**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington
        DC 20549**
 
 **FORM
        10 KSB/A**
 
 (Mark
        One)
 **X** 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}.
 
  **Hybrid
        Fuel Systems, Inc.**
 **Form
        10KSB for the year ended December 31, 2004**
 **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.
  **OVERVIEW**
 
 We
          were
          incorporated in the State of Georgia in 1996 to manufacture and market
          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 kits
          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.
 
 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 operations 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 quarterly periods ended
          March 31, 2005 and 2004 and the years ended December 31, 2003 and 2004.
          During
          the year ended December 31, 2004, we reengineered our principal product
          and
          addressed a number of legal and financial matters which had been created
          over a
          period from our inception in 1996 through December 2003. Therefore, the
          following may not be indicative of our future operating results.
 
 **Overview**
 
 Notwithstanding
          the Company's formation during 1996, Hybrid is still in the beginning stage.
          Prior to January 2004, the Company experienced significant lack of capital.
          The
          cumulative effect of under capitalization, principally between the years
          2000
          through 2003 created an overall shareholder deficit of $(1,941,683). Also
          the
          lack of capital retarded our abilities to engage in meaningful product
          development. As a result, as of December 2003, our product was not commercially
          proven. For these reasons, we encountered a number of financial and operational
          factors during 2004 that we don't believe are indicative of our future
          operating
          outlook.
 
 At
          the
          conclusion of 2004, we believe we accomplished milestones which position
          our
          enterprise for future growth. However, there are uncertainties and challenges
          which we discuss in the following summary as well as in our discussion
          of the
          year to year change for each major line item. We also devote a section
          in the
          following discussion relating to our liquidity and capital resources.
 
 13
 Uncertainties
          and challenges
 
 A
          critical key to the future of our Company is our ability to successfully
          complete the protocol required by the California Air Resource Board (CARB)
          in
          order to achieve a designation as an "Emission Control Device." If we are
          successful in achieving this designation, we will be able to commercialize
          our
          technology in the domestic market. If we are unsuccessful, we will only
          be able
          to commercialize our technology in foreign markets where emission standards
          are
          less stringent.
 
 In
          order
          to achieve designation as an Emission Control Device, we must demonstrate
          through third party testing that when our system is installed, the emissions
          containing NOx have been reduced by at least 15% and PM or particulate
          matters
          has been reduced by at least 50%. We have to date tested according to CARB
          mandates through Olson-Egologic lab in California on three occassions.
          The
          average of these tests reflect a reduction in NOx of approximately 17%
          - 22% and
          a reduction in PM of approximately 55% - 79%. We intend to utilize these
          measurements in our application to CARB. As they exceed the minimum levels
          required to achieve Emission Control Device designation, we are optimistic
          of a
          successful outcome.
 
 The
          CARB
          testing protocol requires that we conduct the initial tests cited above.
          Following CARB's acceptance of those measurements, we must then subject
          the
          engine to 1,000 hours or what is commonly referred to as the "durability
          cycle."
          Upon the conclusion of the 1,000 hours, we must re-measure the emissions
          to
          ensure the outcome is approximately consistent with data derived from the
          intial
          tests cited above. This is a significant uncertainty because should the
          results
          derived from the measurements taken following durability not be consistent
          with
          our intial testing, it is unlikely we will achieve the required designation.
 
 Should
          we
          be successful and achieve our designation, the second uncertainty relates
          to our
          ability to commercialize the technology under terms and conditions which
          will
          allow us to achieve profitability. We have to date installed our electronic
          system on snow-plows in New York, New York, a school bus in Albany, New
          York, a
          refuse hauler in Dallas, Texas and in the United Kingdom. We have received
          repeat orders for our systems in New York, New York and the United Kingdom.
          The
          systems installed in Albany and Dallas were the result of government grants
          arranged by our sub-licensee and may or may not result in additional system
          requests. This limited success indicates to us that our are operating
          efficiently in the marketplace.
 
 However,
          this small number of vehicles is not suffcient to demonstrate our ability
          to
          successfully commercialize our technology sufficiently to achieve profitability.
          There are many uncertainties in migrating a new technology from the development
          to the commercialization stage. Some of these uncertainties are within
          our
          control. However, other factors such as new technologies which may be superior
          to our Fuel2(TM) system or established, large companies which may decide
          to
          enter our marketplace. These factors, taken together with our history make
          it
          impossible for us to assure our future success.
 
 A
          series
          of recent events have created an opportunity for us to accelerate our
          commercialization plan but at the same time, introduce an uncertainty relating
          to our future, continued success. During approximately the past 24 months,
          the
          price of fuels such as diesel and gasoline have increased while the price
          of
          natural gas has remained relatively stable. Our information is substantially
          derived from the Alternative Fuels Price Report, a publication promulgated
          by
          the US Department of Energy which has produced fourteen reports during
          the
          period April 2000 - March 2005. According to the Alternative Fuels Price
          Report,
          since December 2003, the price of diesel has increased from an average
          of $1.50
          a gallon to an average of $2.20 a gallon. During this same period, a natural
          gas-gallon equivalent has grown in price from $1.40 - $1.50. Further, the
          five
          year trend reflects that the average five year price of diesel is approximately
          $1.58 while the five year price of natural gas is $1.22. We also refer
          to a New
          York Times article published June 15, 2005 which quotes a senior energy
          analyst
          with Foresight Research Solutions in New York which claims the cost of
          an energy
          equivalent barrel of natural gas would cost between $18 to $24 dollars
          while the
          cost of a barrel of oil in the world market would cost approximately $50.
 
 This
          price differential is meanginful because our system has demonstrated the
          ability
          to displace between 50 and 80% of the diesel with natural gas. Should this
          price
          differential continue, we believe this economic factor will aid our efforts
          to
          commercialize our technology. However, should the price of diesel fuel
          fall or
          the price of natural gas increase, we would lose this significant advantage.
  **One-Time
          Factors**
 
 2004
          was
          a period when we sought to finalize our product development as well as
          confront
          a number of financial issues created principally during the period 1999
          through
          2003. For example, we settled with the internal revenue service outstanding
          balances which were created in 1999 and 2000 through the intial payment
          of
          $20,000 followed by a $5,000 a month payment schedule. We also made a $30,000
          payment during December in an effort to accelerate the full repayment of
          this
          debt. During the first quarter 2005, we also reached a settlement with
          Peachtree
          National Bank under which we made an initial payment of $20,000 and we
          are
          required to remit $5,000 a month until the debt is fully paid. We similarily
          settled a range of issues such that we eliminated approximately $702,941
          in past
          liabilities.
 
 During
          2004, we made stock payments to our employees in an amount which is recorded
          at
          approximately $1,200,000. We made these payments based on a review of the
          history of the Company, the reduced levels of compensation accepted by
          the
          employees during the period principally between 1999 and 2003 and the value
          brought by our CEO and Chairman including their personal financial commitment
          to
          our continued operations. We do not have any employee stock participation
          plans
          at this time and we do not foresee that we would compensate our future
          employees
          with shares of our stock except when approved by our Board of Directors
          and
          which is considered essential to attract and retain qualified personnel.
 
 14
 **Liquidity
          and Capital Resources**
 
 Previously,
          we have met our cash needs through the sale of our common stock, loans
          and
          contributions from our principals. We recently concluded a $1,200,000 in
          financing and we have received the first $600,000, minus expenses. We are
          also
          beginning to sell our Fuel2 system in quantities which are meaningful such
          as a
          25 system order for a United Kingdom based client and a 50 Fuel2 system
          to a
          Florida based client. We are scheduled to receive the second increment
          of
          $600,000 upon the effectiveness of our SB-2 registration statement. Further,
          our
          Chairman and our Chief Executive Officer and White Knight SST, Inc. have
          previously provided our financing in exchange for our common stock.
 
 Extraordinary
          items which will impact our cash include a one-time fee payable to our
          Licensor
          in the amount of $250,000. We further will be required to remit approximately
          $200,000 toward finalizing our new facility. We intend to pay these amount
          in
          full upon receipt of the second traunch of $600,000 from our financing.
 
 Based
          on
          the cash we receive from the financing, minus the extraordinary commitments
          cited above, taken together with income from the sales of our Fuel2 system,
          we
          believe we can meet all our obligations through February 2006. We believe
          that
          additional sales of our Fuel2 system will allow us to continue meeting
          our
          obligations for the foreseeable future.
 
 If
          we are
          unsuccessful in commercializing an average of approxiamtely 40 systems
          per month
          by February 2006, we will need to raise additional capital through the
          sale of
          our common stock, loans or a combination. In such an event, our shareholders
          would suffer additional dilution.
 
 The
          following depicts our year-to-year fiancial condition comparing 2003 to
          2004.
          However, as previously discussed, the debts we owed had been accumulated
          over a
          three to five year period and accordingly, the changes highlighted should
          not be
          considered 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 84.2% to $82,005.
 In
          addition, during the first quarter 2005, we arranged for the purchase of
          various
          Horiba and other emission testing equipment for $40,000. The seller which
          is a
          utility operating in Georgia had been active in the alternative fuels industry
          in the late 1990s and had since curtailed that portion of their business
          and
          stored all the idle equipment. As our operations are located in Atlanta,
          Georgia
          when we began to set up our new facilities in PeachTree City, Georgia,
          we
          informally inquired the availablility of this equipment. We were informed
          that
          we could purchase the entire room of equipment for a one-time payment of
          $40,000. We did not purchase any other assets or liabilities and there
          are no
          further obligations. The seller of the equipment is not a related party
          to our
          Company. In addition, during February 2005 we made a $76,000 deposit toward
          the
          purchase of a new Taylor dynometer at a total cost of approximately $232,000.
          Final delivery is expected during September 2005. We intend to locate the
          equipment in our new 12,000 square-foot facility in PeachTree City,
          Georgia.
 *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 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.
 
 15
 *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 65.4%
        from $(1,941,683) at the year end December 31, 2003 to $(671,252) 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 84.2%
        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 65.4%
        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.
  16
 *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;
 
 17
 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.
 
 18
 **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.
 
 19
 *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.
 
 20
 *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.
  21
 *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.
  22
 **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 and
        April
        1, 2005 as to Notes 1 & 11
 
 23
 **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
              
              
              15,577Total
                  assets
              
              $
              82,005
              
              $
              44,515
  Please
        Read Accompanying Notes to Financial Statements
  24
 **HYBRID
                  FUEL SYSTEMS, INC.****BALANCE
                  SHEETS****DECEMBER
                  31, 2004 AND 2003**LIABILITIES
                  AND SHAREHOLDERS' DEFICIT2004
              
              2003Accounts
                  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
              
              
              3,852,712Deferred
                    Compensation
              
              
              (500,000
              )Accumulated
                  deficit
              
              
              (7,821,406
              )
              
              (5,808,933
              )Total
                  shareholders' deficit
              
              
              (671,252
              )
              
              (1,941,683
              )Total
                  liabilities and shareholders' deficit
              
              $
              82,005
              
              $
              44,515
 
 Please
        Read Accompanying Notes to Financial Statements
 25
 **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
  26
 **HYBRID
        FUEL SYSTEMS**
 **STATEMENT
        OF CHANGES IN STOCKHOLDERS' EQUITY**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 Preferred
                    Stock
                
                Common
                    Stock
                
                Paid-InCapital
                
                Deferred
                  Compensation
                
                Accumulated
                  Deficit
                
                Shareholders'
                  DeficitSeries
                    A
                
                Series
                    A
                
                Series
                    B
                
                Series
                    B
                
                Shares
                
                AmountBalance
                    Dec 31, 2002
                
                45,215
                
                $422
                
                195,209
                
                $1,952
                
                11,963,646
                
                $11,964
                
                $3,832,912
                
                
                
                $(5,395,113)
                
                $(1,547,863)Legal
                    settlement
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                100,000
                
                
                100
                
                
                9,900
                
                
                
                
                
                
                
                
                10,000Conversion
                    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
                
                $
                0
                
                $
                (5,808,933
                )
                $
                (1,941,683
                )Redemption
                    termination
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                530,000
                
                
                
                
                
                
                
                
                530,000Debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                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
                
                
                (500,000
                )
                
                
                
                
                95,000Management
                    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
                
                $
                (500,000
                )
                $
                (7,821,406
                )
                $
                (671,252
                )
 
 Please
        Read Accompanying Notes to Financial Statements
 
 27
 **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
 
 28
 **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
  29
 **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.
  30
 *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%
  31
 *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.
  In
            addition, the Company has entered into an agreement with certain accredited
            investors to advance $1,200,000 to the company. The first advance of
            funds is
            April 1, 2005 in the amount of $600,000 with the second advance to be
            made upon
            approval of the Form SB-2 herewith being filed. The financing is in the
            form of
            convertible debt with a conversion into stock at the rate of $0.55 per
            share for
            a total 2,181,818 shares. In addition, the investors will be issued warrants
            to
            purchase the common stock of the Company for $0.81 per share. The initial
            advance will receive 1,636,364 warrants and the second advance will receive
            1,636,364 warrants. The warrants are five year warrants and are immediately
            exercisable upon issue. These additional funds are expected to allow
            the Company
            to continue to fund its operations for the ensuring twelve
            months.
 
 **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
          month 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.
  32
 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.
  33
 **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
  34
 **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.
  35
  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
              
              ExercisableNumberOutstanding
              
              Weighted
                      Average
                      Remaining
                      Contractual
                        Life
              
              Weighted
                      Average
                      Exercise
                      Price
              
              Warrants
                  Exercisable
                    at
              
              Weighted
                  Average
                  ExerciseRangeof
                      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.
 
 36
 The
          Company had previously issued common stock to an investor and had granted
          that
          investor a put option for the common stock in the amount of $530,000. That
          option expired unexercised in June 2004 due to the lapse of time per the
          agreement. That put option was recorded as a liability in the financial
          statements. Upon the lapse of that agreement, the liability was reclassified
          to
          paid in capital since it was no longer a liability.
  **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**
 During
          the quarter ended March 31, 2005, the Company acquired various Horiba emission
          and vehicle testing equipment for $40,000 in cash. The Company also acquired
          a
          Taylor Dynamometer for approximately $232,000.
 
 On
          April
          1, 2005, we held our first closing pursuant to a Subscription Agreement
          we
          entered into with several accredited investors dated as of March 31, 2005,
          pursuant to which the investors subscribed to purchase an aggregate principal
          amount of $1,200,000 in secured convertible promissory notes, and Class
          A common
          stock purchase warrants which would be issued on each closing date assuming
          full
          conversion of the convertible notes issued on each such closing date. We
          issued
          the aforementioned securities to the investors pursuant to Rule 506 of
          Regulation D as promulgated under the Securities Act of 1933, as amended
          (the
          "Act"), and/or Section 4(2) of the Act.
 
 $600,000
          of the purchase price was paid to us by the investors on the initial closing
          date of April 1, 2005 and $600,000 of the purchase price will be paid to
          us
          pursuant to the second closing, which will take place on the 5th day after
          the
          actual effectiveness of the registration statement which we are required
          to file
          with the Securities and Exchange Commission registering the shares of our
          common
          stock, par value $.001 per share, issuable upon conversion of the convertible
          notes and exercise of the warrants.
 
 The
          convertible notes bear simple interest at rate equal to the "prime rate"
          as
          published in the Wall Street Journal from time to time plus 3% per annum,
          provided however that the interest shall not be less than 8% per annum.
          Interest
          is calculated on the basis of a 360 day year and is payable monthly, in
          arrears
          commencing on August 1, 2005. The principal amount of the convertible notes
          shall be amortized over a two-year period with payments commencing on August
          1,
          2005. Each investor shall have the right to convert the convertible notes
          after
          the date of issuance and at any time, until paid in full, at the election
          of the
          investor into fully paid and nonassessable shares of our common stock at
          a
          conversion price of $0.55 per share. The conversion price is adjustable
          in the
          event of any stock split or reverse stock split, stock dividend,
          reclassification of common stock, recapitalization, merger or consolidation.
          In
          addition, the conversion price of the convertible notes will be adjusted
          in the
          event that we spin off or otherwise divest ourselves of a material part
          of our
          business or operations or dispose all or a portion of our assets. The
          convertible notes are secured by all of our assets, pursuant to the terms
          of a
          Security Agreement, dated as of March 31, 2005 between us and Barbara Mittman,
          who is acting as collateral agent pursuant to the terms of a collateral
          agent
          agreement dated as of March 31, 2005.
 
 We
          issued
          an aggregate of 1,636,364 Class A common stock purchase warrants to the
          investors and will issue an additional 1,636,364 Class A common stock purchase
          warrants at the second closing. The Class A warrants are exercisable until
          five
          years from the initial closing date at an exercise price equal to the lower
          of
          $0.81 per share or 101% of the closing bid price of our common stock on
          the last
          trading day preceding the initial closing. The exercise price of the Class
          A
          warrants will be adjusted in the event of any stock split or reverse stock
          split, stock dividend, reclassification of common stock, recapitalization,
          merger or consolidation. In addition, the exercise price of the warrants
          will be
          adjusted in the event that we spin off or otherwise divest ourselves of
          a
          material part of our business or operations or dispose all or a portion
          of our
          assets.
 
 Due
          to
          there being detachable warrants and a beneficial convertible feature of
          the
          note, the Company will record a discount to the debt in the amount of $1,200,000
          (assuming both draws are made), in accordance with EITF Issue No. 98-5
          "Accounting For Convertible Securities With Beneficial Conversion Features
          or
          Contingently Adjustable Conversion Ratios", and EITF 00-27 "Application
          of EITF
          Issue No. 98-5 To Certain Convertible Instruments". The value of the detachable
          warrants was determined to be $1,945,594 using the Black Scholes option
          pricing
          model with a volatility of 234.42 % and risk free interest rate of 4.13%.
          In
          accordance with EITF 00-27,when the calculated value of the detachable
          warrants
          exceeds the amount of the debt, the discount is limited to the amount of
          the
          debt. Since the debt is $1,200,000, the discount associated with the warrants
          would be limited to that amount. In the calculation of discount for the
          warrants
          and the embedded conversion feature with the warrants to be calculated
          first,
          the entire discount is being allocated to the warrants since that exceeds
          the
          maximum discount allowed. Therefore, there is no allocation of the discount
          to
          the embedded conversion feature of the debt. The discount of $1,200,000
          will
          then be amortized over the life of the debt which is twenty eight months
          or
          approximately $43,000 per month
 
 We
          filed
          a registration statement registering the shares of our common stock issuable
          upon conversion of the convertible notes and exercise of the Class A warrants
          on
          May 10, 2005 and we are obligated to cause it to be effective within 90
          days
          after the initial closing date or approximately August 1, 2005. If we do
          not
          meet the aforementioned filing and effectiveness deadlines, we shall pay
          to each
          investor an amount equal to 1% for the first 30 days or part thereof of
          the
          pendency of such non-registration event and 2% for each 30 days or part
          thereof,
          thereafter of the purchase price of the notes remaining unconverted and
          purchase
          price of the shares of our common stock issued upon conversion of the notes.
 
 The
          above
          descriptions of the convertible note, the Class A common stock purchase
          warrants, the Subscription Agreement and the Security Agreement are not
          complete
          and are qualified in their entirety by the full text of such documents
          which are
          included as exhibits to our Form 8-K Report filed April 5, 2005.
 37
  **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.
  38
 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
  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%.
 
 39
 **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
 
 40
 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.
 
 41
 *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.
  42
 **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-KSB/A:
  Exhibit
                  Description2.1
                  Asset
                        Purchase Agreement between the Company and New York StateElectric
                        & Gas Corporation, dated as of October 29, 2001,incorporated
                        by reference to Exhibit 2.1 of the 8-K filed onDecember
                        26, 2001.2.2
                  Secured
                        Promissory Note in favor of New York State Electric & GasCorporation,
                        dated as of December 11, 2001, incorporated byreference
                        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
                        byreference
                        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 & GasCorporation,
                        dated as of December 11, 2001, incorporated byreference
                        to Exhibit 2.4 of the 8-K filed on December 26,
                        2001.3.1
                  Articles
                        of Incorporation of Save On Energy, Inc., incorporated byreference
                        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 March23,
                        2000.3.3
                  By-laws
                        of Save On Energy, Inc., incorporated by reference toExhibit
                        3.3 to the SB-2 filed on March 23, 2000.4.1
                  Certificate
                        of Designation of Series A Preferred Stock filed withthe
                        Secretary of State on February 19th, 2002 [incorporated byreference
                        to Exhibit 4.1 to the 10-KSB filed on May 30,
                        2002.*4.2
                  Certificate
                        of Designation of Series B Preferred Stock filed withthe
                        Secretary of State on May 7th, 2002 [incorporated by referenceto
                        Exhibit 4.2 to the 10-KSB filed on May 30, 2002.*4.3
                  Subscription
                      Agreement, dated March 31, 2005, by and among HybridFuel
                      Systems, Inc. and the investors named on the signature pagesthereto,
                      incorporated by reference to Exhibit 4.1 to the 8-K filedon
                      April 5, 2005.4.4
                  Form
                      of Convertible Note of Hybrid Fuel Systems, Inc. issued to
                      theinvestors
                      named on the signature pages thereto incorporated byreference
                      to Exhibit 4.2 to the 8-K filed on April 5, 2005.4.5
                  Form
                      of Class A Common Stock Purchase Warrant of Hybrid FuelSystems,
                      Inc. issued to the investors named on the signature pagesthereto
                      incorporated by reference to Exhibit 4.3 to the 8-K filed onApril
                      5, 2005.4.6
                  Form
                      of Security Agreement by and between Hybrid Fuel Systems, Inc.and
                      Barbara Mittman as collateral agent incorporated by reference
                      toExhibit
                      4.4 to the 8-K filed on April 5, 2005.4.7
                  Form
                      of Collateral Agent Agreement among Barbara R. Mittman, ascollateral
                      agent, and the Lenders as defined therein incorporated byreference
                      to Exhibit 4.5 to the 8-K filed on April 5, 2005.5.1
                  Opinion
                      of Sichenzia Ross Friedman Ference LLP*10.1
                  License
                        Agreement by and between the Davis Family Trust andElectronic
                        Fuel Control, Inc. dated May 13, 1996, incorporated byreference
                        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 Trustand
                        Electronic Fuel Control, Inc, dated June 18, 1998, incorporatedby
                        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 Trustand
                        Electronic Fuel Control, Inc. dated January 3, 2000,incorporated
                        by reference to Exhibit 10.3 to the SB-2 filed on March23,
                        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 March23,
                        2000.10.5
                  Exclusive
                        Supply Agreement between Ambac International Corporationand
                        Electronic Fuel Control, Inc. dated April 29, 1996, incorporatedby
                        reference to Exhibit 10.5 to the SB-2 filed on March 23,
                        2000.10.6
                  Agreement
                        re: International Fuel Systems, Inc. and Davenport, datedJanuary
                        7, 2000, incorporated by reference to Exhibit 10.6 to theSB-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 onNovember
                        19, 2001.
  43
 10.8
                  2001
                        Stock Option Plan - Incorporated by reference to the 2001Annual
                        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 Exhibit10.2
                        of the 8-K filed on December 26, 2001.10.11
                  Convertible
                        Secured Promissory Note issued to SWI Holdings, Limited,dated
                        April 23, 2002 incorporated by reference to Exhibit 10.11
                        tothe
                        10-KSB filed on May 30, 2002.*10.12
                  Security
                        Agreement between the Company and SWI Holdings, Limited,dated
                        as of April 23, 2002 incorporated by reference to Exhibit10.10
                        to the 10-KSB filed on May 30, 2002.*10.13
                  Agreement
                        re: White Knight SST, Inc. and Hybrid Fuel Systems, Inc.(formerly
                        Save On Energy, Inc.) dated December 22, 2003 incorporatedby
                        reference to Exhibit 10.13 to the 10-KSB filed on August
                        16,2004.31.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.
  44
 **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 10th day of August,
        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 August 10, 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
 45