels such as
compressed natural gas and liquefied natural gas. We hold a world-wide exclusive
license to commercialize the technology embodied in five issued and one pending
US patent.   Since 1998, we have dedicated our research and
development exclusively to conversion systems for diesel-powered engines. 
We currently offer the Fuel 2(TM) dual-fuel conversion system designed to
convert medium and heavy duty mobile diesel engines to operate in a natural
gas/diesel dual-fuel mode.
  During
the first quarter 2005 we completed the acquisition of various Horiba emission
testing equipment so that we could accelerate our internal research and
development and offer emission testing services for other companies. During the
first quarter 2005 we expanded the number of parts and components we offer for
resale.
  We
introduced our technology into the marketplace in the 1990’s through the
conversion of gasoline and diesel engines to operate in a dual fuel mode. During
this period, we developed commercial versions of the fuel delivery system to fit
many older, naturally aspirated, diesel engine types and placed conversion units
into engines all around the world. The experiences gained during this period
including conversions on a wide array of engines operating under different
conditions with varying fuel requirements contributed significantly to the
subsequent four patents and the Company's first market application referred to
as the Fuel2TM conversion system.
 
 During
the first six months of 2004, we rededicated our development efforts and
re-engineered our primary system designed to convert medium and heavy duty
diesel engines to operate in a dual-fuel, natural gas and diesel mode for the
electronic version of our Fuel2 system. We refer to the commercial version of
our dual-fuel system as the Fuel2TM system.
 
 **3**
 *Our
Product*
 
 We are
currently engaged in commercializing the Fuel 2(TM) system that allows a medium
or heavy duty diesel engine to operate in a dual-fuel, diesel/natural gas
mode.   There are three main components to our Fuel 2(TM) system:
 
 (i) the
Electronic Control Unit or ECU,
 
 (ii) the
gas air mixing device and
 
 (iii) the
measuring, monitoring and reporting devices.
 
 Our
system can typically be installed in a day with two qualified technicians. 
In addition to the installation of our system, our customers must also mount
fuel storage tanks and linkage.  Typically, it takes approximately one-half
day to install fuel storage tanks and linkage.
  The
conversion of a vehicle to a dual fuel mode requires our Fuel 2(TM) system
together with a catalytic converter, fuel storage tanks and linkage.  The
catalytic converter must be purchased from an approved vendor.  The fuel
storage tanks and linkage can be purchased by our customers on the open
market.  We do not provide the catalytic converter or fuel storage
tanks.
 
 *Engine
Families That Hybrid's Dual Fuel System can be Installed On as of January 1,
2005*
 
 Both
mechanical and electronic diesel engines are used in many applications with
various duty cycles not commonly seen in the average trucks and buses.
Therefore, when the opportunity to convert these engines arises, additional
programming may be required to assure the operation of the dual fuel matches the
performance of 100% diesel. These application can be varied and should be dealt
with on a case by case basis.
 
 The
following discussion specifies the electronic and mechanical engine families our
system has successfully converted to a dual fuel mode. However, until we receive
an Environmental Protection Agency/California Air Resource Board (EPA/CARB)
verification, we cannot engage in meaningful sales within the United States. The
following engines cited in both electronic and mechanical discussions have been
converted on an developmental basis.
 
 *Electronic
Engines*
  ·
    Mack
      E7 through 2003 year models;·
    Cummins
      Celect System M11 and M14 through 2003 year models·
    International
      DT466 through 2003 year models·
    International
      T44E model
 
 A survey
form is required to determine changes in the electronic system introduced by the
OEM's in 2004.
 
 *Mechanical
Engines*
 
 Our Fuel2
system can be installed on all 4-stroke diesel engines, excluding pre-chambered
engines and 2-stage combustion, typically a GM 5.2 liter to 5.6 liter engine.
The International 1996 and older model 7.3 engines used in earlier applications
by Ford and International light-duty vehicles cannot be converted to dual
fuel.
 
 **4**
 *Technology
Verification*
 
 In order
to market our Fuel 2(TM) system within the United States, we must first receive
verification of our technology. Vehicle emissions are regulated by federal and
state agencies with respect to the output of certain atmospheric
pollutants.  A technology which impacts vehicle emissions such as our Fuel
2(TM) system must first be independently evaluated and then formally recognized
as not likely to cause a vehicle to operate in violation of emission
limitations.  Federal and State agencies have developed a series of
programs designed to verify the emission output of a particular
technology.
 
 The EPA
and California Air Resource Board (CARB) have both signed a "memorandum of
agreement" to establish reciprocity and coordination in their efforts to
evaluate and verify emission reduction technologies and products. Under the
agreement, CARB conducts the verification of technologies such as our
Fuel2 ’ system
under a program titled "Diesel Emission Control Strategies Verification" which
involves different paths depending on the type of emission reduction technology.
 
 *Our
Fuel2 System Verification Update*
 
 We are
pursuing sales of our Fuel2TM system
in the United States as well as certain foreign markets. During June 2004, we
began the first portion of the protocol required to achieve verification. We
previously provided detailed information concerning the EPA/CARB verification
program. The following is a further update of the official emission measurements
of our Fuel2 ’ system.
 
 During
October 2004 , we received our first independent emission measurements. We
repeated this test again in January and February in an effort to achieve a 25%
reduction in NOx. A 25% reduction in NOx would make us eligible for various
federal and state grants. We have not yet been successful in achieving a 25%
reduction in NOx.
 
 If we do
not receive a verification for our Fuel2TM technology, we will have difficulty in marketing our system in the United States
and our ability to market the technology outside of the United Stats may also be
adversely affected. The following table details the independent emission
measurements of our Fuel2TM system.
 
 **NOx**
    **PM***Required
      minimum emission reductions for verification*
    *15%*
    *50%*Hybrid’s
      Fuel2TMOctober 2004 results
    19.3%
    73%Hybrid’s
      Fuel2TMJanuary 2005 results
    22.9%
    78.9%Hybrid’s
      Fuel2TMFebruary 2005 results
    17.9%
    56.5%
 
 *Our
Emissions Lab*
 
 We intend
to operate an emissions lab in our Atlanta, Georgia facility which includes at a
minimum the following equipment:
 7
      Rack Horiba Gas Analyzers
    2
      Horiba Rack NOx Analyzers2
      Rack Horiba Constant Volume Samplers
    1
      Horiba Exhaust Analyzer1
      Horiba Air Sampler
    1
      Varian Star Gas Analyzer2
      Horiba Air Sampler Hang Racks
    1
      Zeo Air Supply1
      Horiba 48" Chassis Dyno w/controller & Power Rack
    1
      Zeo Air Generator1
      Horiba CDC 900 Dyno Controller
    1
      Horiba Infrared Gas Analyzer1
      Horiba Power Converter
    2
      Clayton Dynamometers
 
 **5**
 In
addition, we have also purchased a Taylor 535 horsepower dynometer to address
heavy-duty vehicles. Once the above listed equipment is installed, upgraded and
calibrated, we can offer services as an independent emissions lab.
 
 We
estimate our emission lab will be ready to offer services as an emission testing
facility after August 1, 2005.
 
 *The
Fuel 2(TM) Marketplace*
 
 The universe for our Fuel 2(TM) conversion system encompasses all medium and
heavy duty diesel powered trucks and buses. The number of vehicles which are
eligible for our technology represent an estimated 3% or 3,660,000 units of the
total population of medium and heavy duty trucks and buses operating within the
United States.
 
 According to the United States Department of Transportation, Federal Highway
Administration (FHA) and the 2000 US Census there are a total of 83,800,000
trucks and buses in the United States. The FHA further defines this segment to
consist of 92% "light trucks" (74,000,000); 8% "medium trucks and buses"
(4,400,000), and; 2% "heavy trucks and buses" (1,700,.000). The vehicle
manufacturers truck classifications defines light trucks" as those with a weight
of 0 - 14,000 lbs; "medium trucks and buses" as those with a weight of 14,001 -
33,000, and; "heavy trucks and buses" as those with a weight of 33,001 and
higher.
 
 The population of vehicles available for our Fuel 2(TM) technology based on size
consists of approximately 6,100,000 units or 8% of the total population of
trucks and buses. We have no reliable data which provides an estimate about
what percent of the 6,100,000 units are diesel or which operate on a host of
other fuels such as gasoline, dedicated natural gas and hybrid vehicles.
However, our experiences indicate that more than 60% or 6 out of ten medium and
heavy duty trucks and buses are dedicated diesel vehicles and therefore,
immediately eligible for our technology.
 
 As a result of the foregoing factors, we estimate the number of trucks and buses
operating within the United State which are immediately eligible to benefit from
our Fuel 2(TM) technology are approximately 3,660,000 or 3% of the total US
truck and bus population.
 
 *Our
Marketing Strategy*
 
 We offer our Fuel 2(TM) system to parties interested in lowering their
transportation costs through the use of fuels that are less costly than diesel
or to achieve a certain reduction in emission pollutants or both.  We
believe our Fuel 2(TM) system differentiates from competitive technologies in
respect to price, universal applications, ease of installation and fuel
displacement.  Successful verification of our Fuel 2(TM) system as an
Emission Control Device would enhance our competitive
position.
 
 We are currently engaged in introducing our Fuel 2(TM) to the marketplace
through a strategy that:
 
 ·
    *Positions
      our Fuel 2(TM) system as means to take advantage of lower priced natural
      gas verse diesel as a fuel source.*The US Department of Energy publishes a report approximately every six
      months titled*Alternative
      Fuel Price Report*. 
      According to the report, the average price of a gallon of diesel over a
      five year period was $1.52.  The average cost of an equivalent gallon
      of Compressed Natural Gas or CNG during the same five year period is
      $1.18.  Consumers utilizing CNG during this five year period could
      reduce their fuel costs by an annual average of 22%.  We believe this
      annualized savings can offset the purchase price of conversion.  The
      ability to recoup investment through fuel savings would be primarily a
      function of mileage.
 
 ·
    *Market
      our Fuel 2(TM) system as an Emission Control Device.*As discussed elsewhere in this report under the heading*Our
      Verification Progress*,
      the use of our Fuel 2(TM) system together with a specialized catalytic
      converter has been demonstrated to lower the emissions an average of NOx
      by 20.03% and PM by 69.46%.
 
 **6**
 ·
    *Our
      Fuel 2(TM) system at a price point substantially less than the cost of
      alternative dedicated-engine dual-fuel technologies.*The added cost to acquire a new natural gas powered medium and heavy duty
      engine instead of a conventional diesel engine is approximately $20,000 to
      $30,000.  The cost to convert an existing diesel engine to operate in
      a dual-fuel mode is approximately $40,000.  The retail cost of our
      Fuel 2(TM) system is $4,500.  In the case of all three approaches,
      the user would also have to purchase fuel storage tanks and a catalytic
      converter at a cost of approximately $5,000 per vehicle.  We believe
      this system price differential is a significant competitive
      factor.
 
 ·
    *Position
      our Fuel 2(TM) system is an economic and efficient improvement over diesel
      catalysts and emission traps.*As discussed elsewhere in this report under the head Competition, as an
      Emission Control Device, our Fuel 2(TM) system is a superior means of
      reducing harmful atmospheric pollutants over Diesel Oxidation Catalysts
      and Diesel Particulate Filters.
 
 To aid in the market introduction of our Fuel 2(TM) system, we have adopted a
marketing program including:
 
 ·
    Our
      Vice President, Sales and Marketing makes direct contact with prospective
      customers in the private sector worldwide;
 
 ·
    We
      have a license agreement with BAF Technologies to facilitate the sale of
      our Fuel 2(TM) system to various municipalities and governmental entities
      in the States of New York and Texas;
 
 ·
    We
      have a license agreement with DRV Energy to facilitate the sale of our
      Fuel 2(TM) system throughout the mid-United States
      marketplace;
 
 ·
    We
      have a license agreement with Civic Group based in Brazil to facilitate
      the sale of our Fuel 2(TM) system throughout South
  America.
 
 ·
    We
      have entered a Memorandum of Understanding with WITCO, Inc. to
      commercialize our technology in China and India;
 
 ·
    We
      have created a program trademarked No School Bus Left Behind
      Initiative(TM) which seeks the direct sale of our system to school systems
      throughout the continental United
States.
 
 *Competition*
 
 Our
competition comes from two areas:  technology competitors such as catalysts
and traps and conversion competitors such as dedicated natural gas engines and
technologies to convert existing diesel engines.
 
 *Technology
Competitors*
 
 Within
the United States, we must qualify as an Emission Control Device.  As an
Emission Control Device, our principal competitors will be certain catalytic
converters, emission traps and filters.  We believe our Fuel 2(TM) system
is superior to our primary competitors:  Diesel Oxidation Catalysts (DOC)
and Diesel Particulate Filters (DPF).
 
 *Diesel
Oxidation Catalysts*
 
 Diesel
Oxidation Catalysts or DOC’s look like an automotive catalytic converter and
they act in a similar manner. A typical DOC has a ceramic honeycomb cylinder
that fits inside a standard-sized truck muffler. The exhaust passes over the
layers of the catalyst bed and comes into contact with a coating of
platinum-based or other catalysts.
 
 **7**
 DOC’s are a proven technology for controlling emissions of carbon monoxide,
volatile hydrocarbons, and other pollutants that are in gaseous or liquid phases
in diesel exhaust. A wide variety of catalytic coatings, sizes and
configurations are available from many manufacturers, each one tailored to
exhaust flows from particular engines and designed to optimize removal of
specific substances. The Fuel2 ’ system
uses a DOC to control hydrocarbons and CO.
 
 DOC’s can only remove about 20% of a typical engine’s PM emissions. What is
called “Particulate Matter” is actually a complex and changeable mix of solid
carbon particles, sulfate particles and liquids and heavy gases. DOC’s can only
act upon the liquids and gases of PM, solids and adsorbed liquids pass over the
catalytic bed unchanged.
 
 *Diesel
Particulate Filters*
 
 Outwardly, DPF’s resemble DOC’s. A typical trap is a ceramic catalyst coated
matrix that fits inside of a standard sized muffler. The exhaust passes through
a bed of ceramic material, or several of these layers.
 
 The path of the exhaust in a DPF, however, is very different than in a DOC. The
DPF forces the smoke through channels of porous ceramic that are deliberately
dead-ended; the solid soot particles remain behind in the dead end while the gas
is forced through the pores.
 
 If carbon
particles continue to accumulate in the traps, the engine exhaust back pressure
becomes excessive causing the engine shut down. To prevent such clogging, traps
are designed to burn away the accumulated carbon and renew the air flow and
cleaning action. This burning away of accumulated carbon is referred to as a
regeneration cycle, which may be either continuous or
periodic.
 
 The key to successful trap regeneration is temperature: the hotter, the better.
Traps have a successful history of operation, particularly in Europe, in engines
that operate under high loads and thus have exhaust temperatures exceeding 300
degrees Celsius, a temperature at which regeneration is continual and
reliable.
 
 School buses, or any engine that operates in stop-start mode, are more difficult
for traps. There have been a series of failed installations of traps on fleets
of school buses, particularly in urban areas where frequent stops and low speeds
prevent the engines from attaining the temperatures required for successful
regeneration. Drivers are alerted to the clogging of the trap by a backpressure
sensor, which eventually shuts the engine down or does not allow it to start.
(DPF systems are typically sold with a backpressure metering
device).
 
 *Conversion
competitors*
 
 There are
relatively few alternative systems for converting medium and heavy-duty diesel
engines to natural gas. The competing systems offered by competitors described
below are more expensive than our technology or are limited in their application
to specific engine lines. Competitors include:
 
 ·
    *IMPCO
      Technologies, Inc.*
 
 ·
    *Clean
      Air Power*formerly " Clean Air Partners
 
 *·*
    *Westport
      Innovations Inc.*
 
 ·
    *The
      Innovative Technology Group, Corp.*
 
 **8**
 *Manufacturing
& Inventory*
 **
 We
currently utilize contract manufacturers for key components of Fuel 2(TM) system
and assemble the components in-house.  In order to operate converted
vehicles on natural gas, natural gas storage tanks must be installed on the
converted vehicle. We do not include gas storage tanks in our conversion system.
The customer purchases these separately from a number of companies who
manufacture them, or from us at the customer's request.
 
 During
December 2004 we leased a 12,000 square foot facility in Atlanta, Georgia to
house our engine room, emission lab, stock room, assembly, quality
inspection/testing, service and installation management.  We intend to
outsource the manufacturing of our components and to conduct final assembly and
shipping at our new facility.
 
 *Regulatory
Environment*
 
 *Environmental
Legislation Effecting the Demand for Natural Gas Vehicles*
 
 In
addition to the fact that diesel gas is generally more expensive than natural
gas, one of the primary disadvantage of a diesel engine is that it emits far
more pollutants than its gasoline-fueled counterpart. Diesel exhaust contains
particulate matter, visible as soot that contains unburned and partially burned
fuel. These hydrocarbon emissions are a significant contributor to air pollution
and to human respiratory difficulties. Also of significance is the fact that
diesel fuel combustion produces Nitrogen Oxides (NOx), a toxin that is harmful
to humans and the environment. NOx is a major known contributor to greenhouse
gas 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, the Federal Clean Air Act was amended in 1990 (the "1990 Amendments")
to, among other things, set emissions standards for stationary and mobile
pollutant sources and establish targets, standards and procedures for reducing
human and environmental exposure to a range of pollutants generated by industry
in general and transportation in particular. Among other mandates, the 1990
Amendments require businesses that maintain centrally fueled fleets of 10 or
more vehicles in certain heavy smog locations to convert, either through new
vehicle purchases or by converting existing vehicles, a portion of their fleet
to clean burning alternative fuels. These laws specifically include the diesel
and natural gas dual fuel system as an alternative fuel and specify actions that
fleet operators must take in order to comply and timetables for doing
so.
 
 Similarly,
the Energy Policy Act of 1992 (the "Energy Act") was created to accelerate the
use of alternative fuels in the transportation sector. The Energy Act mandates
the schedule by which Federal, state and municipal vehicle fleets must
incorporate alternative fueled vehicles into their overall vehicle mix. This has
significant ramifications for the military, which operates thousands of diesel
vehicles, and for the state departments of transportation, which operate tens of
thousands of diesel powered dump trucks and related highway service and repair
vehicles, plus the tens of thousands of vehicles operated by the private
contractors who support these agencies.
 
 In
addition to the foregoing, a variety of legislative and related incentive
programs relating to alternative fuel vehicle programs have been created,
including:
 
 ·
    *Clean
      Cities Program*.
      Created by the Department of Energy, the Clean Cities Program coordinates
      voluntary efforts between locally based government and industry to
      accelerate the use of alternative fuels and expand the alternative fuel
      vehicle refueling infrastructure. Grants are available for natural gas
      fueling stations and vehicle conversions to natural gas. Typical grants
      offset the cost of conversion by as much as
80%.
 
 **9**
 ·
    *Alternative
      Fuel Vehicle Credits Program*.
      Congress created this credits program to encourage fleets to increase the
      number of alternative fuel vehicles in their fleets early and
      aggressively. Credits are allocated to state fleet operators and cover
      alternative fuel provider fleet operators when alternative fuel vehicles
      are acquired over and above the amount required, or earlier than expected.
      Since credits can be traded and sold, fleets have the flexibility to
      acquire alternative fuel vehicles on the most cost-effective
      schedule.
 
 ·
    *State
      Energy Program*.
      States will promote the conservation of energy,reduce the rate of growth
      of energy consumption, and reduce dependence on imported oil through the
      development and implementation of a comprehensive State Energy Program.
      The State Energy Program is the result of the consolidation of two Federal
      formula-based grant programs - the State Energy Conservation Program and
      the Institutional Conservation Program. The State Energy Program includes
      provisions for financial assistance for a number of state-oriented special
      project activities. These activities specifically include programs to
      accelerate the use of alternative transportation fuels for government
      vehicles, fleet vehicles, taxis, mass transit, and individuals' privately
      owned vehicles.
 
 ·
    *EPA's
      Clean School Bus USA*, a
      program designed to reduce both children's exposure to diesel exhaust and
      the amount of air pollution created by diesel school
  buses.
 
 *Employees*
 
 As of
December 31, 2004, the Company had 9 employees and one technical consultant on a
full-time basis, of which 4 were engaged in research and development and 4 were
engaged in administrative, clerical and accounting functions and 2 were engaged
in sales and marketing.   We believe that our relationship with our
employees is good and we are not a party to any collective bargaining agreement.
 
 *Intellectual
Property*
 
 Our
success depends to a great extent on our ability to protect our intellectual
property. We license our core intellectual property pursuant to a license
agreement. We rely primarily on a combination of copyright and trade secret
protection together with the protections under the Licensing Agreement and
nondisclosure and confidentiality agreements to establish and protect our
proprietary rights. The patent protection afforded to our licensed intellectual
property is uncertain and may involve complex legal and factual issues.
 
 We
license patents that relate to a universal aftermarket fuel delivery system. The
delivery system is compatible with any existing mobile or stationary combustion
engine.  The delivery system can regulate any type of alternative fuel with
any conventional fuel. The patents that we license contain ninety-nine claims
unique to our commercial product.
 
 We have
filed a U.S. Non-Provisional Patent Application No. 10/668,589, titled *Methods
and Apparatus for Operation of Multiple Fuel Engines* , which
was filed September 23, 2003. This patent embodies the electronic version of our
fuel delivery system.
 
 **Item
two -** ***Description
of Property***
 
 We lease
1,500 square feet of manufacturing/office space from our Senior Technical
Consultant at a rate of $1,500 per month on a month-to-month basis.  We
intend to continue this facility through May 2005 afterwhich we will operate our
of our new leased facility in PeachTree City, Georgia.
 
 During
December 2004 we subleased a 12,000 square foot stand alone facility in
PeachTree City, Georgia at the rate of $5,600 per month.  We are obligated
under the terms of the sublease to a two-year period commencing March 1, 2005.
We currently maintain our executive offices in Tampa, Florida. Our executive
office space in Tampa, Florida is provided at no charge by our management
company White Knight SST.
 
 **10**
 **Item
three -** ***Legal
Proceedings***
 
 On
November 14, 2003, Ambac International Corporation (" Ambac.") filed a lawsuit
seeking $109,915 together with interest at the rate of 15% per annum. The suits
stems from a contract for delivery of certain parts for use in the manufacturing
of our systems from 2002. We maintain the parts were delivered substantially
past the date of anticipated delivery and that the parts when received were
defective. We are now scheduled to enter mediation with Ambac during January
2005.   As of March 22, 2005, AMBAC has not responded to requests to
schedule the mediation.
 
 There is
no other pending litigation or other proceedings against the Company.
 
 **Item
four -** ***Submission
of Matters to a Vote of Security Holders***
 
 Since
January 2001, there have been no matters submitted to a vote of security
holders.
 
 **PART
II**
 
 **Item
five -** ***Market
for Common Equity and Related Stockholder Matters***
 
 Our
securities are traded on the OTC Electronic Bulletin Board maintained by the
National Association for Securities Dealers, Inc. (OTCBB) under the trading
symbol " HYFS".   Prior to November 23, 2004, our shares traded on the
"pink sheets."    Between April 2001 and May 2002 our common
stock was quoted on the OTCBB.  Our securities were delisted from the OTC
Electronic Bulletin Board on May 23, 2002 due to the Company's failure to file
periodic reports in a timely fashion.
 
 The
following table sets forth representative high and low bid prices by calendar
quarters as reported in either the OTC Bulletin Board or the Pink Sheets during
the last two fiscal years. The level of trading in the Company's common stock
has been limited and the bid prices reported may not be indicative of the value
of the common stock or the existence of an active market. The OTC market
quotations reflect inter-dealer prices without retail markup, mark-down, or
other fees or commissions, and may not necessarily represent actual
transactions.
 
 ****
    
    **Bid
      Price**
    
    **Ask
      Price****2003**
    ****First
      Quarter
    
    $
    0.02
    
    $
    0.03Second
      Quarter
    
    $
    0.04
    
    $
    0.05Third
      Quarter
    
    $
    0.04
    
    $
    0.09Fourth
      Quarter
    
    $
    0.03
    
    $
    0.05******2004**
    ****First
      Quarter
    
    $
    0.03
    
    $
    0.09Second
      Quarter
    
    $
    0.06
    
    $
    0.09Third
      Quarter
    
    $
    0.15
    
    $
    0.22Fourth
      Quarter
    
    $
    0.50
    
    $
    0.85
 
 At
December 31, 2004, we have an aggregate of 65,509,843 of our $.001 par value
common shares issued and outstanding. As of March 22, 2005, 80,921,230 shares of
our $.001 par value common shares issued and outstanding. At December 31, 2004
we have 42,216 shares of Series A Preferred Stock (which are convertible into an
aggregate of 526,304 shares of common stock), and 195,209 shares of Series B
Preferred Stock (which are convertible into 2,272,238 shares of common stock)
issued and outstanding.
 
 **11**
 *Shareholders*
 
 As of
March 22, 2005, the number of holders of record of our common stock was 246 with
any shares held by persons or companies in street or nominee name counted only
under such street or nominee name.
 
 *Dividends*
 
 We have
not paid any cash dividends in the past and have no present intention of doing
so. Payment of future cash dividends will be determined from time to time by our
Board of Directors, based upon our future earnings (if any), financial
condition, capital requirements and other factors, the company is not presently
subject to any contractual or similar restriction on its present or future
ability to pay such dividends, except that the Company cannot pay dividends on
its common stock unless a dividend is paid on the outstanding Series A and
Series B preferred shares on an as-converted basis.
 
 *Recent
Sales of Unregistered Securities*
 
 On
September 12, 2004, we issued 7,083,331 restricted common shares comprised of:
(i) 5,799,980 to certain employees as compensation; (ii) 683,351 to settle prior
indebtedness; (iii) 100,000 shares for legal fees and (iv) 500,000 shares for
consulting services.
 
 On
October 13, 2004 we issued 28,633,333 restricted common shares comprised of: (i)
250,000 to our VP Operations; (ii) 11,900,000 shares to secure our Chairman and
Chief Executive Officer for a period of two years; (iii) 16,433,333 for
conversion of debt owed to our management company for cash investments and; (iv)
50,000 shares for legal services.
 
 On
November 1, 2004 we issued 1,750,000 restricted common shares comprised of (i)
200,000 to certain employees as compensation; (ii) 1,550,000 shares through the
exercise of warrants which were issued in 2001.
 
 During
December 2004, we agreed to issue 300,000 to two individuals for the sale of our
restricted securities.  Further during December 2004, we agreed to 
issue 10,005,175 restricted common shares to White Knight for partial conversion
of their debt.  We subsequently issued these shares on January 10,
2005.
 
 During
January 2005, we issued 3,150,000 restricted common shares comprised of (i)
100,000 shares to certain employees as compensation; (ii) 2,000,000 shares for
partial conversion of White Knight's debt; (iii) 1,000,000 shares for consulting
services, and; (iv) 50,000 shares for legal fees.
 
 During
February 2005, we issued 13,850,000 restricted common shares comprised of (i)
100,000 as a hiring incentive for our VP Sales and Marketing; (ii) 11,750,000
shares for partial conversion of White Knight's debt.
 
 During
December 2004, we issued 3,004,338 shares which comprise the fees owed to White
Knight pursuant to their management agreement.
 
 **12**
 **Item
six -** ***Management's
Discussion and Analysis or Plan of Operation***
 
 The
following discussion and analysis provides information which management believes
is relevant to an assessment and understanding of the results of our operations
and financial condition. The discussion should be read in conjunction with the
audited consolidated financial statements and notes thereto.
 
 *2003
and 2004*
 
 Since
1996, we have sought to commercialize our dual-fuel technology with limited
success. Between 2001 and the year ended December 31 2003, we experienced a
substantial slow-down in our operational state due principally to under
capitalization. We engaged White Knight on December 23, 2003 as a crisis finance
and management company. Since that date, the principals of White Knight have
arranged for all our financing and our Chief Executive Officer, Chairman of our
Board of Directors and a Director serve similar capacities with White Knight.
White Knight's executives also served as our interim Chief Financial Officer and
financial administrator.
 
 The
following compares our financial statements for the years ended 2003 and 2004.
However, 2004 was a period of reengineering our principal product as well as
addressing a number of legal and financial matters which had been created over a
period from our inception in 1996 through December 2003. We therefore believe
the following is not indicative of our future operating results.
 
 *Balance
Sheet*
 
 *Assets*
 
 For the
year ended December 31, 2003, the Company had current assets of $28,938 and
total assets of $44,515. For the year ended December 31, 2004, current assets
increased 153.9% to $73,498 and total assets increased 1,207.4% to $582.005.
 
 In
addition, during the first quarter 2005, we arranged for the purchase of various
Horiba emission testing equipment for $40,000. In addition, we acquired a new
Taylor dynometer at a cost of approximately $232,000. We intend to locate the
equipment in our new 12,000 square-foot facility in PeachTree City, Georgia. Our
research indicates a replacement value for the Horiba equipment would be in
excess of $2,000,000.
 
 *Liabilities*
 
 For the
year ended December 31, 2003, the Company had current liabilities of $1,456,198
and total liabilities of $1,986,198 including $530,000 of redeemable securities.
For the year ended December 31, 2004, current liabilities had been reduced by
$702,941 or 48.3% to $753,257 and total liabilities had been reduced by
$1,232,941 to $753,257 or 61.9%.
 
 During
this period, convertible debt in default was reduced by 72.4% from $283,200 at
year ended December 31, 2003 to $78,200 at year ended December 31, 2004. During
the 2004, the Company repaid amounts owed to the Internal Revenue Service since
1999. In addition, the Company reduced the sales and payroll taxes payable by
$115,151 or 47% from $245,245 at year ended December 31, 2003 to $130,094 at the
year ended December 31, 2004.
 
 Since the
year ended December 31, 2004, we have reached a settlement with the item listed
as accounts payable in settlement which relates to debts incurred during 2001
and 2002 and we have negotiated a settlement with PeachTree National Bank which
is listed as debt in default. We anticipate both these items will be liquidated
by the year ended December 31, 2005.
 
 **13**
 *Stockholders'
Deficit*
 
 For the
period ended December 31, 2003, the Company reflected $3,852,712 in paid-in
capital and the Company had $12,164 of common stock and a shareholder deficit
totaling $(1,941,683). For the period ended December 31, 2004, paid-in capital
increased by approximately 96.8% to $7,582,270 and the common stock had
increased by 438.5% to $65,510. During the 2004 fiscal year, total shareholders'
deficit was reduced 91.2% from $(1,941,683) at the year end December 31, 2003 to
$(171,252) at year ended 2004.
 
 In
summary, during the twelve months ended December 31, 2004, we increased current
assets by 153.9% and total assets by 1,207.4% while reducing current liabilities
by 48.3% and total liabilities by 62.1%. During this period, we increased
paid-in capital by 96.8% and common stock by 438.5% while reducing shareholders'
deficit by 91.2% and increasing shareholders' equity by 1,207.4%.
 
 *Statement
of Operations*
 
 For the
year ended December 31, 2003, the Company posted revenues of $231,269 and gross
profit of $155,354. During 2004, we dedicated our resources to reengineering the
technology and to pursuing the EPA/CARB technology verification described
elsewhere in this report. As a result, revenues during 2004 decreased by
approximately 40.1% to $138,724 and gross profit decreased by 49% to $79,336.
 
 During
the 12 month period ended December 31, 2004, our consulting fees increased by
approximately 101% from $203,859 to $410,183 and our research and development
costs increased from $0 at year ended 2003 to $130,814 at year ended December
31, 2004. The majority of the research and development costs were incurred in
connection with EPA/CARB verification application. Compensation during this
period increased from $110,013 at year ended December 31, 2003 to $1,415,576 at
year ended December 31, 2004. However, approximately $1,200,000 or 84.7% of the
compensation expenses were one-time issuances of stock to our employees and
consultants. The cash compensation was approximately $216,000.
 
 Total
expenses during the 12 months ended December 31, 2004 increased from $(515,689)
to ($2,113,045). Total expenses minus the one-time charge for the issuance of
stock was $(913,045). The Company's net loss increased from $(413,820) at year
ended December 31, 2003 to $(2,012,473) at year ended December 31, 2004.
However, taking into account the one-time charge for the issuance of stock,
during this 12 month period, the Company's net loss increased to $(812,473).
 
 Basic and
diluted loss per share increased from $(0.03) at the year ended December 31,
2003 to $(0.08). Taking into account the one-time charge for the issuance of
stock, during the 12 month period ended December 31, 2004, the basic and diluted
loss per share would have been approximately $(0.03) which is the same basic and
diluted loss per share posted at the year ended December 31, 2003.
 
 In
summary, during the twelve month period ended December 31, 2004, the Company's
revenues and gross profit decreased by 40% and 49% respectively and expenses
including the one-time charge for the issuance of stock increased 309.8%,
research and development increased by 100% and compensation increased by
1,186.7% and the basic and diluted loss per share increased by 166.5%. Excluding
the one time charge for the issuance of common stock, total expenses increased
by 77%, compensation increased by 96.3% and there was approximately no change to
the Company's loss per common share for the periods ended December 31, 2003
compared to the same period ended December 31, 2004.
  **14**
 *Controls
and Procedures*
 
 *Evaluation
of disclosure controls and procedures.*
 
 As of
December 23, 2003, the Company had not filed required Securities and Exchange
Commission (SEC) reports since December 31, 2001. During the 12 months ended
December 31, 2004, we filed annual reports for the years ended 2002 and 2003 as
well as our required quarterly reports for 2004. Prior to January 2004, we had
minimal accounting resources available due to lack of capital. During the first
quarter 2004, we relocated our executive offices and financial administration to
our offices in Tampa, Florida and instituted professional accounting controls
and systems.
 
 An
evaluation was performed under the supervision and with the participation of our
management, including the Chief Executive Officer, of the effectiveness of the
design and operation of our disclosure procedures. Based on management’s
evaluation as of the end of the period covered by this Annual Report, our
principal executive and financial officer concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) were
sufficiently effective to ensure that the information required to be disclosed
by us in the reports that the we file under the Exchange Act is gathered,
analyzed and disclosed with adequate timeliness, accuracy and completeness.
 
 Changes
in internal controls. **
 
 There
have been no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation referred to above, nor were there any significant deficiencies or
material weaknesses in our internal controls. Accordingly, no corrective actions
were required or undertaken.
 
 During
November, 2004 we made application to the National Association of Securities
Dealers (NASD) to resume trading on the over-the-counter Bulletin Board (OTCBB).
On December 10, 2004, the Company's securities were cleared for trading on the
OTCBB.
 
 *Product/technology
development*
 
 Prior to
December 2003, the Company had been unable to conduct any meaningful product
development due to lack of capital. As a result, since inception in 1996, the
Company has been unsuccessful in any meaningful sales of its technology. Between
January and June 2004, we spent six months re-engineering the electronic version
of our Fuel2 system. As discussed elsewhere in this report, during June 2004, we
commenced the independent testing required in order for our Fuel2 system to
receive EPA/CARB verification.
 
 *Sales
and Marketing*
 
 As
discussed previously, we have been unable to engage in meaningful sales lacking
an EPA/CARB verification of our Fuel2 system. However, we took certain steps and
negotiated agreements which provide an entry point for the sale of Fuel2 system
in the continental US, South America, China and India. Since December 2003 we
have:
 
 ·
    We
      renegotiated a license agreement with BAF Technologies to facilitate the
      sale of our Fuel 2(TM) system to various municipalities and governmental
      entities in the States of New York and
Texas;
 
 ·
    We
      renegotiated a license agreement with DRV Energy to facilitate the sale of
      our Fuel 2(TM) system throughout the mid-United States
      marketplace;
 
 ·
    We
      negotiated a license agreement with Civic Group based in Brazil to
      facilitate the sale of our Fuel 2(TM) system throughout South
      America.
 
 ·
    We
      have entered a Memorandum of Understanding with WITCO, Inc. to
      commercialize our technology in China and India;
 
 **15**
 During
2005, we
 
 ·
    We
      hired an industry-experienced Vice President, Sales and Marketing to make
      direct contact with prospective customers in the private sector
      worldwide;
 
 ·
    We
      have launched a program trademarked No School Bus Left Behind
      Initiative(TM) which seeks the direct sale of our system to school systems
      throughout the continental United States.
 
 *Facilities*
 
 Prior to
December 2003, we shared our office and work space with the technology inventor.
This facility had no meaningful testing or research and development equipment.
The research and development we conducted during the first six months of 2004
required us to make use of our licensee’s facility in Texas.
 
 During
December 2004, we negotiated a lease for a 12,000 square foot facility in
PeachTree City, Georgia. During the first quarter 2005, we acquired a variety of
Horiba emission testing equipment. Further
during 2005, we acquired a Taylor dynamemter designed to handle heavier
vehicles. Our new facility, when fully installed and calibrated, will have two
engines rooms and a state-of-the-art emission testing lab. We believe this asset
will allow us to substantially accelerate the development of future products as
well as permit us to offer the greatest degree of efficiency for our customers.
 
 We have
no off-balance sheet items connected with our Company or our operations.
 **
 *Certain
expectations for 2005*
 
 We
believe our dual-fuel technology has immediate market potential outside of the
United States with particular emphasis on areas with a significant differential
between the cost of diesel and natural gas. We will continue our primary
objective to complete the EPA/CARB verification.
 
 The
Company is also pursuing the use of its technology with stationary diesel
engines and on new vehicles manufactured after 2004. We are also exploring the
use of our technology in bio-diesel and synthetic field applications.
 
 **16**
 **Risk
Factors**
 
 *The
Company's liquidity, capital resources, and results of operations indicate that
an investment in the Company remains speculative, involves a high degree of
risk, and should not be made by persons who cannot afford the loss of their
entire investment. Prospective investors in the Company should carefully
consider all of the information contained in this Report before deciding whether
to purchase securities of the Company, and, in particular, the factors set forth
below.*
 
 *Risks
associated with our Company*
 
 *We
Have A History Of Losses And May Never Achieve Profitability.*
 
 We have
incurred net losses since our inception. At December 31, 2004, our accumulated
deficit was $(7,821,406)   We anticipate that we will continue to
incur additional operating losses in the near term. Our losses to date have
resulted principally from expenses incurred in our research and development
programs, including beta testing, and from general and administrative and sales
and marketing 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
the future.
 
 *Our
Limited Success Makes It Difficult To Analyze Our Prospects For Future
Success.*
 
 We were
organized on April 1, 1996 and have conducted only limited operations to date,
consisting of negotiating the license to use the patents, further research and
development, including beta testing, and limited sales efforts. No assurances
can be given that we will develop a marketing and sales program which will
generate significant revenues from the sales of our dual fuel conversion
systems. The likelihood of our success must be viewed in light of the delays,
expenses, problems and difficulties frequently encountered by an enterprise in
its development stage, many of which are beyond our control. We are subject to
all the risks inherent in the development and marketing of new
products.
 
 *Technological
Change May Make Our Products Obsolete Or Difficult To Sell At A
Profit.*
 
 To date,
the market for alternative fuel technology systems and equipment has not, to our
knowledge, been characterized by rapid changes in technology. However, there can
be no assurance that new products or technologies, presently unknown to
management, will not, at any time in the future and without warning, render our
dual fuel technology less competitive or even obsolete. Major automobile and
truck companies, academic and research institutions, or others, for example,
could develop new fuels or new devices which could be installed at the original
equipment manufacturer level and which could potentially render our systems
obsolete. Moreover, the technology upon which our dual fuel systems are based
could be susceptible to being analyzed and reconstructed by an existing or
potential competitor. Although the Company is the license holder of certain
United States patents respecting its proprietary dual fuel system, we may not
have the financial resources to successfully defend such patent, were it to
become necessary, by bringing patent infringement suits against parties that
have substantially greater resources than those available to us.
 
 In
addition, competitors may develop technology and systems that can be sold and
installed at a lower per unit cost. There can be no assurance that we will have
the capital resources available to undertake the research which may be necessary
to upgrade our equipment or develop new devices to meet the efficiencies of
changing technologies. Our inability to adapt to technological change could have
a materially adverse effect on our results of operations.
 
 *We
license our proprietary technology from a related third party and such
technology may not be adequately protected from unauthorized use by others,
which could increase our litigation costs.*
 
 Our
success depends to a great extent on our ability to protect our intellectual
property. We license our core intellectual property pursuant to a license
agreement between the Company and Electronic Controls Technology LLC
("ECT").  Our ability to compete effectively will depend in part on our
ability to develop and maintain proprietary aspects of our technology and either
to operate without infringing the proprietary rights of others or to obtain
rights to technology owned by third parties. Pursuant to the License Agreement,
we have licensed certain patents from ECT. We cannot assure you that any of our
licensed technology rights will offer protection against competitors with
similar technology. We cannot assure you that the patents covered by the License
Agreement will not be challenged, invalidated or circumvented in the future or
that the rights created by those patents will provide a competitive advantage.
We also rely on trade secrets, technical know-how and continuing invention to
develop and maintain our competitive position. We cannot assure you that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets.
 
 **17**
 *We
license our proprietary technology from a related third party and such
technology may not be adequately protected from unauthorized use by others,
which could increase our litigation costs. (continued)*
 
 We cannot
assure you that we will not become subject to patent infringement claims and
litigation in the United States or other countries or interference proceedings
conducted in the United States Patent and Trademark Office to determine the
priority of inventions. The defense and prosecution of intellectual property
suits, interference proceedings, and related legal and administrative
proceedings are costly, time-consuming and distracting. We may also need to
pursue litigation to enforce any patents issued to us or our collaborative
partners, to protect trade secrets or know-how owned by us or our collaborative
partners, or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation or interference proceeding will
result in substantial expense to us and significant diversion of the efforts of
our technical and management personnel. Any adverse determination in litigation
or interference proceedings could subject us to significant liabilities to third
parties. Further, as a result of litigation or other proceedings, we may be
required to seek licenses from third parties which may not be available on
commercially reasonable terms, if at all.
 
 *We
Have Limited Manufacturing Experience and Will Rely Upon Third Party Contract
Manufacturers Who Have Not Yet Been Contractually Secured*
 
 To be
successful, we must manufacture, or contract with a third party for the
manufacture of, our current and future products in sufficient quantities and on
a timely basis, while maintaining product quality and acceptable manufacturing
costs. Should we not timely secure a contract manufacturer, or for some reason
we are no longer able to obtain key elements from a supplier, we will not be
able to produce or will be delayed in producing conversion systems for sale or
distribution, which could cause delays in our operation or sales or make
continued operation or sales unprofitable.
 
 *The
sale of our Fuel 2(TM) system must be conjunction with components we do not
offer*
 
 The
conversion of a medium or heavy duty mobile diesel engine requires three primary
components: (i) our Fuel 2(TM) conversion system; (ii) fuel storage tanks,
and; (iii) a specialized catalytic converter (for sales as an Emission Control
Device).  While we can control the pricing and delivery of our Fuel 2(TM)
systems, we have no control over pricing, availability or delivery of fuel
storage tanks or specialized catalytic converters.  The costs of these
items can potentially prevent us from selling our Fuel 2(TM) system either
because the costs of these additional components make the conversion of a
vehicle uneconomical or the due to lack of availability of either additional
component.  We believe fuel storage tanks are readily available on the open
market at prices that will allow us to commercialize our Fuel 2(TM) system and
we believe the specialized catalytic converters can be likewise acquired on the
open market at prices that will allow us to commercialize our Fuel 2(TM)
system.  However, there can be no assurance given that our customers will
be able to acquire these components at prices that permit us to sell our Fuel
2(TM) system as a fuel savings device because the upfront costs to acquire and
install these components.
 
 **18**
 *The
Limited Availability of Alternative Fuels Can Hinder Our Ability to 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 fuel vehicles
traditionally has been the limited availability of alternative fuel sources,
such as natural gas and propane. The success of engines based on alternative
fuels will probably be directly effected by the development of the
infrastructure of the natural gas industry and the widespread availability of
such fuel sources. To some degree, this problem will remain at the forefront of,
and be an impediment to, the success of alternative fuel power sources. However,
we believe that with the development of the dual fuel conversion system,
vehicles will not be tied exclusively to alternative fuels, but will have the
option and ability to operate on standard diesel fuel alone. In all events, our
business and the market for alternative fuel vehicles would benefit
substantially from the growth of the infrastructure of the natural gas industry
and the more widespread availability of alternative fuels. Conversely, our
business and the market for alternative fuel vehicles would be substantially
hurt by a diminished or lack of growth of the infrastructure of the natural gas
industry and the less widespread availability of alternative fuels.
 
 *The
Nature of Our Products Subjects us to Product Liability Risks.*
 
 Our
product and services relate to fuel system components which handle or come into
contact with natural gas which is highly combustible. A malfunction of or design
defect in certain of our products or improper design, construction, installation
or servicing of facility and equipment infrastructure could result in liability,
tort or warranty claims. Although we attempt to reduce the risk of exposure from
such claims through warranty disclaimers and liability limitation clauses in our
sales agreements and by maintaining product liability insurance, we cannot
assure you that these measures will be effective in limiting our liability for
any damages. Any liability for damages resulting from product malfunctions or
services provided could be substantial and could have a material adverse effect
on our business and operating results. In addition, a well-publicized actual or
perceived malfunction or impropriety involving our products or service could
adversely affect the market's perception of our products in general, regardless
of whether any malfunction or impropriety is attributable to our products or
services. This could result in a decline in demand for our products and
services, which would have a material adverse effect on our business and
operating results.
 
 *Competition
From Companies With Already Established Marketing Links To Our Potential
Customers May Adversely Effect Our Ability To Market Our
Products.*
 
 Current
and potential competitors have longer operating histories, larger customer
bases, greater brand name recognition and significantly greater financial,
marketing and other resources than we have. Certain of our competitors may be
able to secure product from vendors on more favorable terms, devote greater
resources to marketing and promotional campaigns, and adopt more aggressive
pricing or inventory availability policies, than we will. There can be no
assurance that we will be able to compete successfully against current and
future competitors, and competitive pressures faced by us are likely to have a
materially adverse affect on our business, results of operations, financial
condition and prospects.
 
 *Risks
associated with our securities*
 
 *Unless
An Active Public Trading Market Develops For Our Securities, You May Not Be 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, if developed,
that it will be maintained. Failure to develop or maintain an active trading
market could negatively affect the price of our securities.
 
 **19**
 *Our
Common Stock May be Subject to Penny Stock Regulation.*
 
 The
Securities Enforcement and Penny Stock Reform Act of 1990 requires special
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a "penny stock". Securities Exchange Commission
("Commission") regulations generally define a penny stock to be an equity
security that has a market price of less than $5.00 per share. These regulations
subject all broker-dealer transactions involving such securities to the special
"Penny Stock Rules" set forth in Rule 15g-9 of the Securities Exchange Act of
1934 (the "34 Act"). These Rules affect the ability of broker-dealers to sell
the Company's securities and also may affect the ability of purchasers of the
Company's common stock to sell their shares in the secondary market, if such a
market should ever develop.
 
 *We
May Issue Preferred Stock With Certain Preferences which May Depress Market
Price Of The Common Stock.*
 
 The Board
of Directors may designate additional series or classes of preferred shares
without shareholder consent and those designations may give the holders of the
preferred stock, if previously issued, voting control and other preferred rights
such as to liquidation and dividends. The authority of the Board of Directors to
issue such stock without shareholder consent may have a depressive effect on the
market price of our common stock even prior to any such designation or issuance
of preferred stock.
 
 *Members
of our Board of Directors either own or control 61% of our voting
shares*
 
 Primarily
as repayment of cash investments, our Chairman and our Chief Executive Officer
combined directly own approximately 37% of our voting common stock. Further,
White Knight SST, our management company which is owned by our Chairman and our
Chief Executive Officer owns approximately 24% of our voting common shares. As a
result, these two individuals may direct approximately 61% of our voting common
shares. As such, they may approve or disapprove items to which you may not
agree.
 
 **20**
 **Item
seven -** ***Financial
Statements***
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 Board of
Directors
 Hybrid
Fuel Systems, Inc.
 
 We have
audited the accompanying balance sheets of Hybrid Fuel Systems, Inc. as of
December 31, 2004 and 2003 and the related statements of operations, changes in
shareholders’ equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
 
 The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Hybrid Fuel Systems, Inc. and as of
December 31, 2004 and 2003 and the results of operations and cash flows for the
years ended December 31, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America.
 
 
 /s/
BRIMMER, BUREK & KEELAN LLP
 Brimmer,
Burek & Keelan LLP
 
 Tampa,
Florida
 March 24,
2005
 
 **21**
 **HYBRID
      FUEL SYSTEMS, INC.****BALANCE
      SHEETS****DECEMBER
      31, 2004 AND 2003**ASSETS2004
    
    2003Current
      assetsCash
    
    $
    2,025
    
    $
    6Accounts
      receivable, net of $10,000 and $0 allowance
      in
      2004 and 2003, respectively.
    
    
    27,005
    
    
    10,953Other
      receivables
    
    
    —
    
    
    5,395Prepaid
      expenses and deposits
    
    
    7,845
    
    
    —Inventories
    
    
    36,623
    
    
    12,584Total
      Current Assets
    
    
    73,498
    
    
    28,938Property
      plant & equipment, net
    
    
    8,507
    
    
    15,577Deferred
      compensation
    
    
    500,000
    
    
    —Total
      assets
    
    $
    582,005
    
    $
    44,515
  Please
Read Accompanying Notes to Financial Statements
  **22**
 **HYBRID
      FUEL SYSTEMS, INC.****BALANCE
      SHEETS****DECEMBER
      31, 2004 AND 2003**LIABILITIES
      AND SHAREHOLDERS' DEFICIT2004
    
    2003Current
      liabilitiesAccounts
      payable
    
    $
    120,980
    
    $
    166,734Accounts
      payable in settlement
    
    
    121,956
    
    
    121,956Debt
      in litigation
    
    
    109,868
    
    
    109,868Due
      to related parties
    
    
    7,197
    
    
    157,528Due
      to related parties, convertible debt
    
    
    18,866
    
    
    179,746Debt
      in default
    
    
    123,272
    
    
    123,272Convertible
      debt in default
    
    
    78,200
    
    
    283,200Sales
      and payroll taxes payable
    
    
    130,094
    
    
    245,245Other
      current liabilities
    
    
    42,824
    
    
    68,649Total
      current liabilities
    
    
    753,257
    
    
    1,456,198Redeemable
      securities
    
    
    —
    
    
    530,000SHAREHOLDERS'
      DEFICITShareholders'
      deficitPreferred
      A stock ( .01 par value; 42,215 shares authorized;
    
    
    422
    
    
    42242,215
      shares issued and outstanding) (liquidation preference$8,021)Preferred
      B stock ( .01 par value; 954,563 shares authorized;
    
    
    1,952
    
    
    1,952195,209
      shares issued and outstanding) (liquidation preference$1,002,291)Common
      stock ($.001 par value; 95,000,000 shares authorized;
    
    
    65,510
    
    
    12,16465,509,843
      and 12,163,646 shares issued and outstanding,respectively)Additional
      paid-in capital
    
    
    7,582,270
    
    
    3,852,712Accumulated
      deficit
    
    
    (7,821,406
    )
    
    (5,808,933
    )Total
      shareholders' deficit
    
    
    (171,252
    )
    
    (1,941,683
    )Total
      liabilities and shareholders' deficit
    
    $
    582,005
    
    $
    44,515
 
 Please
Read Accompanying Notes to Financial Statements
 **23**
 **HYBRID
      FUEL SYSTEMS, INC.****STATEMENT
      OF OPERATIONS****FOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003**2004
    
    2003REVENUESRevenue
      from product sales and related income
    
    $
    138,724
    
    $
    231,269Cost
      of product sales
    
    
    59,388
    
    
    75,915Gross
      profit
    
    
    79,336
    
    
    155,354EXPENSESOperating
      expensesConsulting
      fees
    
    
    410,183
    
    
    203,859Research
      and development
    
    
    130,814
    
    
    —Compensation
    
    
    1,415,576
    
    
    110,013Other
      operating expenses
    
    
    156,472
    
    
    201,817Total
      expenses
    
    
    2,113,045
    
    
    515,689Loss
      from operations
    
    
    (2,033,709
    )
    
    (360,335
    )Other
      expenses (income)Inventory
      obsolescence
    
    
    41
    
    
    11,186Settlements
    
    
    (17,911
    )
    
    9,227Interest
      expense
    
    
    8,041
    
    
    34,448Other
      income
    
    
    (11,407
    )
    
    (1,376
    )(Income)
      loss from other expenses
    
    
    (21,236
    )
    
    53,485Net
      loss
    
    
    (2,012,473
    )
    
    (413,820
    )Basic
      and diluted loss per share
    
    $
    (0.08
    )
    $
    (0.03
    )Basic
      and diluted weighted average number ofcommon
      shares outstanding
    
    
    23,857,093
    
    
    12,054,742
  Please
Read Accompanying Notes to Financial Statements
 
 **24**
 **HYBRID
FUEL SYSTEMS**
 **STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 
 **Preferred
      Stock**
    
    **Common
      Stock**
    
    
    
    
    
    **Total****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    
    
    
    
    **Paid-In**
    
    **Accumulated**
    
    **Shareholders'****Series
      A**
    
    **Series
      A**
    
    **Series
      B**
    
    **Series
      B**
    
    **Shares**
    
    **Amount**
    
    **Capital**
    
    **deficit**
    
    **deficit**Balance
      Dec 31, 2002
    
    
    45,215
    
    $
    422
    
    
    195,209
    
    $
    1,952
    
    
    11,963,646
    
    $
    11,964
    
    $
    3,832,912
    
    $
    (5,395,113
    )
    $
    (1,547,863)
    )Stock
      issued for
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    100
    
    
    9,900
    
    
    
    
    
    10,000legal settlementIssuance
      of stockfor conversion of note
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    100
    
    
    9,900
    
    
    
    
    
    10,000Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (413,820
    )
    
    (413,820
    )Balance
      Dec 31, 2003
    
    
    45,215
    
    $
    422
    
    
    195,209
    
    $
    1,952
    
    
    12,163,646
    
    $
    12,164
    
    $
    3,852,712
    
    $
    (5,808,933
    )
    $
    (1,941,683
    )Redemption
      termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    530,000
    
    
    
    
    
    530,000Common
      Stock Issued:Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,450,000
    
    
    3,450
    
    
    148,681
    
    
    
    
    
    152,131Compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,983,351
    
    
    3,983
    
    
    515,853
    
    
    
    
    
    519,836Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    150
    
    
    17,850
    
    
    
    
    
    18,000Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,550,000
    
    
    1,550
    
    
    213,900
    
    
    
    
    
    215,450Cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    300
    
    
    49,700
    
    
    
    
    
    50,000Convertible
      debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,570,000
    
    
    2,570
    
    
    221,769
    
    
    
    
    
    224,339Deferred
      compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,900,000
    
    
    11,900
    
    
    583,100
    
    
    
    
    
    595,000Management
      fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,004,338
    
    
    3,004
    
    
    417,603
    
    
    
    
    
    420,607Related
      party debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,438,508
    
    
    26,439
    
    
    1,031,102
    
    
    
    
    
    1,057,541Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,012,473
    )
    
    (2,012,473
    )Balance
      Dec 31, 2004
    
    $
    42,215
    
    $
    422
    
    $
    195,209
    
    $
    1,952
    
    
    65,509,843
    
    $
    65,510
    
    $
    7,582,270
    
    
    ($7,821,406
    )
    
    ($171,252
    )
 Please
Read Accompanying Notes to Financial Statements
 
 **25**
 **HYBRID
      FUEL SYSTEMS, INC.****STATEMENTS
      OF CASH FLOWS****FOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003**2004
    
    2003CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
    
    $
    (2,012,473
    )
    $
    (413,820
    )Adjustments
      to reconcile net income to netcash
      provided (used) by operating activities:Depreciation
    
    
    10,271
    
    
    9,804Warrants
      for services and warrant modification
    
    
    213,900
    
    
    —Common
      stock issued for settlement of debt
    
    
    —
    
    
    10,000Common
      stock issued for legal services
    
    
    18,000
    
    
    —Common
      stock issued for compensation
    
    
    519,836
    
    
    —Common
      stock issued for management fees
    
    
    420,607
    
    
    -Change
      in operating assets and liabilitiesAccounts
      receivable
    
    
    (16,052
    )
    
    243Inventory
    
    
    (24,039
    )
    
    6,951Accounts
      payable
    
    
    (45,753
    )
    
    24,852Accrued
      tax settlement
    
    
    5,000
    
    
    —Accrued
      expenses
    
    
    (4,848
    )
    
    29,295Related
      party payable
    
    
    —
    
    
    106,144Deferred
      compensation
    
    
    100,000
    
    
    —Prepaid
      and deposits
    
    
    7,845
    
    
    —Net
      cash provided (used) by operating activities
    
    
    (807,706
    )
    
    (226,531
    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of leasehold improvements
    
    
    (3,200
    )
    
    —Net
      cash provided (used) by investing activities
    
    
    (3,200
    )
    
    —CASH
      FLOWS FROM FINANCING ACTIVITIES:Loans
      to employees
    
    
    —
    
    
    (3,756
    )Loans
      from related parties
    
    
    896,660
    
    
    179,746Payments
      on notes payable
    
    
    —
    
    
    (49,600
    )Payments
      on settlement
    
    
    (15,006
    )
    
    —Proceeds
      from convertible debt
    
    
    —
    
    
    100,000Payments
      on tax settlement
    
    
    (120,279
    )
    
    —Proceeds
      from the sale of common stock
    
    
    50,000Proceeds
      from the exercise of warrants
    
    
    1,550
    
    
    —Net
      cash provided (used) by financing activities
    
    
    812,925
    
    
    226,390Net
      decrease in cash and cash equivalents
    
    
    2,019
    
    
    (141
    )Beginning
      cash and cash equivalents
    
    
    6
    
    
    147Ending
      cash and cash equivalents
    
    $
    2,025
    
    $
    6
 
 Please
Read Accompanying Notes to Financial Statements
 
 **26**
 **HYBRID
      FUEL SYSTEMS, INC.****STATEMENTS
      OF CASH FLOWS****FOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003****(continued)**
 
 SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the year for interest
    
    $
    —
    
    $
    9,517Non-Cash
      investing and financing activities:Common
      stock issued for settlement of debt
    
    $
    152,131
    
    $
    10,000Common
      stock issued for conversion of convertible note
    
    $
    224,339
    
    $
    10,000Common
      stock issued for compensation
    
    $
    512,023
    
    $
    —Common
      stock issued for services
    
    $
    18,000
    
    $
    —Common
      stock issued for warrants exercised and modification
    
    $
    215,450
    
    $
    —Common
      stock issued for deferred compensation liability
    
    $
    595,000
    
    $
    —Common
      stock issued for related party debt
    
    $
    1,057,541
    
    $
    —Common
      stock issued for management fees
    
    $
    420,607
    
    $
    —
 
 Please
Read Accompanying Notes to Financial Statements
 
 **27**
 **HYBRID
FUEL SYSTEMS, INC.**
 **NOTES
TO FINANCIAL STATEMENTS**
 **DECEMBER
31, 2003 AND 2004**
  **NOTE
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  Hybrid
Fuel Systems, Inc. (the " Company.") manufactures retrofit systems for the
conversion of gasoline and diesel engines to non-petroleum based fuels such as
compressed natural gas. The Company manufactures and sells its systems to
customers pursuant to a license agreement originally acquired on June 1, 1996
and again on August 31, 2004 with a related party. The Company has exclusive
world-wide rights to all things which result from five issued and one pending
U.S. Patent.
  *Cash
and Cash Equivalents*
  For
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
  *Accounts
Receivable*
  Accounts
receivable, are stated at estimated net realizable value. Accounts receivable
are comprised of balances due from customers. In determining collectibility,
historical trends are evaluated and specific customer issues are reviewed to
arrive at appropriate allowances.
  *Inventories*
  Inventories,
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. Inventories consist of component parts used in the
manufacture and assembly of retrofit systems for the conversion of gasoline and
diesel engines to non-petroleum based fuels such as compressed natural
gas.
  *Property,
Plant and Equipment*
  Depreciation
is provided for using the straight-line method, in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives
(asset categories range from three to seven years). Leasehold improvements are
amortized using the straight-line method over the lives of the respective leases
or the service lives of the improvements, whichever is shorter. Leased equipment
under capital leases is amortized using the straight-line method over the lives
of the respective leases or over the service lives of the assets for those
leases that substantially transfer ownership. Accelerated methods are used for
tax depreciation.
  *Impairment
of Assets*
  The
Company's policy is to evaluate whether there has been a permanent impairment in
the value of long-lived assets, certain identifiable intangibles and goodwill
when certain events have taken place that indicate that the remaining balance
may not be recoverable. When factors indicate that the intangible assets should
be evaluated for possible impairment, the Company uses an estimate of related
undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of these assets. Losses on impairment are
recognized by a charge to earnings. Factors considered in the valuation include
current operating results, trends and anticipated undiscounted future cash
flows.
  **28**
 *Income
Taxes*
  The
Company utilizes the guidance provided by Statement of Financial Accounting
Standards No. 109, " Accounting for Income Taxes." (SFAS 109). Under the
liability method specified by SFAS 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the enacted tax rates which will be in
effect when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities. Valuation allowances are
provided if necessary to reduce deferred tax assets to the amount expected to be
realized.
  *Earnings
(Loss) Per Common Share*
  Earnings
(loss) per share are computed using the basic and diluted calculations on the
face of the statement of operations. Basic earnings (loss) per share are
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings (loss) per
share is calculated by dividing net income (loss) by the weighted average number
of shares of common stock outstanding for the period, adjusted for the dilutive
effect of common stock equivalents, using the treasury stock method. The
warrants outstanding were determined to be antidilutive and therefore do not
affect earnings per share.
  *Use
of Estimates*
  The
preparation of financial statements in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at December 31, 2004 and 2003, as well as the
reported amounts of revenues and expenses for the years then ended. The actual
outcome of the estimates could differ from the estimates made in the preparation
of the financial statements.
  *Revenue
Recognition*
  Revenues
are recognized when the merchandise is shipped to the customer, which is when
title and risk of loss has passed to the customer.
  *Stock
Based Compensation*
  The
Company has adopted the disclosure-only provisions of SFAS No. 123, " Accounting
for Stock Based Compensation.", but applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for options issued to
employees. Under Opinion No. 25, the intrinsic method is used to determine
compensation expense when the fair market value of the stock exceeds the
exercise price on the date of grant. As of December 31, 2003 and 2004, no
options had been granted under the plan and therefore no compensation expense
has been recognized.
  During
October 2004, the Company modified certain outstanding warrant rights from $.01
per share to $.001 per share and increased those warrants from 1,550 to
1,550,000. Immediately thereafter the holders redeemed their warrants. As a
result the Company used the Black Scholes method of valuation of the modified
warrants and expensed the valuation as determined in the amount of $213,900. The
fair value per option (in dollars) was $0.139. The Black Scholes calculation was
based on an expected option term of less than one year, volatility was 241.28%,
risk free interest rate 2.88% and expected dividend yield of 0.00%
  **29**
 *Research
and Development Costs*
  The
Company charges research and development costs to expense as
incurred.
  *Fair
Value of Financial Instruments*
  The
Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:
  *Cash,
Accounts Receivable, Accounts Payable and Accrued Expenses* : The
carrying amounts reported in the balance sheet for cash, accounts receivable,
accounts payable and accrued expenses approximate their fair value due to their
relatively short maturity.
  *Long-Term
Obligations* : The
fair value of the Company's fixed-rate long-term obligations is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. At December 31,
2004 and 2003, the Company did not have any long-term obligations.
  The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern for a reasonable period, not to exceed one year. As
reflected in the financial statements, the Company has negative working capital
for the year ended December 31, 2004 and a loss from operations for the year
2004. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern. The Company has adequate financing in place and
subsequent to December 31, 2004 has completed significant trials on its new
conversion kits and has received initial potential orders for sales so as to
provide funding for the continued operations of the Company.
 
 **NOTE
2 OPERATING LEASES**
 
 For the
year ended December 31, 2004 and the fourth quarter of the year ended December
31, 2003, the Company subleased its building from a related party on a moth to
month basis with the same terms and amounts as the primary lease. The monthly
rental payments were $1,500. Prior to September, 2003, the Company leased a
facility for monthly base rent of $2,351 plus cost of living increases, property
taxes and water fees. This lease was terminated when the Company moved in
September 2003.
 
 In
addition, in the year ended December 31, 2003 the Company had a vehicle lease
which expired during the year then ended. The Company also has a lease for
office equipment which is currently on a month to month basis.
 
 Rent
expense for the years ended December 31, 2004 and 2003 was $20,124 and $33,507,
respectively.
 
 During
December 2004, the Company executed a two year lease for a 12,000 square foot
facility. The monthly base rental expense is $5,230 and the lease expires on
December 31, 2006. The lease requires comprehensive coverage insurance with
minimum limits of $500,000 per person and $1,000,000 per incident and property
damage limits of $100,000 or the minimum amount of coverages required in the
master lease, whichever is greater. All applicable terms and conditions of the
master lease are incorporated into the sublease.
  
 **30**
 The
following is a schedule by years of the future minimum lease payments under this
operating lease:
 December
      31,2005
    
    $
    57,5302006
    
    
    62,7602007
    
    
    02008
    
    
    02009
    
    
    0Total
      minimum lease payments
    
    $
    120,290
 ****
 **NOTE
3 RELATED PARTY TRANSACTIONS**
 
 *License
Agreement*
  The
Company entered into a licensing agreement collectively with Frank Davis (a
significant stockholder and consultant) and Engine Control Technology LLC (ECT).
The license gives the Company the exclusive world-wide rights, to utilize and
exploit five issued and one pending patents including marketing and selling
products. The underlying patents were developed by Frank Davis and other family
members who are employees of the Company and have since been assigned to ECT,
the owner of which is Patricia Davis.  Patricia Davis is the wife of Frank
Davis our Chief Technical Consultant.
  In
addition, the Company has a consulting agreement with Frank Davis to probvide
various technical consulting services. the agreement expires in 2009 but is
automatically renewable annually thereafter, if not terminated by written
notice. During the term of the agreement, the consultant shall receive health
and dental insurance for himself and his immediate family which includes his
wife, the use of a vehicle and reimbursement of certain related expenses.
  *Leases*
  The
Company currently subleases a building from ECT on a month to month basis on the
same terms and amount as the primary lease. The monthly lease amount is
$1,500.
  *Equity*
  At the
beginning of 2004, the Company issued 3,450,000 shares of common stock as bonus
compensation to various members of the Davis family and to Frank Davis, all of
whom are employees of our Company. During December, 2004, the Company issued
3,004,338 shares of common stock as payment to White Knight for fees earned
pursuant to the Company's agreement.
  The
Company issued 11,900,000 shares in advance payment for a consulting agreement
with John Stanton and Mark Clancy at a value of $595,000. A remaining $5,000 or
100,000 shares is still due on that agreement at December 31, 2004.
  The
Company issued 26,438,508 shares of common stock in payment of approximately
$1,057,541 of loans made by our Chairman and Chief Executive Officer through
White Knight SST.
  **31**
 **NOTE
4 PROPERTY, PLANT AND EQUIPMENT, NET**
  At
December 31, 2004 and 2003, property, plant and equipment, net consist of the
following:
  **2004**
    
    **2003****Machinery
      and equipment**
    
    $
    63,652
    
    $
    63,651**Furniture,
      fixtures and equipment**
    
    $
    7,461
    
    $
    7,461**Vehicles**
    
    $
    41,336
    
    $
    46,336**Leasehold
      improvements**
    
    $
    3,200
    
    $
    5,775**Less
      accumulated depreciation and amortization**
    
    $
    (107,142
    )
    $
    (107,646
    )**Total**
    
    $
    8,507
    
    $
    15,577
 Depreciation
expense charged to operations was $10,471 and $9,804 for the years ended
December 31, 2004 and 2003, respectively.
 
 **NOTE
5 - INCOME TAXES**
 
 Income
tax expense (benefit) for the years ended December 31, 2004 and 2003 are as
follows:
 
 **2004**
    
    **2003****Current
      income tax expense (benefit)**
    
    $
    —
    
    $
    —**Deferred
      income tax expense (benefit) net operating****loss carryforward**
    
    
    (746,834
    )
    
    (287,490
    )**Change
      in valuation allowance**
    
    
    (746,834
    )
    
    (287,490
    )**Income tax expense (benefit)**
    
    $
    —
    
    $
    —
 
 Income
taxes for the years ended December 31, 2004 and 2003 differ from the amounts
computed by applying the effective income tax rate of 37% to income before
income taxes as a result of the change in the valuation allowance.
 
 Temporary
differences and carryforwards that give rise to deferred tax assets and
liabilities as of December 31, 2004 and 2003 are as follows:
 
 As of
December 31, 2004, the Company has a net operating loss carryforward of
approximately $6,658,867 available to offset taxable income through
2025
 
 **2004**
    
    **2003**Net
      operating loss carryforwards
    
    $
    2,463,780
    
    $
    1,716,946Valuation
      allowance
    
    $
    2,463,780
    
    $
    1,716,946
  **32**
 **NOTE
6 DEBT IN DEFAULT**
 
 The
Company did not meet the payment terms on the note payable to Peachtree National
Bank during the years ended December 31, 2004 and 2003. The note is secured by
the common stock owned by Robby Davis and Ricky Davis, both employees of the
Company. The provisions of the note allow for the note to become immediately and
fully payable upon default of payments. While the bank had not initiated any
remedy actions for the default as of December 31, 2004 or 2003, the full balance
of the note has been reclassified as a current liability for both
years.
 
 During
March, 2005, the Company negotiated a settlement with PeachTree National Bank
requiring the Company to remit $20,000 upon acceptance of the transaction,
followed by a $30,000 payment followed by a monthly payment plan of $10,000
until the PeachTree Note is paid in full. The payment of $20,000 was delivered
to PeachTree during March 2005.
 
 **NOTE
7 COMMITMENTS AND CONTINGENCIES**
 
 *Operating
Leases*
 
 Describe
new facility lease:
 
 The
Company is delinquent in the payment of payroll and state sales taxes. The
Company is currently following payment schedules, developed after negotiations
with the taxing authorities. Amounts in arrears for delinquent taxes, along with
estimated penalties and interest assessed by the taxing authorities are as
follows, as of December 31, 2004 and 2003
 
 **2004**
    
    **2003**Payroll and sales taxes
    
    $
    85,588
    
    $
    162,739Penalties and interest
    
    $
    44,506
    
    $
    82,506$
    130,094
    
    $
    245,245
 *Litigation*
 
 The
Company is, from time to time, involved in litigation relating to claims arising
out of its operations in the ordinary course of business. The Company believes
that none of the claims that were outstanding as of December 31, 2004 and 2003
should have a material adverse impact on its financial condition or results of
operations.
 
 **NOTE
8 STOCK OPTIONS**
 
 The
Company's Stock Option Plan (" SOP.") was adopted in 2001 to provide for the
grant to employees up to 2,000,000 incentive stock options within the meaning of
Section 422 of the Internal Revenue Code. The SOP, which is administered by the
Company's Board of Directors, is intended to provide incentives to directors,
officers, and other key employees and enhance the Company's ability to attract
and retain qualified employees. Stock options are granted for the purchase of
common stock at a price not less than the 100% of fair market value of the
Company's common stock on the date of the grant (110% for holders of more than
10% of the total combined voting power of all classes of capital stock then
outstanding). As of December 31, 2004 and 2003, no options had been granted
under the plan.
 
 *Warrants*
 
 The
Company has issued warrants to purchase shares of common stock to consultants
and other non employees. The company uses the Black Scholes option pricing model
to value warrants issued to non employees.
 
 **33**
  The
following table summarizes the Company's warrant activity:
 
 Number
      of
    
    Weighted
      AverageWarrants
    
    Exercise PriceBalance
      as of December 31, 2002
    
    
    1,935,000
    
    
    0.7AdditionsExercisedExpirations
    
    
    -352,500
    
    
    -0.94Balance
      as of December 31, 2003
    
    
    1,582,500
    
    $
    0.58Modifications
    
    
    1,395,000Exercised
    
    
    1,550,000Expired
    
    
    (565,000
    )Balance
      as of December 31, 2004
    
    
    862,500
    
    $
    0.57
 
 
 Warrants
    
    Outstanding
    
    
    
    Warrants
    
    ExercisableWeightedAverage
    
    WeightedRemaining
    
    Average
    
    
    
    WeightedRangeof
      Exercise
    
    NumberOutstanding
    
    Contractual
      Life
    
    ExercisePrice
    
    WarrantsExercisable
      at
    
    Average
      ExercisePrices
    
    12/31/2004
    
    (years)
    
    12/31/2004
    
    12/31/2004
    
    Price$.50
      - $1.00
    
    
    862,500
    
    
    0.90
    
    $
    0.57
    
    
    862,500
    
    $
    0.57
 
 
 
 **NOTE
9 SHAREHOLDERS' EQUITY**
 
 *Preferred
Stock*
 
 Effective
February 1, 2002, the Company designated 999,779 shares of previously
undesignated preferred stock as Series A Preferred Stock, for which 45,215
shares are authorized and Series B Preferred Stock, for 954,563 shares are
authorized.
 
 Series A
Preferred Stock is convertible, at the option of the holder, at any time, into
shares of the Company's common stock as determined by dividing $.19 by a
conversion price determined on the date the related certificate is surrendered.
The conversion price is subject to periodic adjustment and is initially
established at $.01632. Series A Preferred Stock is automatically convertible
into shares of the Company's common stock upon (i) the date specified by vote or
written consent or agreement of holders of at least three quarters of the shares
of Series A Preferred outstanding, or (ii) upon the closing of the sale of the
company's common stock in a firm commitment, underwritten public offering
registered under the Securities Act in which the Company receives gross proceeds
of no less than $20 million. Series A Preferred Stock has a liquidation
preference of the greater of $.19 per share or the amount that such share would
be entitled to upon liquidation or distribution. The Series A Preferred Stock
has voting rights, except as to the election of debtors, equal to the number of
shares of common stock into which the Series A Preferred Stock is convertible.
The Series A preferred Stockholders have the right to elect one director of the
Company.
 
 Series B
Preferred Stock is convertible, at the option of the holder at any time, into
shares of the Company's common stock as determined by dividing the lower of $.09
or the price per share paid by the holder of the Series B Preferred Stock by a
conversion price determined on the date the related certificate is surrendered.
The conversion price is subject to periodic adjustment and is initially
established at $.00773. Series B Preferred Stock is automatically convertible
into shares of the Company's common stock upon (i) the date specified by vote or
written consent or agreement of holders of at least three quarters of the shares
of Series B Preferred Stock outstanding, or (ii) upon the closing of the sale of
Company's common stock in a firm commitment, underwritten public offering
registered under the Securities Act in which the Company receives gross proceeds
of no less than $20 Million. Series B Preferred Stock has a liquidation
preference of the greater of $.09 per share or the amount that such share would
be entitled to upon liquidation or distribution. The Series B Preferred Stock
has voting rights, except as to the election of directors, equal to the number
of shares of common stock into which the Series B Preferred Stock is
convertible. The Series B Preferred Stockholders have the right to elect one
director of the Company.
 
 **34**
 **NOTE
10 - CONCENTRATION OF CREDIT RISK**
 
 The
Company has reduced its sales of conversion units during 2004 and 2003 while it
conducted research on the new digital based units. It primarily has sold a
limited number of units through one sales representative. This represents a
concentration of credit risk since most sales are through that one source. If
that source were to be lost, it would have a significant detrimental affect on
the Company. The Company is currently cultivating other markets and
representatives for its old and new products which they anticipate being
successful to mitigate this concentration.
  **NOTE
11 SUBSEQUENT EVENT**
  In a
special transaction between the Company and Georgia Power and Light during March
2005, Hybrid acquired certain Horiba emission and vehicle testing equipment. The
Company paid $40,000 in cash for this equipment. The replacement value of this
equipment would be in excess of $2,000,000. The Company also acquired a Taylor
Dynamometer for approximately $213,000.
  **35**
  **PART
III**
 
 **Item
nine -** ***Directors,
Executive Officers, Promoters and Control Persons; Compliance With Section 16(a)
of the Exchange Act***
 
 **Name**
    **Age**
    **Position/Office
      Held**John
      Stanton
    56
    Chairman
      of the Board of DirectorsMark
      Clancy
    49
    Chief
      Executive Officer, Chief Financial Officer
Director
 
 *John
Stanton - Chairman of the Board of Directors* . Since
December 23, 2003, John Stanton has served as our *Chairman
of the Board of Directors* . Mr.
Stanton is also the Chief Executive Officer and Chairman of the Board of
Directors of White Knight. From 1987 through the present, Mr. Stanton has served
as the President and Chief Executive Officer of Florida Engineered Construction
Products Corporation. Mr. Stanton has served as Chairman and President of
several public and private companies. Since the early 1990's, Mr. Stanton has
been, and continues to be, involved in turn-around management for financially
distressed companies, providing both management guidance and financing. Mr.
Stanton worked with the international professional services firm that is now
known as Ernst & Young, LLP from 1973 through 1981. Mr. Stanton, a Vietnam
veteran of the United States Army, graduated from the University of South
Florida with a Bachelors Degree in Marketing and Accounting in 1972, and with an
MBA in 1973. Mr. Stanton earned the designation of Certified Public Accountant
in 1974 and was a Sells Award winner in the CPA examination. Mr. Stanton is a
lifetime resident of Tampa, Florida.
 
 *Mark
Clancy - Chief Executive Officer and Director* . Since
December 23, 2003, Mark Clancy has served as our *Chief
Executive Officer and our Chief Financial Officer* and as a *Director* . Mr.
Clancy is also the President of White Knight SST, Inc., a publicly-traded
company and the Chief Executive Officer of White Knight Strategies, Inc. Mr.
Clancy founded White Knight Strategies during December 2001 and was acquired by
White Knight SST during December 2003 . Since April 2000, Mr. Clancy has
participated in turn-around management for financially distressed companies.
From November 1997 through April 2000, Mr. Clancy was co-founder, Director and
Executive Vice President of publicly-traded EarthFirst Technologies, Inc.. Mr.
Clancy has been an advisor to the Chairman of the Board of 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 based boutique investment banking
firm. Mr. Clancy was honorably discharged after six years of service with the
United States Marine Corps. Mr. Clancy was born in Massachusetts and has resided
in Florida since 1982.  Mr. Clancy holds a Bachelors Degree from the
University of South Florida and is a lifetime member of various academic honor
societies including Phi Theta Kappa, Phi Alpha Theta and USF Arts and Sciences
Honor Society.
 
 *Rule
406 Code Of Ethics*
 
 The
Company has adopted a Code of Ethics and has posted our Code of Ethics on our
internet web site at hybridfuelsystems.com.  Our Code of Ethics applies to
all our employees and those doing business with our Company and specifically
applies to our Chief Executive Officer, Chief Financial Officer and all persons
serving in similar capacities.
 ******
 **36**
 Item 10 - *Executive
Compensation*
 **


*Executive
Compensation*
 
 None of
the Company's employees have earned $100,000 per year during 2003 and 2004. Our
current Chief Executive Officer and Chief Financial Officer are provided by
White Knight.
 **Name
      and**
      **Principal**
      **Position**
    **Year**
    ****
    ****
    **Other
      annual**
      **compensation**
      **($)**
    **Long********term********compensation**
    ********
    ****
    **Securities**
    ****
    **All
      other****Annual
      Compensation**
    **Restricted**
      **Stock
      Awards**
    **underlying**
      **options**
    **LTIP**
    **compensation****Salary**
    **Bonus**
    ****
    **SARs**
    **Payouts**
    ******($)**
    **($)**
    (**$)**
    **(#)**
    **($)**
    **($)**Clancy,
      Mark
      CEO/CFO
    2003
    0
    0
    0
    0
    0
    0
    02004
    0
    0
    0
    $335,0001
    0
    0
    0Stanton,
      John
      Chairman
    2003
    0
    0
    0
    0
    0
    0
    02004
    0
    0
    0
    $335,0001
    0
    0
    0
1 Messrs.
Clancy and Stanton each received a total of 750,000 restricted common shares as
an employee bonus and 5,950,000 restricted common shares in fulfillment of a two
year employment agreements with our Company.
 
 **Item
11 -** ***Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters***
 
 The
following table sets forth, as of March 2005, the beneficial ownership of the
Company's Securities by (i) each current member of the Board of Directors of the
Company, (ii) the executive officer named in the Section entitled "Executive
Compensation," above; (iii) all persons or entities known by us who own more
than 5% of our voting common stock, and; (iv) all current directors and
executive officers of the Company as a group. On March 22, 2005, the Company had
80,921,230 shares of common stock issued and outstanding.
  **Name
      and Address**
      **of
      Beneficial**
    
    **Number
      of**
      **Owner
      Shares**
    
    **Percent**
      **of
      Class**John
      Stanton
    
    
    19,471,948
    
    
    24
    %Chairman
      of the BoardFrank
      Davis
    
    
    1,708,000
    
    
    2.11
    %Chief
      Technical ConsultantMark
      Clancy
    
    
    11,101,035
    
    
    13
    %Chief
      Executive OfficerDirectorWhite
      Knight SST, Inc.1
    
    
    20,000,000
    
    
    24.7
    %Officers
      & Directors as a group
    
    
    32,280,983
    
    
    40
    %
 1  White
Knight SST, Inc. is a publicly-traded company of which Mr. Stanton owns
approximately 92% and Mr. Clancy owns approximately 3%.
 
 **37**
 **Item
12 -** ***Certain
Relationships and Related Transactions***
 
 The
following summarizes pertinent agreements relating to our operations including
our agreement with White Knight, our Proposed Technology License Agreement and
our 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 to serve as
our Chief Executive Officer. Further, the President and Chief Executive Officers
of White Knight are to be nominated to fill vacancies on our Board of Directors
until the next annual meeting of shareholders. The Agreement further required
the resignation of certain former Officers and consultants and adoption of White
Knight's proposed operating plan. The Agreement requires that we issue 5% of our
common stock as compensation for White Knight's participation.
 
 As a part
of the following Technology License Agreement, our current Chairman of the Board
John Stanton and our Chief Executive Officer Mark Clancy have agreed to continue
in executive roles for a minimum of twenty-four months following the execution
of the License Agreement. Mr. Stanton and Mr. Clancy do not receive any cash
compensation from the Company.
 
 *Our
Technology License*
 
 All of
the technology, know-how, devices and apparatus embodied in the patents and
incorporated into the various products sold by us were developed and patented by
Frank Davis or Frank Davis and Robby E. Davis. Previously we licensed the
worldwide rights to commercialize the Dual-Fuel Technology from a Trust
established for the Davis family. In the course of reorganizing our enterprise,
we have negotiated a new License Agreement to embody all of our technology and
know how into one comprehensive, world-wide exclusive agreement We executed our
license agreement August 31, 2004 between Hybrid Fuel Systems, Inc. and
Electronic Control Units, LLP ("ECT") ("License Agreement."). ECT is owned by
Frank Davis the technology inventor and holder of the patents. The following
details the License Agreement.
 
 Under the
terms of the License Agreement, Hybrid has the worldwide exclusive right to use,
manufacture, lease and/or sell products and/or systems 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 gas and
      air mixing device, as assigned to Licensor; any divisions or continuations
      in whole or in part thereof; any U.S. patents or applications that are
      later added to this license; any patents issuing on any of such
      applications; any reissues 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 and
      air mixing device, as assigned to Licensor; any divisions or continuations
      in whole or in part thereof; any U.S. patent or applications that are
      later added to this license; any patents issuing on any of such
      applications; any reissues or extensions or reexaminations 'of any such
      patents; and
 
 3.
    U.S.
      Patent Serial No. 5,370,097, dated December 6, 1994, for a dual fuel
      control system which controls the flow of liquid fuel alone or in
      combination with a gaseous fuel, as assigned to Licensor; any divisions or
      continuations in whole or in part thereof; any U.S. patent or applications
      that are later added to this license; any patents issuing on any of such
      applications; any reissues or 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 and
      air mixing device, as assigned to Licensor; any divisions or continuations
      in whole or in part thereof; any U.S. patent or applications that are
      later added to this license; any patents issuing on any of such
      applications; any reissues or extensions or reexaminations of any such
      patents; and
 
 **38**
 5.
    U.S.
      Patent Serial No. 4,479,466, dated October 30, 1984 for a natural gas and
      air mixing device, as signed to Licensor; any divisions or continuations
      in whole or in part thereof.; any U.S. patent or applications that are
      later added to this license; any patents issuing on any of such
      applications; any reissues or extensions or reexaminations. of any such
      patents;
 
 6.
    U.S.
      Non-Provisional Application No. 10/668,589, METHODS AND APPARATUS FOR
      OPERATION OF MULTIPLE FUEL ENGINES, Filed September 23, 2003, Priority
      based on U.S. Provisional Application No. 60/413,269, ELECTRONIC FUEL
      CONTROL SYSTEMS, Filed September 24, 2002 PCT Application No.
      PCT/US03/29914, METHODS AND APPARATUS FOR OPERATION OF MULTIPLE FUEL
      ENGINES, Filed September 23, 2003, Priority based on U.S. Provisional
      Application No. 60/413,269, ELECTRONIC FUEL CONTROL SYSTEMS, Filed
      September 24, 2002.
 
 The term
of the license shall expire upon the later of (i) the expiration of the
last-expiring patent covered, including any extensions, or (ii) ten (10) years
from the date of execution of the License Agreement. In exchange for the
worldwide exclusive rights described above, we are required to make a one-time
license acquisition payment of $250,000 (two hundred and fifty thousand dollars
which amount would be due and payable (i) the first anniversary of the execution
of the License Agreement, (ii) the Company's closing on an equity or debt
financing, or a combination thereof, following the date of the License Agreement
in which we receive gross aggregate proceeds in an amount no less than USD$1
million, or (iii) the sale of the 100th Unit.
 
 Following
the one-time fee, we are required to pay $250.00 per Unit sold (we estimate at
this time our Units will range in price from $3,500 to $4,500 each) with a
minimum royalty of $250.00 and maximum royalty of $1,000 for Unit. We are
further obligated to pay a royalty rate of 3.5% for any items which are not
included in the per system royalty calculation such as spare parts and
consulting services. Under the terms of the License Agreement, we are obligated
to sell a minimum of 750 Units during 2005 and 2,500 Units during 2006 and for
each subsequent year during the term of the License.
 
 ECT shall
have the right to immediately terminate the License Agreement by giving written
notice to the Company in the event Hybrid:
 
 1.
    is
      adjudicated bankrupt or insolvent, enters into a composition with
      creditors, makes an assignment of all or substantially all of its assets
      for the benefit of its creditors, or if a receiver is appointed for its
      assets;
 
 2.
    fails
      to produce, manufacture, sell, market, or distribute or cause to be
      produced, manufactured, sold, marketed, or distributed the
      Units;
 
 3.
    or
      its Affiliates, agents, distributors or sublicensees is in material breach
      or default of any provision of the Proposed License Agreement which
      default or breach 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 or
      otherwise;
 
 6.
    experiences
      a material adverse effect in the financial condition, operations, assets,
      business, properties or prospects of the Company. " Material adverse
      effect." means any event, change, violation, inaccuracy, circumstance or
      effect that is or is reasonably likely to be, individually or in the
      aggregate, materially adverse to the condition (financial or otherwise),
      capitalization, operations or business of the
Company;
 
 7.
    fails
      to maintain its status as a public company.
 
 **39**
 *Our
Chief Technology Consulting Agreement*
 
 In order
to ensure ourselves of the continuation of the technology inventor Mr. Frank
Davis, we have entered a Consulting Agreement between the Company and Electronic
Controls Technology LLC (the " Consulting Agreement."). Under the terms of the
Consulting Agreement, we are to compensate Electronic Fuel Technology LLC $7,000
per month until we complete our current verification after which we are to remit
$12,000 per month. In exchange for such compensation, Electronic Controls
Technology LLC . We opted to increase the monthly payment from $7,000 to $12,000
effective January 1, 2005. The Consulting Agreement further requires we provide
health insurance to Mr. Frank Davis and his wife which was effective January 1,
2005. Under the terms of the Consulting Agreement, ECT shall:
 
 1.
    provide
      general advice, guidance and counsel to, and consult with, senior
      management 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 be
      reasonably requested by Hybrid, the current condition, history and
      prospects of Hybrid and its predecessors, including with respect to
      operating, financial and organizational matters; manufacturing, marketing,
      planning and other activities; inventions, patents, patent applications,
      and other intellectual property rights and 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 all files,
      documents and other books and records, in whatever form or media, relating
      to Hybrid's business or its history, prospects, financial condition or
      results of operations; and
 
 4.
    shall
      maintain a regular, ongoing and routine physical presence at the Atlanta
      area research, development, and distribution center of Hybrid .
 
 *Employment
Agreement*
 
 Effective
August 30th, 2004, we entered a 24-month Employment Agreement with our Chairman
an with our Chief Executive Officer and Director. Together, these two
individuals are referred to as the "Employee" for the purposes of the Employment
Agreement.
 
 Under the
terms of the agreement, the Employee is entitled to compensation at the rate of
$25,000 per month (for both individuals combined), payable exclusively in
restricted common shares. All restricted common shares due under the Employment
Agreement were issued to Messrs. Stanton and Clancy and shall vest on a
quarterly basis in advance of each quarter.
 ******
 **40**
 **Item
13 - *Exhibits
and Reports on Form 8-K***
 
 *Reports
on Form 8-K*
 
 We filed
a Form 8-k on March 26, 2004 reporting that March 16, 2004, the Company
dismissed its former independent accountant and engaged Brimmer, Burek and
Keelan, LLP as our independent accountants.
 
 *Exhibits*
 
 The
following exhibits are filed as a part of, or are incorporated by reference
into, this Report on Form 10-K:
  No.
    Description of
      Exhibit2.1
    Asset
      Purchase Agreement between the Company and New York State Electric &
      Gas Corporation, dated as of October 29, 2001, incorporated by reference
      to Exhibit 2.1 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
      the 8-K filed on December 26, 2001.2.3
    Security
      Agreement between the Company and New York State Electric & Gas
      Corporation, dated as of December 11, 2001, incorporated by reference to
      Exhibit 2.3 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 the 8-K filed on December 26, 2001.3.1
    Articles
      of Incorporation of Save On Energy, Inc., incorporated by reference to
      Exhibit 3.1 to the SB-2 filed on March 23, 2000.3.2
    Amendment
      to Articles of Incorporation of Save On Energy, Inc., incorporated by
      reference 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 the
      SB-2 filed on March 23, 2000.3.4
    Hybrid
      Fuel Systems, Inc. Code of Ethics4.1
    Certificate
      of Designation of Series A Preferred Stock filed with the Secretary of
      State on February 19th, 2002.*4.2
    Certificate
      of Designation of Series B Preferred Stock filed with the Secretary of
      State on May 7th, 2002.*10.1
    License
      Agreement by and between the Davis Family Trust and Electronic Fuel
      Control, Inc. dated May 13, 1996, incorporated by reference to Exhibit
      10.1 to the SB-2 filed on March 23, 2000.10.2
    Amendment
      to License Agreement by and between the Davis Family Trust and Electronic
      Fuel Control, Inc, dated June 18, 1998, incorporated by reference to
      Exhibit 10.2 to the SB-2 filed on March 23, 2000.10.3
    Amendment
      to License Agreement by and between the Davis Family Trust and Electronic
      Fuel Control, Inc. dated January 3, 2000, incorporated by reference to
      Exhibit 10.3 to the SB-2 filed on March 23, 2000.10.4
    Consulting
      Agreement between Save on Energy, Inc. and MBO, Inc. dated November 23,
      1999, Trust and Electronic Fuel Control, Inc, incorporated by reference to
      Exhibit 10.4 to the SB-2 filed on March 23, 2000.10.5
    Exclusive
      Supply Agreement between Ambac International Corporation and Electronic
      Fuel Control, Inc. dated April 29, 1996, incorporated by reference to
      Exhibit 10.5 to the SB-2 filed on March 23, 2000.10.6
    Agreement
      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,
      2000.10.7
    Employment
      Agreement with Robert Stiles, dated July 17, 2001, incorporated by
      reference to Exhibit 10.1 of the 10-QSB filed on November 19,
      2001.
  **41**
 10.8
    2001
      Stock Option Plan - Incorporated by reference to the 2001 Annual Proxy
      Statement filed October 1, 2001. 10.9 Stock Purchase Agreement between the
      Company and SWI Holdings, Limited, dated as of December 10, 2001
      (Composite Version), incorporated by reference to Exhibit 10.1 of the 8-K
      filed on December 26, 2001.10.10
    Security
      Agreement between the Company and SWI Holdings, Limited, dated as of
      December 10, 2001, incorporated by reference to Exhibit 10.2 of the 8-K
      filed on December 26, 2001.10.11
    Convertible
      Secured Promissory Note issued to SWI Holdings, Limited, dated April 23,
      2002.*10.12
    Security
      Agreement between the Company and SWI Holdings, Limited, dated as of April
      23, 2002.*10.13
    Agreement
      re: White Knight SST, Inc. and Hybrid Fuel Systems, Inc. (formerly Save On
      Energy, Inc.) dated December 22, 2003.31.a
    Chief
      Financial Officer Section 302 Certification31.b
    Chief
      Executive Officer Section 302 Certification32.a
    Chief
      Financial Officer Certification32.b
    Chief
      Executive Officer Certification
 **Item
14 -** ***Principal
Accountant Fees and Services***
 
 *Audit
Fees:* The
aggregate fees billed by BBK for professional services rendered for the audits
of the Company's annual financial statements for the years ended December 31,
2004 and 2003 were approximately $65,000.
 
 *Audit
Related Fees.* The
Company did not engage BBK to provide professional services to the Company
regarding audit related matters during the years ended December 31, 2004 and
2003.
 
 *Tax
Fees.* The
Company did not engaged BBK for professional services regarding tax advice or
return preparation.
 
 *All
Other Fees.* There
were no fees billed by BBK for services rendered to the Company, other than the
services covered above for the years ended December 31, 2004 and 2003.
 
 **42**
 **SIGNATURES**
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned; thereunto duly authorized, on this 4th day of April,
2005.
 
 
 **Hybrid Fuel Systems, Inc.**By:
    /s/ Mark ClancyMark ClancyChief Executive Officer
 
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Registrant and in the
capacities indicated on April 4, 2005.
 
 /s/
      John Stanton
    
    Chairman
      of the Board of DirectorsJohn
      Stanton/s/
      Mark Clancy
    
    Chief
      Executive Officer (Principal Executive Officer) and Chief Financial
      Officer (Principal Financial Officer) and DirectorMark
      Clancy
 **43**