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

FORM 10-KSB

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

For The Fiscal Year Ended June 30, 2002

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

For The Transition Period from _______ to__________

                   Commission File Number 0-29351

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

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

      PO Box 41118, Winfield B.C.,                     V4V 1Z7
  ------------------------------------------       --------------
   (Address of Principal Executive Offices)           (Zip Code)

Issuer's Telephone Number (250) 868-0600

Securities registered pursuant to section 12 (b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:
Common stock with par value of $0.001.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes [ ] No [X]

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

The number of shares issued of the registrant's common stock as of September 24, 2002 is 21,573,353

The number of shares outstanding of the registrant's common stock as of September 24, 2002 is 21,336,000

Amount of revenue for most recent fiscal year $0.00

DOCUMENTS INCORPORATED BY REFERENCE: NONE


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TABLE OF CONTENTS

PART I...........................................................Page 3

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

 Item 2.   DESCRIPTION OF PROPERTY...............................Page 19

 Item 3.   LEGAL PROCEEDINGS.....................................Page 19


PART II .........................................................Page 21

 Item 5.   MARKET FOR REGISTRANT'S COMMON
           EQUITY AND RELATED STOCKHOLDER MATTERS................Page 21

 Item 6.   MANAGEMENT DISCUSSION AND ANALYSIS OR
           PLAN OF OPERATION.....................................Page 22

 Item 7.   FINANCIAL STATEMENTS..................................Page 29

 Item 8.   CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS..........Page 40


PART III ........................................................Page 40

 Item 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
           AND CONTROL PERSONS...................................Page 40

 Item 10.  EXECUTIVE COMPENSATION................................Page 41

 Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
           OWNERS AND MANAGEMENT.................................Page 42

 Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........Page 43

 Item 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
           AND REPORTS ON FORM 8-K...............................Page 43

 Signatures......................................................Page 43

 Exhibits........................................................Page 44


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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

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

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

The Company is a developmental stage company and has had no income since the acquisition of the hybrid fuels technology in June 1998, nor is it likely to have any significant cash flow until after the end of its current fiscal period ending June 30, 2002. The Company is currently seeking additional capital to pay operating costs and develop operating activities, but there can be no assurance that the Company will be able to fulfill its capital needs in the future. Moreover, due to Company's poor liquidity, lack of operations and the absence of a listing for its common stock on a major exchange, the cost of obtaining additional capital is expected to be significant. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive. If the Company is unable to obtain funds from external sources, it is probable that it will be unable to continue to operate in the long term.

RISK FACTORS

You should carefully consider the following risks and the other information contained in this report and in our other filings with the Securities and Exchange Commission before you decide to invest in us or to maintain or increase your investment. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

1. Our cash reserves may not be adequate to cover our costs of operations. To date, we have covered our operating losses by loans from shareholders or privately placing securities. We expect to fund our general operations and marketing activities for 2002 with our current cash, which was obtained from the sale of securities. However, our cost estimates may not include enough provisions for any contingency, unexpected expenses or increases in costs that may arise.

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


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

4. We have a history of operating losses and an accumulated deficit, as of June 30, 2001, of $1,057,212.

5. Our ability to begin operations and to generate revenues and profits is subject to the risks and uncertainties encountered by development stage companies. Our future revenues and profitability are unpredictable. We currently have no operating activities that will produce revenue and have not been able to raise the capital necessary to build our first facility and commence operating activities and as such, we do not know when we may be able to begin operations. Furthermore, we cannot provide assurance that we will be successful in raising the money necessary to begin or expand operations.

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

7. We have no operating history which makes an evaluation of our future prospects very difficult. There can be no assurance that we can raise the money to build the first plant and if we succeed in building the first operating plant, there can be no assurances that we will be able to develop operations that are profitable or will operate as intended. If the market for our plants fails to develop, or develops more slowly than anticipated, we may not be able to meet our expenses and may not achieve profitable results.

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

9. Our Common Stock is traded on the "pink sheets" and there is no assurance that it will ever be listed on any major stock exchange. While our stock is on the "pink sheets", it has an effect on the perception of us amongst potential investors which makes it very difficult to raise capital. It can also effect the dilution associated with any financing.

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

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

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12. We may experience a period of expansion and growth, which would likely place significant strain upon management, employees, systems, and resources. Because the market could develop rapidly, it is difficult to project the rate of growth, if any. Failure to properly manage growth and expansion, if and when it occurs, may jeopardize our ability to sustain our business. There can be no assurance that we will properly be able to manage growth, especially if such growth is more rapid than anticipated.

The following discussion has been prepared assuming the Company will continue as a going concern; however, the audit report for the financial statements as of and for the periods ended June 30, 2000 and 2001, includes a caveat on this point. In reading the following, one should consult the audit report, financial statements and footnotes, and keep in mind the significant losses generated by the Company.

(a) BUSINESS DEVELOPMENT The Company was originally incorporated in the state of Florida on February 16, 1960 as Fiberglass Industries Corporation of America. On September 3, 1966, the Company changed its name to Rocket-Atlas Corp. It changed its name again on December 1, 1966 to Rocket Industries, Inc. On January 28, 1984, the Company changed its name to Polo Investment Corp. of Missouri, Inc., and on October 7, 1985 changed it's name to Medical Advanced Systems, Inc. Then, by resolution adopted May 14, 1993 and filed on June 3, 1993, the Company changed its name to Polo Equities, Inc., and increased its authorized capital to 50,000,000 shares with a par value of $0.001. In May 1998, the Company changed its domicile to Nevada and, on June 10, 1998, changed to its current name, Hybrid Fuels, Inc.

In May of 1998, as part of a reverse merger, the Company recalled 12,000,000 shares held by 3 individuals: Justeen Blankenship, Shane Duffin, and Danni Uyeda, 4M shares each. So far as the Company is aware, no consideration was paid to those three individuals in return for the cancellation of the shares. Then, in a stock for stock exchange, the Company issued 12,000,000 shares to Donald Craig to acquire all of the issued and outstanding shares of Hybrid Fuels, U.S.A., Inc. and 330420 B.C. Ltd., (which subsequently changed its name to Hybrid Fuels (Canada) Inc.) At the time of the acquisition, Donald Craig held all of the issued and outstanding shares of Hybrid Fuels, U.S.A., Inc., and Hybrid Fuels (Canada) Inc., as Trustee for a group of individuals and companies that had contributed to the development of the Hybrid technology. At the time of the acquisition, Hybrid Fuels (Canada) Inc., owned the rights to the technology, with the result that, as a part of the acquisition, the Company acquired control over the technology necessary for the Company's intended operations. Prior to the acquisition of Hybrid Fuels, U.S.A., Inc. and Hybrid Fuels (Canada) Inc., the Company had no significant operations and was seeking a business opportunity.

(a) BUSINESS OF THE ISSUER

Hybrid Fuels intended business is to sell integrated farm scale facilities that combine ethanol production with a beef finishing operation. This integration is achieved through certain procedures, process improvements and mechanical devices the company has discovered or developed. The ethanol is intended to be mixed with diesel to create a hybrid fuel. The Company expects to act as the marketing agent for the hybrid fuel and the finished animals in order to control quality and present a unified marketing presence as a way of generating better returns from the sale of the products.


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SOME CONCERNS ABOUT PRESENT FINISHING METHODS

We believe beef cattle do not do well using what may be referred to as "factory farming methods". In "Diet For A New America", John Robbins describes how, in most conventional beef feedlots, antibiotics are fed to the animals daily to prevent them from becoming sick. In addition, growth hormones are implanted or fed to increase weight gains and toxic chemicals are used to kill flies and to protect the animals from parasites that might interfere with weight gains. He also reviewed the evidence pointing to growing health concerns that seem to be the result of those substances remaining in the meat, and being ingested when consumers eat the end product.

Further, according to a report by noted security analyst, Edward Luttwalk, published in the February 12, 2001 edition of the Toronto Globe and Mail, factory farming involves the crowding, of thousands of animals, into an area about the size of a city block. The report states, "to put it plainly, nearly all beef cattle in North America and Europe survive in a chronic state of low level sickness with the use of large amounts of antibiotics. Because they are cheap and induce water retention that increases weight, antibiotics are just the thing for feedlot operators whose animals could not survive a week without them." Luttwalk goes on to say, "At a time when old diseases such a tuberculosis are reappearing, along with bacteria strains that have become highly resistant to antibiotics, their use in mass quantities by cattle raisers is a real problem. Until recently, it was thought that humans couldn't absorb antibiotics from cooked meat, but research prompted by bovine spongiform encephalopathy (BSE) has disproved all that." These findings are further supported by recent research at the University of Illinois, according to a Canadian Press report. This research has documented the transfer of antibiotic resistant genes from large-scale hog facilities to surrounding water and soil. These scientists are reported to have concluded that this is evidence to tie antibiotic resistance in humans to widespread use of antibiotics in the livestock industry. Rustam Aminov, one of the scientists, is reported to have said, "Its not an unreasonable conclusion with 75% of all the antibiotics in the US finding their way into meat and poultry."

Typical beef operations produce manure and bedding which are expensive to dispose of and cause tremendous groundwater contamination. See the cover story from Macleans Online for June 12, 2000, which says in part, about the dangers of factory farms: "The monstrous size of these profitable operations has raised troubling questions about water quality and threats to public health from coast to coast. Manure from factory farms often contains a variety of heavy metals, lake-choking nutrients and deadly pathogens such as e-coli 0157." This article says, in describing the resulting groundwater pollution problem in great detail:
"In the US, the EPA estimates that agricultural runoff from animal factories and traditional farms is the leading source of water pollution in that country." The article then quotes Les Klapatiuk, who runs a firm specializing in water treatment, that there isn't a single government in Canada with adequate legislation to deal with these volumes of animal waste. The article says: "The leakage from lagoons is incredible, and when you spread millions of gallons of waste on a field it just runs into the surface water. If a city or oil company operated in this way, they would be shut down."


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Concerns such as these and others about:
1. declining farm income and the number of family farms;

2. declining fossil fuel reserves;

3. increasing ground water contamination from animal finishing operations;

4. the increase in antibiotic resistant "super bugs" as a result of over-use of antibiotics; and

5. threats of global warming from use of fossil fuels; led the development of this "farm integration" plan.

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

SOME HISTORY

The technology was developed over more than a decade. Pilot testing of the first proprietary developments relating to fermentation techniques and distillation procedures of ethanol were carried out in Kelowna, B. C., Canada in the early 1990's. After initial tests, a confinement type barn and adjoining buildings were leased at Dalum, Alberta in 1994 for full-scale testing. These facilities were utilized for animal feed test trials, fermentation testing, and other associated full-scale research and testing on all aspects of the system for a period of two and a half-years. The Company does not have written records of the test results, as those records were lost when that plant was shut down. However, those test results persuaded us to begin commercialization of the process.

The hybrid fuels technology was acquired by the Company in a reverse takeover in June 1998 as described above, and a plant that was intended to be the first commercial plant was constructed near Cardston, Alberta. Improvements to the technology installed in that plant included an innovative separation column that added a Company developed, vegetable based emulsifier and diesel fuel at the point of condensation of the ethanol vapor.

Before the plant near Cardston could begin operating, the farmer sold the land and improperly removed the buildings and equipment. Although the plant never operated, much was learned from the construction. That information has been used to refine the design which is expected to reduce construction costs and improve operating efficiency. As a consequence of the Cardston plant being dismantled, there are no prototypes in existence at this time

THE PROPOSED FACILITIES

The proposed plants are planned to consist of a barn in which the cattle are kept, a second building housing the ethanol making equipment and the gasifier, which will be set up next to the barn and ethanol plant. The ethanol making equipment consists of feedstock handling and preparation tanks, water tanks, fermentation tank, separation columns, a spin dryer, necessary pumps and the tanks to hold the ethanol.

In the Company's intended facilities, approximately 200 animals are kept in a warm, dry and clean barn during the finishing process of approximately 100 to 120 days. The farm operator supplies the feedstock, which is used first to make the ethanol and then to feed the animals.


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In order to make ethanol, grain, referred to as feedstock, and heat for fermentation and distillation, are needed. The heat is supplied from the burning of the used bedding straw and manure. To avoid confusion, we need to make it clear that the ethanol is not made from this waste. The ethanol is made from the fermentation of the feedstock, followed by the separation of the mash from liquid and then the distillation of the ethanol from the liquid.

The operator is to supply the cattle, straw or other bedding, electricity, diesel, emulsifier and about 2500 gallons of water per day. These barns have been designed to raise beef cattle under controlled atmospheric conditions. The buildings are prefabricated metal, insulated sufficiently to keep them warm in cold weather and cool in warm weather. Each barn is to be divided into eight pens, 20 feet by 30 feet, 1 of which is empty and 7 of which have animals in them. This means that there will be approximately 29 animals per pen, depending on the size of the animals.

These barns are intended to include air to air heat exchangers that in cold weather, exchange the warm, heavily moisture-laden barn air with fresh air from outside, that is heated and dried as it passes through a heat exchanger. Del Air Systems, Humbolt, Saskatchewan, manufacture the heat exchanger equipment we plan to use. Their calculations estimate heat losses from the barn at a total of 404,052 BTU per hour with gain from animal heat production of 407,078 BTU per hour at -17 Degrees F outside temperature. At this outside temperature, the inside building temperature should remain around 50 Degrees F. Management believes that these heat exchangers will keep the barn warm and dry in winter and that simple "swamp type" coolers common to the greenhouse industry will be adequate to provide summer cooling.

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

Cattle being finished generally average about 12 pounds of manure and urine each day, containing about 80% moisture. (See Saskatchewan Agriculture 1988, ISBN 0-88656-475-1) Moisture content in the waste is controlled by spreading bedding, in the form of chopped straw, wood shavings, or sawdust (depending on price and availability) into the pens to soak up moisture from the manure and urine. The amount of bedding is adjusted so that one weeks' accumulation of manure and urine in the bedding will generate waste with moisture content of approximately 45%, which is ideal for the gasifier, according to the manufacturer.

Each day the empty pen is cleaned and new bedding is placed in the clean pen. Then the animals from the next occupied pen are moved into the newly cleaned pen. When the manure and used bedding is removed, it is shoveled into a central waste removal system which carries it into a gasifier/burner to be transformed into heat.

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


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The cattle are expected to be started between 600 and 1000 pounds and finished to about 1100 to 1400 pounds. Not all of the cattle are brought in to the barn at the same time and so are at various weights and stages of finishing. The lighter animals eat less and the heavier ones eat more, generating an average that achieves a balance that management believes will average out over the whole operation.

These plants are expected to be operated manually by 2 people, which would usually be the operator and one employee. Thus trained people are expected to be in contact with the animals several times a day, while they are being fed, or moved from one pen to another. These operators should be able to detect any illness or disease early, separate any ill animal from the rest of the herd, and treat it for that specific illness, rather than giving a general course of antibiotics to all the animals as a precautionary measure. As a result, Company intends to have a policy that permits the use of antibiotics only as required on any sick animal.

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

ETHANOL ENERGY BALANCE INFORMATION

The history of ethanol production for fuel worldwide is well documented, and covers a period of more than 75 years. The term "energy balance" associated with ethanol production, means the relationship or ratio between the energy (generally expressed in British Thermal Units or BTU's) in the ethanol compared to the energy used to produce the ethanol and is written as 2:1, 4:1, etc. Those ratios would mean 2 or 4 BTU's of energy in a quantity of ethanol compared with 1 BTU of energy from some external source required to make that quantity of ethanol.

According to the publication "Advances in Biochemical Engineering - Alcohol Production and Recovery" by Maiorella, Wilke, and Blanch, of Lawrence Berkley Laboratory and Department of Chemical Engineering, University of California, Berkley, CA 94720: "Distillation until now has been considered to be very inefficient - utilizing as much energy as is produced in the alcohol product."

The Peoria, IL pilot plant built by the US Department of Agriculture illustrates that energy in the product is only 30% of energy consumed for distillation. The commercial Peoria plant indicates a more favorable energy balance in the range of 2:1. Management believes that a ratio of around 4:1 is probably fairly representative of newly built ethanol making facilities.

HYBRID FUELS ETHANOL PRODUCTION

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


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

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

Management believes that the combination of the Company's proprietary fermentation process and distillation column, will result in completion of the whole process in about 12 to 15 hours. In most typical distillation operations, the process takes around 60 hours. See "Biomass Energy Monograph" published by Texas Engineering Station, Texas A & M University System, page 121, or "Saccharification and Fermentation of Barley", by Drs. M.Wayman, R.S.Parekh, O.Trass, and E.Gondolfi, Dept of Chemical Engineering, University of Toronto, Canada. The proprietary fermentation process referred to above is considered a "trade secret" as it was developed by the Company, and is not used by anyone else so far as we are aware. It is not protected by patent and therefore could be used by others which could reduce our competitive advantage.

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

At the completion of distillation, the de-alcoholized stillage water is recovered and stored for delivery to appropriate feed containers for the animals in the barn. According to the research described below under the heading "Feeding Wet Distillers Grains and Stillage Water", the feeding of wet distillers' grains and stillage water to cattle promotes weight gains. In addition, feeding the WDGs and stillage water to the animals in the adjacent barn is very important because it uses another co-product on-site, eliminates transport and drying costs and addresses the challenge of stillage disposal. The Biomass Energy Monograph by Edward Hiler and Bill Strout of Texas A. & M. University, states: "If the nation were to replace 10 percent of its gasoline consumption with ethanol, the liquid stillage from ethanol fuel production would constitute a biochemical oxygen demand (BOD) load equivalent to all its domestic sewage. Therefore, expensive water pollution controls must be major goals of the emerging fuel-alcohol industry." These "expensive water pollution controls" are not necessary in our process, as the stillage becomes a valuable animal feed supplement, not a by-product destined for disposal.

Aside from the capital costs of the plant, the two major costs of ethanol production are the feedstocks and the input energy required for fermentation and distillation. For ethanol to be accepted as a fuel extender, it must be available in a practical price range. By using the feedstock for the dual


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purpose of making ethanol and feeding cattle, our process effectively reduces the cost of making the ethanol. Also, by using the heat from burning the waste as an energy source for the fermentation and distillation processes, the Company believes it will not have to pay for energy from an outside source to make the ethanol, which means the process will not incur that input energy cost. Making ethanol also generates another stream of income, which should make the operation more economical.

The distillers grains that are left over from the ethanol making process have a low moisture content around 5% and are fed as wet distillers grains (WDGs). The stillage water is also to be fed to the animals. The plants are designed to run in a balanced state, producing 200 Imperial (240 US) gallons of ethanol per day and enough distillers grains to supply enough food for 200 cattle.

FEEDING WET DISTILLERS' GRAINS AND STILLAGE WATER

There is a considerable body of literature which indicates that the feed value of the distillers' grains is superior to that of ordinary grain, and feeding stillage water increases weight gains. For example, see Dr. T. J. Klopfenstein of the University of Nebraska, in an article entitled: "How Do Wet Distillers Grains (Byproducts) Compare To Dry Distillers Grains?" and in a report to the 31st Distillers Feed Conference on the "Digestibility of Distillers Grains", and G. M. Erickson and G. R. Tisher, writing in a Beef Science article #72-980 in 1989; "Barley Distillers Grains As Supplements For Beef Cattle". These articles generally indicate a significantly higher feed value of dried distillers grains (DDG) over ordinary grain, and higher still for wet distillers grains (WDG), which our process uses, over DDG.

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

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

Processors, like Cargill, and consumers, pay higher prices for the superior grades because they are generally more tender and taste better.

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


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the animals because they represent more meat at higher grades which means higher prices.

The same kill report showed there was no death loss, no liver damage and none were condemned. Industry average for death loss and rejected animals is about 1% according to CCA. Because of these processing results, Cargill offered a premium of $0.10 per pound, for all animals that could be produced using this process, FOB the plant, which eliminates trucking and auction costs. We see no reason why operators should not be able to achieve similar results using this system, or better results if good beef cattle are used.

HORMONE FREE BEEF

There are a growing number of stores that are offering hormone free beef. For example, Laura's Lean Beef is now available in 3000 grocery stores in 33 states in the US, according to their website, www.laurasleanbeef.com. Consumers generally pay higher prices for this beef, and the cattle raiser receives a higher price per pound as well. The Company wishes to have its operators use the process to raise hormone free beef for this market, partly because of these higher prices.

In order to access the hormone free beef market, the Company intends to require that when the operators bring animals in for finishing they be certified hormone free in accordance with an existing certification protocol. This program requires that calves be registered and ear-tagging records be kept of the ancestry, ranch of origin and every inoculation, injection and implant. The Company anticipates accessing such animals in order to assure our operators of receiving the type and quality of beef we require. Company policy will also require compliance with the hormone-free protocol and that antibiotics not be used generally on the animals, although use on an ill animal as prescribed by a vet will be allowed.

The operator selection process will seek to ensure that prospective operators are in favor of producing hormone free animals. In addition, random drug tests are anticipated to detect any use of hormones and those who violate this policy may be subject to penalties. It is also expected to be in the operators best interests to market hormone and antibiotic free beef as it commands higher prices. Hormones are generally used to reduce the cost of weight gains. The Company believes that feeding the wet distillers grains and stillage water will result in lower cost weight gains without resorting to hormones. The Company intends to seek out markets for these animals as a way of generating higher returns for the operators, which is also expected to generate an incentive revenue for the Company.

MISCELLANEOUS NEW TECHNOLOGIES

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

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


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THE HYBRID FUEL

The ethanol is "de-natured" by mixing about 2% emulsifier and diesel into the ethanol in the vaporization column so there is no pure ethanol accessible in the plant. 200 gallons are intended to be produced each day, and this chemical mixture is stored in an appropriate tank (3500 to 5000 gallons) on site until it is picked up, similar to bulk milk pickup, and delivered to a mixing plant to be further mixed into the final ratio.

In June of 1996, the Company contracted with The British Columbia Institute of Technology (BCIT) to test the hybrid fuel for a fee. The tests were conducted using a 1994 Dodge diesel truck with 215,717 kilometers (134,176 miles) on the odometer. The truck was first tested using regular diesel, then run on the hybrid fuel for 2 days and re-tested. The tests of this fuel showed opacity (black smoke) readings reduced by 65.5% and NOx emissions by 22.2%. These test indicated that this fuel is more effective in reducing particulate and nitrogen oxide emissions from diesel than any other diesel mixture of which the Company is aware. For example, diesel/water mixtures are being independently developed and tested by Elf Acquitane and retired MIT Professor, Keith Johnson, according to an article in the March 13, 1999 edition of New Scientist. The article reports that these mixtures reduce particulate emissions by 45% and NOx by 15%. On its website, The University of Illinois reports similar reductions regarding the use of a mixture of diesel and dry ethanol. Compared to both of those mixtures, Hybrid's mixture showed greater reduction of emissions at 65.5% and 22.2% respectively in the BCIT tests.

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

In the beginning, with the small quantities of the fuel from the first plant, the plan is to mix locally and use the fuel for testing and evaluation by local users. Two local firms have agreed to evaluate the fuel made by the first plant as soon as we produce it. This evaluation is expected to begin at no cost to the operators. However, later, as quantities increase, is expected to generate $1.00 to $1.40 per gallon in revenue from the sale of the ethanol to the local firms that have agreed to conduct the evaluation. The price is somewhat tied to the retail price of diesel. Although we have not yet agreed on benchmarks, the price is expected to gradually increase over time as the evaluation progresses. Handling and mixing costs are expected to be minimal, in the range of 5 to 7 cents per gallon.

After the first plant is operating, subsequent facilities are expected to be built in the vicinity of commercial mixing plants that have the capacity to handle the production from the plants on a contract basis. The plan is for the Company to purchase the resulting chemical mixture from each plant, and transport it to mixing plants for further mixing to achieve the appropriate ratio. This is designed to ensure control over all of the ethanol produced to ensure the over all best price and equitably distribute that amongst the operators. The Company expects to earn revenue for providing this service.

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


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

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

Our fuel is different because it contains a small amount of water, and it will therefore require separate evaluation. The Company believes that the small amount of water in the mix will reduce the power loss from using the blend. The testing that was done at BCIT in June 1996, did not disclose any significant power loss, but further evaluation is required.

Some potential users will be concerned about using this product. Ethanol-diesel mixes are presently being evaluated by Archer Daniels Midland, The Chicago Transit Authority, and The University of Illinois. Their reports either are or are expected to be available on The University of Illinois website. The Company plans to provide end users with copies of these and subsequent evaluation reports in order to help alleviate potential users concerns about the safety and performance of the fuel. As a result of these evaluations and the testing done at BCIT, the Company believes the fuel is safe for use.

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

EMPLOYEES

Since his appointment on June 28, 1999, Clay Larson has been the President, a Director and the only employee of the Company. He is entitled to a salary of $6000.00 per month which is deferred until the Company has money to pay him. The Company does not have a written employment contract with Mr. Larson. The Company does not intend to hire any other employees for the immediate future. For the short term, until resources permit, services we need to hire, will be supplied by paid consultants, contractors or commissioned salespeople.

SIGNIFICANT CONSULTANTS

Sir Donald Craig is the individual who is most responsible for the development of the concepts and invention of much of the equipment or improvements to the equipment. Mr. Craig is expected to supervise the building of the first plants, and the preparation of the training and operations manuals. He has agreed to donate his time without remuneration until the first plant is generating cash flow. Thereafter, he may provide consulting service as needed at mutually agreeable prices, and the Company intends to pay his Company related expenses. The Company does not have a written employment contract with Mr. Craig.


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SUPPLIERS

The Company is not dependent on a limited number of suppliers as most of the equipment and materials required for the plants are readily available in all areas where the Company expects to be operating. The Company plans to obtain its raw materials as and when needed from local suppliers. In addition, we expect to arrange with independent contractors, to manufacture the columns and separators as necessary. Fabrication of these items is expected to be on the basis that the Company will supply the raw materials for each item, and the contractor will fabricate each item only on request by the Company. Each item will be made to our specifications, on a price that is agreed for each item. The price may change over time. Dale Hallaby Fabricating, the independent contractor we have used to date, works from its own premises and management believes they have the capacity to supply all of the items required by the Company for the next 12 to 24 months. We do not have contracts with any contractors at this time, although they are still available to us.

The Company intends to seek quotes from independent contractors to supply and install the buildings, the flooring materials, pumps, tanks and other "off-the-shelf" items required for each plant. As the Company develops a history of operations and experience with particular sources of supply, the Company may enter into exclusive supply contracts in the future if it is advantageous to the Company and its operators. No such arrangements are being negotiated at this time.

GOVERNMENTAL REGULATION

Each plant will require some form of government permit in order to operate. In the United States, the Bureau of Alcohol Firearms and Tobacco is the appropriate agency and they have verbally indicated to the Company that it would be able to obtain the appropriate permits. In Canada, the appropriate agency is Excise Canada which has taken the position that since the plants produce ethanol, each will require a distillers license. This would require the installation of equipment in each plant which is designed to measure the amount of alcohol.

Unfortunately that equipment will not work because the ethanol is denatured by the addition of diesel and the emulsifier in the column which means that it is impossible to detect, access or measure any pure ethanol in the process. The Company is therefore seeking an exemption for its operations and has enlisted the assistance of a number of people and politicians to assist in persuading Excise Canada to issue the necessary exemption. Until such an exemption is made, the plants may be built without the ethanol equipment. The operators of these plants would pay lower royalties until their ethanol equipment was installed. If there are significant delays in obtaining the desired exemption, the Company anticipates that it will commence building plants in the U.S. The prototype plant will have the ethanol making equipment and is expected to operate with a special permit.

COST AND EFFECTS OF GOVERNMENTAL REGULATION

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

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During the last two years the Company has spent zero dollars on compliance with environmental regulations. The Company believes that the impact of the cost and effects of the Company's compliance with environmental laws should be minimal as the Company's process is believed to be very environmentally friendly.

TARGET MARKET AND ADVERTISING

The Company's target market for the sale of the plants is the farming communities. The Company intends to advertise its plants in trade journals, local newspapers, on radio and television programs, and through seminars and presentations at trade shows. The Company is also in contact with a number of government agencies and industry organizations whose role it is to locate and promote new opportunities for the economic benefit of farmers.

There appears to be very strong interest in the Company's project from the farming community. Even though we have not been advertising, to date the Company has received applications from more than fifty farmers, and we receive more phone calls each month.

The Company is expecting to have a screening process in place and at least four candidates approved by the time the first facility is ready to operate. These individuals will need to qualify for financing in accordance with the requirements of the particular financial institution. Financing will have to be committed before the Company would start construction. It is anticipated that the first operators will be fully trained and qualified by the time the second plant is finished and ready to operate.

COMPETITION

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

Major oil and petroleum companies as well as alternate energy companies will all be competitors of the Company. The Company is not aware of any competitors who offer farm scale feedlot-fuel plants, although there are several competitors who produce ethanol on a very large scale basis. Generally speaking, they produce dry ethanol for the gasahol market. The tests being done by Archer Daniels Midland suggest they are looking for ways to expand their ethanol production into use in the diesel fuel business. The Company believes it has a competitive advantage because of the quality of its hybrid fuel combined with the potential of significantly reduced environmental impact in both producing and using the hybrid fuel.

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

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

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The Company plans to promote the beef as being free of antibiotics and hormones. As consumers become more selective about eating "clean" meat, the Company anticipates capitalizing on these products being free of these substances. The Company also intends to "brand" the finished product with a name, trade marks and logos (not yet selected) to make the product more easily recognizable in order to generate consumer loyalty and capitalize on brand quality.

TRENDS THAT MAY EFFECT THE COMPANY'S BUSINESS

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

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

Over the last three decades, there has been a trend toward reducing consumption of meat generally and beef in particular. Continuation of this trend could have an adverse effect on the Company. However, in January 2000, Successful Farming Online reported the first increase in consumer spending on beef since the early 1970s. This was an increase of 4%. This report further says that consumers will pay more for beef that is guaranteed good quality. The Company believes that it will be able to take advantage of this, and a trend toward consumption of healthier foods.

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

As a result of environmental and fuel price concerns in both Canada and the US, there is a push to increase the production of ethanol. One example is former President Clinton's announcement in August 1999 of incentives to triple the use of ethanol in fuels in the US within 10 years. More recently, a press release issued by Agriculture Canada reads, "Ottawa Has Big Plans For Ethanol." The release says in part that, "government officials state that as part of Canada's commitment to reducing emissions from vehicle exhaust, Ottawa will soon announce a package that includes extension and expansion of a plan to guarantee loans for ethanol plant construction or expansion. There will be provision for direct government aid to build new facilities. Recommending a goal of increasing ethanol production capacity to close to one billion liters by 2005, (250,000,000 US gallons) Agriculture Minister Vanclief said producing alcohol from grain would be "the main ticket" for future rural incomes.

The Company believes that initiatives such as these create a more favorable climate for the expansion of the Company's business, even though the Bush administration seems to have much less enthusiasm for ethanol than the previous administration.

The United States and Canada are signatories to the Kyoto Emission Standards Agreement which requires them to adhere to the Kyoto Protocol commitments to reduce pollution by the year 2010, although the Bush administration has been balking at complying with those commitments. In addition, many states, such as California, have or are considering legislation to eliminate the use of MTBE as an octane enhancer and "clean air" additive. This should work to the advantage of the Company, as most media reports indicate that ethanol appears to have the edge as the product to reduce the use of fossil fuels and the "clean air" additive of choice to replace MTBE. Our initial calculations suggest that use of our hybrid fuel by the majority of diesel engines could reduce their exhaust emissions sufficient to meet Canada's Kyoto requirements.


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Also, the Company expects to be able to produce ethanol relatively inexpensively, as the proprietary emulsifier allows the mixing of wet ethanol and diesel which reduces emissions, without incurring drying costs. Even if there is no market for the hybrid diesel fuel, the ethanol should still be valuable for use in other products such as windshield washer fluid or gasohol.

Another trend that may work to our advantage is the trend of governments and health regulators to mandate environmental clean-ups and reduce pollution. In California and other states, local authorities are implementing stricter environmental clean-up requirements, in particular tighter restrictions on the handling of dairy waste which has been found to contaminate ground water. According to a Press-Enterprise report written by Leslie Berkman, in 1999, the Santa Ana Regional Water Quality Control Board, which enforces state and federal water quality standards in the Santa Ana River watershed, mandated dairy farmers remove stockpiled manure by December 31, 2001. They also established a new 180 day limit for new manure to be cleared from the dairies. The Company's use of gasifier technology and the fuel/feed facilities may assist farmers to comply with this type of regulation.

Another factor is that beef prices are especially volatile as a result of the "mad cow" scare sweeping Europe. Management believes that as a result, prices for hormone free beef, particularly from North America, which is still BSE free, will rise in the short term even though demand is likely to decline. This should work to the benefit of the Company.

In addition, with fuel prices as high as they are, the price of ethanol has increased over the last year. This trend should work to the advantage of the operators and the Company.

RESEARCH AND DEVELOPMENT

Since 1998, the Company has spent $8,000 on research and development. The majority of funds were spent on perfecting the formula for the emulsifier. The balance of the funds were spent on testing at the British Columbia Institute of Technology to quantify the effects of the use of the hybrid fuel in an unaltered diesel engine.

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

1. Researching the long-term use of the hybrid fuel, particularly in extreme temperatures; plus testing and refinement to obtain the optimum hybrid fuel mixture.

With respect to further testing of the hybrid fuel, the Company has had preliminary discussions with manufacturers of diesel engines and several companies that operate large fleets of diesel powered equipment. This research is expected to cost the Company very little as several local operators such as Oyama Forest Products Ltd., and Mark Tarasewich Trucking Ltd., have expressed interest in using the fuel in their operations and providing testing and evaluation services at no charge to the Company. As of this date, no contracts have been entered into.

The Company is also investigating the availability of grants from various government agencies for support in further testing of the hybrid fuel.

2. Researching efficiencies in plant construction and operation;

3. Research of training methods and development of training and operations manuals.


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The research contemplated in 2 & 3 is not expected to cost much as most of it will be conducted in conjunction with the day to day operations of the plant. No money has been allocated to this research as it will have to be done out of operating revenues when the Company begins to generate those.

PRODUCT PROTECTION

The Company has not patented any of it's proprietary technologies, on the advice of legal counsel. Their reasoning is that obtaining patents tends to publish the discoveries which others can then copy and a small company will have difficulty protecting itself from infringement. As a consequence, the Company has determined that it will protect it's trade secrets and proprietary technologies by careful screening of potential operators and then having them sign non-disclosure agreements. All operators will be well briefed on protecting the proprietary information in their own best interests and all reasonable steps will be taken to ensure that they take all reasonable precautions. Also, the column and the spinner will be manufactured elsewhere, delivered and installed, without the operators knowing how they are constructed. They would essentially have to destroy the column to find out how it was made and how it works. While the Company intends to take all appropriate measures to protect secrecy, as far as the Company is aware, we are the only ones that are developing small scale plants. All of the other ethanol plants that are being considered, of which we are aware, are large operations that will produce millions of gallons per year. Our technology is useless to those operations. Management therefore believes that the risk associated with the lack of patent protection, described under number 3, RISK FACTORS, on page 3 above, is reasonably acceptable.

Item 2. DESCRIPTION OF PROPERTY

The President maintains an office in his home at 740 Westpoint Court, Kelowna, British Columbia, Canada at no cost to the Company and Donald Craig maintains an office at his home in Winfield, B.C., 15 miles north of Kelowna and about 5 miles from the proposed location of the first plant, also at no cost to the Company.

The Company has a verbal agreement with the owner of a 6 acre parcel of bare farm land on which the first plant is to be situated in Oyama. The owner is not related to the Company. Prior to commencement of construction of the plant, the Company is expecting to complete a written lease with the land owner for the land. We will own the plant and use it as a training and demonstration facility. The terms of the lease of the land are not expected to be finalized until the terms of the financing are agreed.

Item 3. LEGAL PROCEEDINGS

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

Although the Company is not involved in any legal proceedings, the following issues may eventually lead to legal action: (a) On August 4, 1998 and March 23, 1999, the Company's former President authorized the issuance of 1,000,000 and 900,000 shares respectively to individuals without consideration and without Board of Directors resolutions. On August 21, 1999, the then only Director resolved that the share certificates representing ownership of these 1,900,000 shares were issued without adequate consideration being paid to the Company and were therefore not fully paid and non-assessable. The Company first determined that these shares had not been transferred out of the names of the original recipients and then resolved to cancel the share certificates. The Company indemnified the transfer agent, for any costs or liability it may incur in any way arising out of the cancellation of such shares and the transfer agent removed the 1,900,000 shares from the stockholder list effectively reversing the

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issuance. Six of the cancelled certificates, totalling 550,000 shares, have been endorsed and returned to the Company for cancellation. No formal legal demand for the return of the shares has been made as the former administration has failed to provide addresses despite a number of requests.

The contingencies regarding the cancelled shares relate to anyone who may have subsequent holder rights, and possibly the individuals who were issued those shares who may claim that they were issued for due consideration. The Company has determined that there is no amount to be accrued for future liabilities associated with these shares. The first reason is that all of the shares were still in the names of the original holders when they were cancelled and some of the holders and previous directors were informed verbally of the cancellation. The second reason is that there were no directors resolution issuing the shares and the individuals to whom those shares were originally issued gave no consideration to the Company for those shares. In addition, to date, when a broker has received these shares for possible resale, the broker has phoned the Company or the transfer agent to confirm the status of the shares. Once informed the shares were issued without consideration, the brokers have refused to deal further with the shares.

(b) Unauthorized and/or unsupported payments in the amount of $243,463 were made from Company funds by the past President of the Company during the period May, 1998 to June, 1999. The Company has had no response to requests that the past president provide a full accounting of these amounts. All amounts that were unauthorized by the board of directors or amounts that are not properly documented with invoices and receipts have been accounted for as disputed executive compensation. When the Company has the money available to do so, Company will seek legal advice to determine whether or not it is possible to recover these amounts from the previous administration.

(c) In May and June 2000, the Company issued 3,000,000 shares in return for promissory notes for $300,000. The 3,000,000 shares were released from escrow to the investors to facilitate financing. We believe the 3,000,000 shares have since been sold by the investors to innocent third parties, and the Company has not been paid for these shares, despite demands. Since these shares have been resold to innocent third parties they must be considered outstanding. When the Company has the funds available, it intends to seek legal advice to collect the balance due on the notes. However the Company believes the balance is probably uncollectible.


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PART II

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

The Company has authorized capital of 50,000,000 share of common stock with a par value of $0.001, of which 21,533,353 were issued and 21,286,000 were outstanding as at June 30, 2002 and the Company had 240 shareholders of record.

During the quarter ended June 30, 2000, 3,000,000 shares were issued to investors in return for promissory notes. As those notes had not been paid, the shares were treated as issued but not outstanding. During the quarter ended June 30, 2001, Management learned that that the investors had sold the shares to innocent third parties and not paid the Company. Because those shares have now been sold to innocent third parties, they must be considered issued and outstanding, and are so reflected in the financial statements. For more information regarding the stock, see the Consolidated Statement of Change of Stockholders Equity and Note 7, in the Financial Statements.

The Company's common stock is traded in the National Quotation Bureau's "Pink Sheets" under the symbol "HRID."

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

            HIGH           LOW
            ----           ----
                   2000
                   ----
3rd Quarter 0.75           0.275
4th Quarter 0.40           0.15

            HIGH           LOW
            ----           ---
                   2001
                   ----
1st Quarter 0.28           0.05
2nd Quarter 0.14           0.045
3rd Quarter 0.092          0.030
4th Quarter 0.25           0.035

            HIGH           LOW
            ----           ---
                   2002
                   ----
1st Quarter 0.11            0.06
2nd Quarter 0.15            0.05

The Company has never paid cash dividends. The Directors of the Company currently anticipate that it will retain all available funds for use in the operation of the business and does not anticipate paying any cash dividends in the foreseeable future.


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RECENT SALES OF UNREGISTERED SECURITIES.

1. Date, title and amount of securities recently sold by the Company:

    Date                     Title                 Amount
    ----                     -----                 ------
May 6, 2002               Common Stock            31,300 shares
May 31, 2002              Common Stock           147,000 shares

These shares were sold to an investor who is not an U.S. person. The transactions were accomplished outside the United States with a person who was involved with the business of the Issuer, so there were no selling efforts of any kind involved with the transactions. The shares were issued to the investor with restrictive legends. As a result, the Issuer believes that the exemption afforded by Regulation S applies to this investor. In the alternative, because the shares were issued in isolated private transactions not involving any public offering to one sophisticated investor, who had a prior business relationship with the Company, the Issuer believes that the Section 4(2) private offering exemption also applies. No offering materials were used, no brokers were involved and no discounts or commissions were paid in connection with these transactions.

Item 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Background

We are a development stage company that has not yet proved the feasibility of its planned principal operations. In their opinion on our June 30, 2002 financial statements, our independent auditors raised a substantial doubt about our ability to continue as a going concern because we have not generated any revenues and have conducted operations at a loss since inception. To date we do not have any operations that generate revenue and have been unable to raise money to begin operations. Until such time as we prove the feasibility of our planned principal operations, we are likely to continue to experience a cash shortage. Because we are a developmental stage company, we are unlikely to be able to borrow money from banks and other traditional financial institutions. We do not anticipate making any commitments to borrow money within the next 12 months, unless we can secure construction loans to build our first plant. The lack of long term, adequate financing continues to be of great concern to management.

We will require additional capital soon in order to continue as a going concern in the long term. Until we have arranged financing, no operating activities are planned. In the absence of operating activities, our cash general and administrative expenses for the next 12 months are expected to be less than $500 per month, exclusive of executive compensation, which is deferred, and professional fees for legal and accounting services.

Our ability to continue to operate in the future depends on us being able to raise money to build our first plant. We have discussed with a general contractor, Team Steel Building Systems, of Edmonton Alberta, working towards a plan to build the first plant. We do not have any written or specific arrangements with Team Steel at this time. We are concentrating our efforts on raising money to build the first plant and commence operations. We estimate we need to raise approximately $1 million to cover payables, build the first plant, begin the development of operating activities and deal with potential claimants. This estimate includes $350,000 for plant construction, $110,000 for cattle, $30,000 for payables (excluding shareholder loans and accrued executive salaries), $70,000 for salaries, consumables and other operating expenses until the plant begins to generate cash flow, and $250,000 for contingencies and to start developing operating activities. The remaining $190,000 constitutes a reserve for any shortfalls in our estimation process or any unforeseen contingencies.

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Although we are negotiating with potential investors to fund the construction of the first plant, we do not have any commitments at this time.

Management recognizes that to generate long-term cash flow, we need to develop operating activities. We need to build and begin operating the first bio-fuel and beef facility to create cash flow and to demonstrate to potential operators, lenders and investors that the technology works as described. Prospective operators and those who will approve the financing for the construction of subsequent plants want to see a profitable facility in operation before they commit themselves.

Strategy to Raise Capital

Although we do not have any cash reserves, related parties have indicated a willingness for the time being to continue to pay operating expenses and advance funds to pay legal and accounting fees. The Company therefore believes that it can continue as a going concern in the near term. These related parties are not obligated to pay Company operating costs, and therefore, no assurances can be given that they will continue to do so. If these related parties cease to advance money to pay these operating costs, the Company may have to cease operations and liquidate.

So far, all potential investors we have contacted have been reluctant to invest funds as long as we are on the "pink sheets." Our plan is to comply with all applicable SEC reporting requirements so that we can have a market maker apply to the NASD to have our common stock authorized for inclusion on the OTC Bulletin Board. We are aware of a class of investors who will invest money in companies whose stocks are traded on the OTC Bulletin Board, although we do not have any specific investors identified at this time who have committed to invest funds in the Company. We hope to have met these requirements and to have our stock quoted on the OTC Bulletin Board within four months. Although our plan is to have our stock traded on the OTC Bulletin Board, there can be no assurance concerning the time frame when that may occur, if at all.

Because of our low stock price, and the fact that we are on the "pink sheets", we do not intend to sell additional shares of our common stock in the immediate future unless we have no other source of money to pay expenses. Once our stock is trading on the OTC Bulletin Board, we plan to contact prospective investors to raise the approximately $1 million in capital discussed above. This planned offering and sale of our common stock will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirement. This disclosure is not an offer of securities or a solicitation of an offer to buy securities. Placements will be made only to investors with preexisting contacts with Hybrid Fuels and its authorized representatives. If we encounter unforeseen delays or difficulties in getting our stock to trade on the OTC Bulletin Board and we must continue to trade on the pink sheets, we may reevaluate the price at which we will sell our equity securities to raise capital.

Our plan to have our stock traded on the OTC Bulletin Board could also be frustrated by the introduction of the BBX Exchange, a proposed automated electronic exchange that would replace the negotiated order system of the OTC Bulletin Board. In the near term, the NASD may slow its processing of new applications to the OTC Bulletin Board, because the OTC Bulletin Board will terminate soon and BBX applications may be filed as early as July 1, 2002. The BBX Exchange is slated to go "live" in March 2003. The most recent NASD proposal to the SEC regarding the BBX Exchange does not contain a definite date when the OTC Bulletin Board will terminate, but the stated objective of the introduction of the BBX Exchange is to remove any market for stocks between the pink sheets and the BBX Exchange. If the uncertainty created by the BBX Exchange prevents us from having our stock traded on the OTC Bulletin Board, we would have to reevaluate our capital raising strategy. We would have to assess

Page-24-

whether we would remain a pink sheets company and sell our equity securities at the lower prices that a pink sheets listing entails or whether we could achieve the more rigorous listing standards of the BBX Exchange and apply to have our common stock traded there. If we were to attempt the BBX Exchange alternative, we would either have to raise some capital at the pink sheets level to fund the application process or have to convince related parties to advance these funds.

Plan of Operation Assuming Adequate Capital Raised

The discussion in this section assumes that we will succeed in raising the approximately $1 million that will be used to place our first plant in service. The major goal of placing the first plant in service is to demonstrate the economic feasibility of the system. Once this first plant is operating, we expect to use it as a demonstration and training facility and to earn revenue from its operation. Assuming that it will be necessary to pay market price for grain, bedding and other supplies and that we will receive no more than market price for the finished animals, our projections indicate that the plant should generate sufficient revenue to pay all of our operating costs, plus a small surplus which may be used toward development of operating activities. The financial institutions that have expressed interest in financing subsequent plants want to see this first plant generate sufficient cash flow to pay all operating costs and debt service. We anticipate that the plant will show sufficient cash flow to make it possible for us to get approval for financing subsequent plants.

Management has planned to build the first plant at Oyama, on approximately six acres of farmland just north of Kelowna, British Columbia. We will need to finalize a lease to enable us to build on this site. This location provides the company supervisory ability and site control. Once we have financing available to construct the plant, we believe we can quickly finalize the lease for the site.

An operating facility includes the barn, the ethanol making equipment, the bio-furnace or gasifier, "Greener Pastures" grass growing system, and the right to use the proprietary information and technology, as more fully described under "Proposed Facilities" on page 6 above. The cost of building this plant is anticipated to be approximately $350,000. Approximately $220,000 of this cost is for foundations and flooring, buildings, the gasifier, the ethanol making equipment, tanks and machinery. Soft costs, for such items as permits, engineering and other professional fees, survey and layout, site preparation, delivery of buildings and materials, rentals, small tools and miscellaneous, are estimated at $60,000. We estimate we will spend approximately $70,000 for construction labor and supervision.

Once financing is arranged and we have finalized our lease, we anticipate it will take approximately two months to construct the plant. Foundations and flooring are expected to take approximately two weeks and the erection of the buildings are expected take another two weeks. Once the buildings are finished, the installation of the gasifier, pens, feed bunks and ethanol making equipment are expected to take another month. Our plan then provides up to another two months for any delays, initial start-up and testing, for a total of up to four months from beginning construction until the plant is fully operational. At one point we had attempted to have a contractor construct the plant, which we would then lease from the contractor. That proposed arrangement is no longer available to us; we must finance the plant construction ourselves.

We have designed the plant to accommodate 200 head of cattle. As we near the end of testing the plant, we plan to begin the finishing operation for the cattle, with an initial group of 20 to 25 cattle. The finishing operation is designed to function on a staggered basis, so that every two weeks (initially) we will bring in an additional 20 to 25 cattle. We will sell the cattle on the same staggered basis as they complete the finishing process. As we gain


Page-25-

experience with the plant, we intend to bring cattle in 40 to 50 at a time on three to five week intervals to take maximum advantage of the size of the trucks used to transport the cattle.

The cattle will begin the finishing operation in quieting pens where they spend approximately two weeks being transitioned from their prior diet to the wet distillers grains diet. After completing the diet transition, the cattle are moved into the barn, where, on average, they will spend approximately 100 days being fed the finishing diet. At the end of the finishing operation, our plans for this demonstration plant call for the cattle to be sold at auction. As one group of cattle is sold, another takes its place, as both the finishing operation and our staggered acquisition scheme are scheduled to take approximately three to four months, depending on how long the finishing takes. As a result of using this staggered acquisition scheme, we will not run the plant at full capacity until approximately four months have passed from the plant becoming operational. As a result the cattle we begin selling during the fourth month, which will generate our initial revenues, will bear a disproportionate amount of fixed costs compared to cattle sold beginning in the eighth month. We believe, however, that at the end of the fourth month, when we sell the first group of finished cattle, we will have an initial set of data with which to prepare pro forma information for purposes of estimating cash flows to prospective financiers of future plants, rather than having to wait until the end of the eighth month, to present this information.

We plan to add, on average, between 400 and 500 pounds per head during the finishing operation. The weight per head when we acquire the cattle will vary, principally due to the time of year when the cattle are acquired (most calves are born in the spring and are ready to begin being sold as feeder cattle seven months to a year later). Generally speaking, the older they are, the more they weigh. One of our fundamental assumptions is that the plant will have the potential to break even if we can sell finished cattle at prices per pound that are less than the prices per pound at which we purchase them. Generally in the cattle industry feeder cattle sell at a higher price per pound than finished cattle. The increase in weight during the finishing operation provides the potential for generating a profit or at least breaking even when selling finished cattle at a lower price per pound. For example, assume we purchase a 600 pound animal for $0.90 per pound, or $540, that we finish to 1000 pounds and sell at $0.85 per pound, or $850. The $310 difference between our purchase price and the sale price would have to cover the consumables purchased to prepare wet distillers grains for the animal and a pro rata share of the plant's operating costs, including debt service. At this time we do not have financial data to support the breakeven pricing spread for the plant. Developing this relationship between the plant's cost structure and tolerable price differentials will provide critical information for prospective financiers of future plants.

We expect that as sale prices move close to or exceed purchase prices, the plant's cattle finishing operation will make a profit. Cattle prices are volatile, however, so there is a distinct risk that sale prices for finished cattle could be below the pricing threshold, resulting in a loss on cattle finishing. The greater the price spread, the more important ethanol sales become to the overall profitability of the plant. Farmers with integrated operations who grow their own consumables could have greater price flexibility on the cattle finishing operation if their cost of producing the consumables is less than the market price for consumables. We do not plan to have an integrated operation at the first plant, so we will have to pay market prices for our consumables.


Page-26-

We do not plan to sell the ethanol produced by the first plant during at least the first two to three months of its operation. We have discussed with a local owner of a sawmill and trucking company giving him the ethanol for this two- to three-month period, with a view toward charging him in the future once he has determined that he can use the ethanol economically without harm to his equipment. Once the plant is at full capacity, we project that the plant will produce approximately 240 US gallons of ethanol per day, which could be sold at market prices slightly below the price of the diesel fuel with which it will be blended. The price of ethanol will vary, usually in tandem with the price of diesel. Assuming a price of $0.70 per gallon for ethanol, monthly sales of ethanol would be approximately $5,000.

Once we have operated the plant for four months, we believe that the actual financial results for the finishing operation and ethanol sales will provide us with the data needed to prepare pro forma financial information assessing the economic feasibility of the plant. If the data establishes the economic feasibility of the plant, we will then be able to implement our business plan, which is based on identifying third parties who will work with us to construct and operate their own plants. If our assumptions prove wrong or we encounter unforeseen obstacles, our ability to demonstrate the plant's economic feasibility may be delayed, or, in the worst case, we may not be able to establish the economic feasibility of the plant and may have to abandon the business and liquidate the company.

Plan of Operation Assuming Establishment of Facility Feasibility

The discussion in this section assumes that we will succeed both in raising the approximately $1 million that will be used to place our first plant in service and in demonstrating the economic feasibility of the plant. Once these milestones are achieved, we intend to have others build, own and operate additional plants, while we earn revenues from a variety of sources related to the plants. We plan to earn revenue from:

1. operating the demonstration facility we build and own;
2. profit on the sale of subsequent plants;
3. the lease of the column and spinner to each operator;
4. the royalties and service fees that each operator will pay;
5. the purchase of the ethanol mixture from the operator at 80 % of wholesale value and the sale to distributors or end-users;
6. an incentive from premiums from marketing the finished animals.

Once we have established the economic feasibility of our demonstration plant, we intend to operate it and earn revenue from the sale of cattle and ethanol.

We intend to license our technology and provide our expertise to third parties that want to construct plants. We expect to earn a profit and recognize revenue on the sale of each plant. We plan to charge fees in connection with the sale of each plant, based on the value to the operator of having us organize and supervise the construction of the plant and train the operator. We expect the fees from the sale of the plants to be sufficient to cover all of the operating costs we will incur in qualifying candidates, training operators, supervising construction and start-up, etc., until royalties are received.


Page-27-

To date, we have received applications from more than 50 farmers who have expressed interest in constructing a plant. We are currently developing a screening process to select suitable candidates, and we expect to assist them in obtaining financing for plant construction. Once we have demonstrated our demonstration plant's economic feasibility for purposes of obtaining financing of subsequent plants, we expect to have selected four operators. After operators have been selected and have qualified for financing, we plan to train them and assist in constructing the facility. We anticipate that it will take approximately six months from the time our plant demonstrates economic viability to build the second plant and get it operating.

We intend to lease to the operators, on a permanent basis, the separation column, which is used to distill the ethanol, and the spinner, which is used to separate the mash from the water after the fermentation process. These two items are integral parts of the plants, and leasing them is designed to protect the secrecy of these most vital pieces of the technology. The lease payments will generate revenue for us and will be payable monthly in amounts yet to be finalized.

We plan to charge a royalty for the use of the trade secrets and proprietary information. The royalty, which is expected to be $2500US per month, per plant, based on the projected benefits of the use of trade secrets to the operator, will begin when each plant begins operation. Incentives in the form of reduced royalties may be offered to the first 10 to 20 operators who make early commitments to purchase plants.

We also expect to charge each operator service fees to cover the cost of ongoing training, service, technical support, and quality control. We expect these fees to be in the $150 to $250 per month range.

We expect to enter into contracts with our operators to act as their marketing arm for the beef and fuel. We expect this arrangement to generate revenue for us and give us control over greater quantities of both products than any individual operator would have. We believe this arrangement will provide us with the ability to make better deals with, and provide more secure delivery to, distributors and other purchasers. We believe that operators will appreciate being relieved of these marketing responsibilities, particularly if beef sales at premium prices generate greater revenue for them. We expect revenue for Hybrid to come from the resale of the fuel and from a portion of any premium that the Company can obtain from the sale of the beef.

Based on the results of the test trials at the Dalum plant, we believe we will be able to generate premium prices for the beef because it is hormone free and because of its high quality and taste. At the Dalum plant, the purchaser of the 123 heifers agreed to pick up subsequent lots at the plant and pay a premium of $0.10 per pound for all of the beef that could be produced using our process. We do not have commitments from any buyers to purchase the beef at premium prices at this time.

We believe that ultimately the best way to obtain the best premium, is to control the processing, marketing and distribution of the finished beef. To that end we continue to search for money to purchase the packing plant known as Blue Mountain Packers, near Salmon Arm, B.C. This purchase is not likely to happen before our next fiscal year end, but it remains part of our long


Page-28-

term plan. No commitment will be made to purchase the packing plant until sufficient money is committed to pay the purchase price and cover operating expenses until positive cash flow is achieved. Within 18 to 24 months of the first plant demonstrating viability, we expect third parties to have 15 to 20 plants operating. We expect that many of these operators will require assistance to obtain financing in order to construct a plant. We have had preliminary discussions with CIBC, Scotiabank, Leaseline, Dominion Leasing and a Swiss broker with connections to several European "ECO" funds, all of whom have expressed interest in providing financing for plants. We have been told that our project should qualify if we can demonstrate the economic viability of the operation. Once the first plant is operating the plan is for the Swiss broker to arrange to have the appropriate representatives of these ECO funds inspect the plant and if it qualifies, to use them as a source of financing for plant construction, thereby permitting us to expand our operations.

Historical Results

The loss for the year ended June 30, 2002, was 167,850, compared to $312,660 for the comparable period the previous year. The largest items making up this years losses were the deferred salary for the President of $72,000 and imputed interest of $58,932, down from $59,202 in 2001. Imputed interest is interest that is imputed on non-interest bearing amounts that are advanced to, or paid on behalf of the Company, plus deferred executive compensation. Executive compensation shown is the salary for the President, which is deferred until funds are available to pay his salary.

The losses for 2001 were also significantly higher than the loss for the current year because the advances of $84,951 to Blue Mountain were written off in 2001, and professional fees for 2002 were $23,890, compared to $72,419 for 2001. In addition, rent, telephone and travel expenses were all lower in 2002.

In an attempt to raise money to build the demonstration plant, in April 2001, we agreed in principle to sell a license to use the technology in the Province of Quebec, in Canada. This was done by a combination of letters and telephone discussions. As it became obvious that the prospective licensee was not making the progress expected, we terminated negotiations on March 28, 2002. We have no present intent to sell a license based on a geographic territory.

At June 30, 2002 the Company had sufficient cash reserves to pay all of our ordinary operating expenses for the subsequent 12 months, with the exception of professional fees. Related parties have agreed to pay those professional fees but are not obligated to do so. If there is no other source of funds to pay operating expenses the Company will probable sell more shares.


Page-29-

Item 7. FINANCIAL STATEMENTS

Hybrid Fuels Inc.

Index to Consolidated Financial Statements

Report of Independent Auditors..........................................F-1
Consolidated Balance Sheets.............................................F-2
Consolidated Statements of Operations...................................F-3
Consolidated Statements of Cash Flows...................................F-4
Consolidated Statements of Stockholders' Equity.........................F-5
Notes to Consolidated Financial Statements..............................F-6-F-10


F-1

INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of Hybrid Fuels, Inc.

(A Development Stage Company)

We have audited the accompanying consolidated balance sheets of Hybrid Fuels, Inc. (A Development Stage Company) as of June 30, 2001 and 2000 and the related statements of operations, stockholders' equity and cash flows accumulated for the period from February 16, 1960 (Date of Inception) to June 30, 2002 and 2001 and the years ended June 30, 2002 and 2001. 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 generally accepted auditing standards used in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Hybrid Fuels, Inc. (A Development Stage Company), as of June 30, 2002 and 2001, and the results of its operations and its cash flows accumulated for the period from February 16, 1960 (Date of Inception) to June 30, 2002 and the years ended June 30, 2002 and 2001 in conformity with generally accepted accounting principles used in the United States.

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

MANNING ELLIOTT
CHARTERED ACCOUNTANTS
Vancouver, Canada
September 13, 2002


F-2

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Balance Sheets

                                                      June 30,     June 30,
                                                       2002          2001
                                                        $             $
--------------------------------------------------------------------------------
ASSETS
Current Assets
Cash                                                    1,796             2
--------------------------------------------------------------------------------
Total Assets                                            1,796             2
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable                                       20,458        14,807
Accrued liabilities (Note 6(d))                         3,907        15,000
Note payable (Note 4)                                  33,638        33,638
Shareholder loan payable (Note 6(a))                  199,635       196,255
Amounts owing to a `Director (Note 6(b))              218,699       152,111
--------------------------------------------------------------------------------
                                                      476,337       411,811
--------------------------------------------------------------------------------
Temporary Equity (Note 7(d))                          223,000       223,000
--------------------------------------------------------------------------------
Stockholders' Deficit

Common Stock (Note 7): $0.001 par value;
50,000,000 shares authorized 21,300,600
and 20,623,600 shares are issued and
outstanding respectively                              21,300         20,624

Additional Paid-in Capital                           331,352        285,842

Donated Capital - Imputed Interest (Notes 5 and 6)   174,869        115,937

Deficit Accumulated During the Development Stage  (1,225,062)    (1,057,212)
--------------------------------------------------------------------------------
Total Stockholders' Deficit                         (697,541)      (634,809)
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit            1,796              2
--------------------------------------------------------------------------------

Nature of Operations and Continuance of Business (Note 1) Other Contingencies (Note 8)

(See Accompanying Notes to the Consolidated Financial Statements)


F-3

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Statements of Operations

                                          Accumulated from       Years ended
                                          February 26, 1960  June 30,   June 30,
                                          Date of Inception)   2002      2001
                                          to June 30, 2002
                                                 $              $          $
--------------------------------------------------------------------------------
Revenue                                          -              -          -
--------------------------------------------------------------------------------
Expenses
Consulting fees                                 6,520          6,520       -
Deposit and advances written-off (Note 3)     255,512           -        84,951
Disputed compensation (Note 8(b))             243,463           -          -
Executive compensation (Note 6(b))            216,000         72,000     72,000
Filing and regulatory fees                     17,630          2,100      5,092
General and administration                     59,675            726      2,973
Imputed interest (Notes 5 and 6)              174,869         58,932     59,202
Interest                                        4,851          2,722      2,129
Investor relations                             16,698           -         4,092
Professional fees                             165,258         23,890     72,419
Rent and telephone                             42,598            676      6,699
Research and development                        8,000           -          -
Travel and promotion                           13,988            284      3,103
--------------------------------------------------------------------------------
                                            1,225,062        167,850    312,660
--------------------------------------------------------------------------------
Net Loss                                   (1,225,062)      (167,850)  (312,660)
--------------------------------------------------------------------------------
Net Loss Per Share                                              (.01)      (.02)
--------------------------------------------------------------------------------

Weighted Average Shares Outstanding 20,962,210 19,524,000

(See Accompanying Notes to the Consolidated Financial Statements)


F-4

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows

                                          Accumulated from       Years Ended
                                          February 26, 1960  June 30    June 30
                                         (Date of Inception)   2002      2001
                                          to June 30, 2002
                                                 $              $         $
--------------------------------------------------------------------------------
Cash Flows To Operating Activities

Net loss                                  (1,225,062)       (167,850) (312,660)
Adjustments to reconcile net loss to cash
Shares issued for services                    17,000            -         -
Other adjustment                                (502)           -         -
Imputed interest                             174,869          58,932    59,202
Deposit and advances written-off             255,512            -       84,951

Change in non-cash working capital items
Accounts payable and accrued liabilities      24,365          (5,442)   26,695
--------------------------------------------------------------------------------
Net Cash Used In Operating Activities       (753,818)       (114,360) (141,812)
--------------------------------------------------------------------------------
Cash Flows To Investing Activities
Deposit and advances                        (170,561)           -         -
Advances to Blue Mountain Packers Ltd.       (84,951)           -      (84,951)
--------------------------------------------------------------------------------
Net Cash Used By Investing Activities       (255,512)           -      (84,951)
--------------------------------------------------------------------------------
Cash Flows From Financing Activities
Note payable                                  33,638            -       33,638
Advances payable                             134,468          15,000    82,455
Amounts owing to a director                  218,699          66,588    77,679
Shareholder loans payable                    199,635           3,380    32,508
Temporary equity and redeemable shares       223,000            -         -
Issuance of common stock                     201,686          31,186      -
--------------------------------------------------------------------------------
Net Cash Provided By Financing Activities  1,011,126         116,154   226,280
--------------------------------------------------------------------------------
Net Increase (Decrease) in Cash                1,796           1,794      (483)

Cash - Beginning of Period                      -                  2       485
--------------------------------------------------------------------------------
Cash - End of Period                           1,796           1,796         2
--------------------------------------------------------------------------------
Non-Cash Financing Activities
Common shares issued for services             17,000           5,000         -
Common shares issued to settle debt          134,468          10,000         -
--------------------------------------------------------------------------------
Supplemental Disclosures
Interest paid in cash                           -               -            -
Taxes paid in cash                              -               -            -
--------------------------------------------------------------------------------

(See Accompanying Notes to the Consolidated Financial Statements)


F-5

Hybrid Fuels, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Equity

                                                               Deficit
                                                               Accumulated
                           # of            Additional          During the
                           Shares          Paid-in   Donated   Development
                       Issued and  Par     Capital   Capital   Stage
                       Outstanding Value                                   Total
                                     $        $         $         $          $
--------------------------------------------------------------------------------
Cumulative from February 16, 1960 (Date of Inception) to June 30, 1997
                         15,000,000  15,000    3,398    -     (18,398)       -

Shares returned to treasury for cancellation
                        (12,000,000)(12,000)  12,000    -        -           -

Shares issued to effect a reverse merger
                         12,000,000  12,000  (12,000)   -        -           -
Net loss for the year         -       -        -        -    (93,633) (93,633)
--------------------------------------------------------------------------------
Balance at June 30, 1998 15,000,000  15,000    3,398    -   (112,031) (93,633)

Issuance of 1,900,000 shares
                          1,900,000   1,900   (1,900)   -        -           -
Issuance of shares for cash  23,600      24   13,576    -        -     13,600

Imputed Interest - - - 26,000 - 26,000 Net loss for the year - - - - (308,377)(308,377)

Balance at June 30, 1999 16,923,600 16,924 15,074 26,000(420,408)(362,410)

Cancellation of shares previously issued (1,900,000) (1,900) 1,900 - - - Issuance of shares for no consideration
3,000,000 3,000 (3,000) - - - Issuance of shares pursuant to a subscription agreement

                          1,500,000   1,500  148,500    -       -     150,000
Imputed Interest               -       -        -     30,735    -      30,735
Net loss for the year          -       -        -       -   (324,144)(324,144)
--------------------------------------------------------------------------------
Balance at June 30, 2000 19,523,600  19,524  162,474  56,735(744,552)(505,819)

Issuance of shares to settle debt
                          1,100,000   1,100  123,368    -       -     124,468
Imputed interest               -       -        -     59,202    -      59,202
Net loss for the year          -       -        -       -   (312,660)(312,660)
--------------------------------------------------------------------------------
Balance at June 30, 2001 20,623,600  20,624  285,242 115,937(1,057,212)(634,809)
Issuance of shares to settle debt
                            200,000     200    9,800    -       -        10,000
Issuance of shares for

services 100,000 100 4,900 - - 5,000 Issuance of shares for cash 377,000 376 30,810 - - 31,186 Imputed interest - - - 58,932 - 58,932 Net loss for the year - - - - (167,850)(167,850)
Balance at June 30, 2002 21,300,600 21,300 331,352 174,869(1,225,062)(697,541)
As at June 30, 2002, 232,753 shares were issued but not outstanding as these shares were issued with rescission rights attached (Note 7(d)).
(See Accompanying Notes to the Consolidated Financial Statements.)

F-6

1. Nature of Operations and Continuance of Business The Company was originally incorporated in the State of Florida on February 16, 1960. After a number of name changes the Company changed its name to Polo Equities, Inc. on June 3, 1993. Prior to May, 1998 the Company had no business operations.

In May 1998, the Company caused a Nevada corporation to be formed under the name Polo Equities, Inc., (Polo) (a Nevada corporation), with authorized capital of 50,000,000 common shares of $.001 par value. The two companies then merged pursuant to Articles of Merger adopted May 28, 1998 and filed with the State of Nevada on June 10, 1998, which changed its domicile to Nevada.

On May 28, 1998, the Company acquired, by issuing 12,000,000 shares, Hybrid Fuels, USA, Inc. and 330420 B.C. Ltd., which changed its name to Hybrid Fuels (Canada) Inc. This acquisition was accounted for as a reverse merger whereby the shareholder of Hybrid Fuels, USA, Inc. and Hybrid Fuels (Canada) Inc. gained control of Polo Equities Inc. which changed its name to Hybrid Fuels, Inc. All historical financial statements are those of Hybrid Fuels, USA, Inc. and Hybrid Fuels (Canada) Inc. As part of the acquisition, three shareholders holding 12,000,000 previously issued shares returned their shares for cancellation. For accounting purposes the acquisition was treated as a reverse merger business purchase of Polo Equities Inc. by Hybrid Fuels, USA, Inc. and Hybrid Fuels (Canada) Inc. No amount was allocated to the intellectual asset as it was acquired from a related party and the transfer had no cost basis associated with it. There was no public market for the shares of Polo Equities, Inc. at the time of the reverse merger. The Company operates through these two wholly-owned subsidiaries. On May 29, 1998 the Company changed its name to Hybrid Fuels, Inc., herein "the Company". On June 10, 1998 the Company began trading on the OTC Bulletin Board under the symbol "HRID" and in December, 1999 was moved to the "Pink Sheets".

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

The Company is in the early development stage. In a development stage company, management devotes most of its activities in investigating business opportunities and further advancing its technologies. Because of a serious working capital deficiency and significant operating losses from inception, there is substantial doubt about the ability of the Company to continue as a going concern.

The Company will need to rely on the forbearance of some creditors and related parties have agreed to continue to fund working capital as needed. The Company has entered into discussions with third parties to directly finance a facility in which the Company will then commence with its business plan.


F-7

2. Summary of Significant Accounting Policies
(a)Consolidated Financial Statements These consolidated financial statements represent the consolidation of the Company and its two subsidiaries Hybrid Fuels, U.S.A., Inc, and Hybrid Fuels (Canada) Inc.

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

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

(d) Accounting for Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock awards granted be recognized as compensation expense based on fair values at the date of grant. Alternatively, a company may account for stock awards granted under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has elected to account for stock-based compensation for employees under APB No. 25 and make the required pro forma disclosures for compensation expense. Stock based compensation for non-employees are accounted for using SFAS No. 123.

(e) Basic and Diluted Net Income (Loss) per Share The Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires presentation of both basic and diluted earnings per shares (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is antidilutive. Loss per share for 2002 and 2001 does not include the effect of the potential conversions of stock options, warrants or convertible debentures, as their effect would be anti-dilutive.

(f) Foreign Currency Transactions/Balances Transactions in currencies other than the U.S. dollar are translated at the rate in effect on the transaction date. Any balance sheet items denominated in foreign currencies are translated into U.S. dollars using the rate in effect on the balance sheet date.


F-8

3. Deposit on Plant The Company deposited Cnd$250,000 ($170,561), with Mega Holdings, Inc., pursuant to an option agreement to purchase a beef processing plant owned by Mega Holdings, Ltd. The Company agreed to purchase the beef processing plant facility including land, buildings and equipment for Cnd$3,000,000 which was below appraised value. The purchase agreement required an additional payment of Cnd$150,000 on June 24, 2000, the parties agreed to extend the deadline for the payment until March 15, 2001. This payment was not made and the deposit was forfeited and the option agreement terminated. Upon anticipated completion of the purchase, this beef processing plant was to be operated by Blue Mountain Packers, Ltd. (a related company). The Company intended to acquire the issued and outstanding common shares of Blue Mountain Packers, Ltd. for a nominal amount and operate it as a wholly-owned subsidiary. Blue Mountain Packers, Ltd., received certification by the Canadian Food Inspection Agency of the Government of Canada, Department of Agriculture for the processing of Canadian beef. Blue Mountain Packers is a related party due to having one common director. The Company advanced $84,951 to Blue Mountain Packers for plant refurbishing. Interest on these advances was to be paid at 8%. Due to the termination of the option agreement these advances were considered uncollectible and were charged to operations during fiscal 2001.

4. Note Payable On September 15, 2000, the Company issued a note for Cnd$50,000 ($33,638) due and payable on or before September 15, 2001 plus 8% interest. Repayment of the note has been extended until completion of a financing. Interest of $4,851 has been accrued for the year ended June 30, 2002 and is included in accounts payable.

5. Advances Payable Prior to the year ended June 30, 2001, a non-related company coordinated investor relations services for the Company, paid expenses of $69,248 on behalf of the Company and loaned the Company Cnd$78,000 ($50,220) for a total amount owing of $119,468. This debt was settled in June 2001 by the issuance of 1,000,000 restricted common shares of the Company. These advances were non-interest bearing and unsecured until the settlement date. Imputed interest of $16,291, calculated at a rate of 15% per annum, was charged to operations and treated as donated capital during fiscal 2001 and 2000.

6. Related Party Transactions/Balances
(a) Cash loans of $499,059 were advanced to the Company by the major shareholder. A total of $365,590 was repaid with cash. The controlling shareholder also paid office, rent and professional fees totalling $62,786 on behalf of the Company. The balance of $199,635 is currently owing without interest or specific repayment terms. Imputed interest of $29,731 (2001 - $29,041), calculated at a rate of 15% per annum, was charged to operations and treated as donated capital.

(b) The President who is also a Director of the Company, has paid office and related expenses from personal funds in the amount of $16,486 of which $14,788 has been reimbursed with cash. Effective July 1, 1999 thee President is entitled to a deferred salary of US$6,000 per month and was owed a total of $216,000 at June 30, 2002. These amounts are unsecured, non-interest bearing and due on demand. Imputed interest of $29,201 (2001 - $16,835), calculated at a rate of 15% per annum, was charged to operations and treated as donated capital.

(c) See Note 3 for advances to Blue Mountain Packers Ltd.

(d) On September 19, 2001 pursuant to a directors' resolution, a total of 200,000 shares were issued to a director/officer of the Company to settle $10,000 owing as at June 30, 2001. On October 18, 2001, a further 100,000 shares were issued to an arms-length party for services rendered to the Company, valued at $5,000.

F-9

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

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

(c) On May 17, 2000 the Company issued 1,500,000 shares for $150,000 cash pursuant to a subscription agreement dated February 17, 2000. On February 17 and 18, 2000, the Company accepted subscription agreements and notes whereby the Company would receive $300,000 for 3,000,000 shares. The 3,000,000 shares were issued and were then held in escrow . These shares were subsequently released from escrow to the investors to facilitate financing. The notes were to bear interest at 8% and were to be paid within 60 days or at the discretion of the President. In June 2000 the President extended the time for repayment to one week of the Company being relisted on the Over-The-Counter Bulletin Board or other suitable exchange. When it became apparent there were going to be long delays the notes were demanded to be repaid by February 21, 2001. The notes were not paid as demanded, and the 3,000,000 shares have since been sold by the investors to innocent third parties. The investors did not and have not paid the Company for these shares, despite demands. Since these shares have been resold to innocent third parties they must be considered outstanding. The Company intends to sue the investors for the balance due on the notes, however the Company believes the balance is uncollectible.


F-10

7. Stockholders' Equity (continued)

(d) Between October 1998 and June 1999, the previous administration sold a total of 361,120 common shares of the Company to 34 subscribers on the basis of an Offering Memorandum that contained a significant number of inaccuracies. A total of $223,000 was raised pursuant to this Offering. The current administration has concerns regarding possible misstatements, omissions and misleading statements. On the advice of legal counsel, the Company offered these 34 subscribers the option of receiving restricted stock as the Company did not and does not have the funds to repay these subscribers. Those who opted to receive restricted stock were also given an undertaking that they would receive a rescission offer when the Company was in a position to repay their money plus appropriate interest, in return for a return of the restricted stock, or they could elect to retain the stock. To date, 23 subscribers, have, pursuant to this offer received 237,753 shares, representing $158,000. These shares are issued but not considered outstanding. The remaining 11 subscribers, who paid $65,000 for 123,367 shares, have not responded to the offer. These subscriptions are recorded as temporary equity until rescission rights have been revoked.

(e) See Note 5 for 1,000,000 restricted common shares issued to a non-related company to settle debt of $119,468 during fiscal 2001.

(f) A total of 100,000 restricted common shares, valued at $5,000, were issued to the plant manager of Blue Mountain Packers Ltd. for plant refurbishing work to March 15, 2001.

(g) On September 19, 2001, 200,000 shares were issued to settle debt referred to in Note 6(d).

(h) On October 18, 2001, 100,000 shares where issued for services referred to in Note 6(e).

(i) During fiscal 2002 a total of 377,000 shares were issued for cash of $31,185 at an average price of $0.08 per share.

8. Legal Issues Although the Company is not involved in any legal proceedings, several issues may eventually lead to the Company instituting legal action as follows: (a) See Note 7(b) for contingencies relating to improperly issued shares that were later cancelled.

(b) Unauthorized and/or unsupported payments in the amount of $243,463 were made from Company funds by past officers of the Company during the period May, 1998 to June, 1999. The Company has requested a full accounting from the past president. All amounts that were unauthorized by the board of directors or amounts that are not properly documented with invoices and receipts have been accounted for as disputed executive compensation. At such time as Company resources permit, the Company will seek legal advice to determine whether or not it is possible to recover all such disputed and unauthorized amounts from the previous administration.

(c) See Note 7(d) for temporary equity and related rescission rights for subscribers of 361,120 shares of the Company.


Page-40-

ITEM 8. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS

During the Company's two fiscal years ended June 30, 2001 and 2002, and any subsequent interim period, there were no "reportable events" requiring disclosure pursuant to Item 304 of Regulation S-B.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.

The following table sets forth as of June 30, 2001, the name, age, and position of each executive officer and director and the term of office of each director of the Corporation.

NAME            AGE     POSITION                    DIRECTOR OR OFFICER SINCE

Clay Larson     61      President and Director,           June 28, 1999

John Morrison   68      Director, Secretary and           August 6, 2000,
                        Chief Financial Officer,

Gordon Colledge 58 Director and Vice-President. September 26, 2000

Information about the Offices and Directors

Clay Larson
Prior to becoming a Director and President, Mr. Larson was a practicing lawyer for 25 years. Prior to leaving the profession in February 1997, he was the senior and managing partner in the law firm. He has extensive business experience involving dealing with government agencies, financial institutions, client services, personnel, computer equipment and operating systems. After leaving the practice of law, he worked as a business consultant, leaving that to become President and Director of the Company. Mr. Larson has no other directorships in any reporting companies.

John Morrison
Mr. Morrison has an extensive accounting background with over thirty years experience with KPMG ("KPMG"). He passed his CPA exams in 1966, and was appointed to Beta Alpha Psi as a result of receiving a GPA in excess of 3.5 and graduated Summa Cum Laude. He received his CA designation in 1968 and then worked his way from partner in KPMG's Winnipeg Office in 1972 to a senior partner in KPMG's Vancouver office in 1979. From 1980 to 1989, Mr. Morrison was the managing partner of KPMG's Kelowna office. He was also Vice-President of Thorne Ernst & Whinney Inc. from 1980 to 1989. During his tenure with KPMG, Mr. Morrison was involved in a large number of mergers, acquisitions and reorganizations. After his retirement from KPMG in 1989, he has provided ongoing consulting services to a wide range of clients in diverse industries.

Gordon Colledge
Gordon Colledge was appointed a Director and Vice-President on September 26, 2000. Mr. Colledge attended the University of Lethbridge and is currently taking courses at the University of Great Falls in Montana. During the last five years, he has been a contract instructor in Family Studies at the Lethbridge Community College and an international conference keynote speaker and workshop facilitator. In addition to teaching, Mr. Colledge, along with his wife, operate two privately held, family owned companies: Advance Communications Ltd. and Adcomm Research Ltd., both of which are involved in educational workshops, family mediation and succession planning for small businesses.

Gordon has earned an international Teaching Excellence Award from the University of Texas at Austin. He has worked with dozens of towns and communities in Western Canada on community development projects through WESTARC, an applied research group at the University of Brandon, Manitoba. An expert in

Page-41-

communication, Mr. Colledge was also assigned to work with farm and ranch families and has earned recognition on the Premier's Council in Alberta for his support of those families. Mr. Colledge knows the value of cost effective ranching and farming.

It was in his counseling capacity that Mr. Colledge became knowledgeable with the Issuer's proprietary technology and the positive effect that these technologies have for small to large farms and ranches. Gordon has been an enthusiastic supporter of the Hybrid technology for more than a decade.

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

ITEM 10. EXECUTIVE COMPENSATION.

Mr. Larson, the Company's President and a Director, began accruing salary in the amount of $6,000 per month as of July 1, 1999, which is being deferred until such time as the Company has adequate funds to pay compensation. The Company also agreed to pay John Morrison $150.00 per hour for work he does for the Company. As at June 30, 2001, the Company issued 200,000 restricted shares to Mr. Morrison for services rendered to year end. At the present time, the Company does not have any other compensation agreements or plans with any other officers and directors of the Company. The Company does intend to enter into such agreements in the future when resources allow.

The Company intends to appoint not more than five new directors who will be remunerated in accordance with their responsibilities with the Company. At year end, no prospective directors had been identified. At such time as new directors and/or officers are appointed, the Company will adopt a compensation plan which will likely include stock options and performance incentives which may be tied to gross sales, increase in sales, gross revenues, increase in gross revenues and profitability.

SUMMARY COMPENSATION TABLE

               Annual compensation               Long term compensation
-----------------------------------------------------------------------------
                              Other   Restricted Securities   LTIP    All
                              Annual    stock    underlying   payouts other
Name &      Year Salary Bonus Compen-   awards   options/SARs  ($)    Compen-
Principal   ($)  ($)          sation($)  ($)        (#)               sation
Position
-----------------------------------------------------------------------------
Clay Larson 2001 72,000 -0-    -0-      -0-         -0-        -0-     -0-
            2000 72,000 -0-    -0-      -0-         -0-        -0-     -0-
President,  1999 36,000 -0-    -0-      -0-         -0-        -0-     -0-
-----------------------------------------------------------------------------

There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in Cash Compensation set out above which would in any way result in payments to any such person upon termination of their employment with the company or its subsidiaries, or any change in control of the Company, or a change in the person's responsibilities following a change in control of the Company.


Page-42-

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;

CHANGES IN CONTROL

The following table sets forth as of June 30, 2001, the name and the number of shares of the Registrant's Common Stock, par value $.001 per share, held of record or beneficially by each person who held of record, or was known by the Registrant to own beneficially, more than 5% of the 20,623,600 issued and outstanding shares (see Consolidated Statement of Shareholders Equity in Financial Statements) of the Registrant's Common Stock, and the name and shareholdings of each director and of all officers and directors as a group.

Title  of   Name and Address of     Amount and Nature of     Percentage of
Class       Beneficial Owner        Beneficial Ownership     Class
-------------------------------------------------------------------------
Common      Donald  Craig                    1,850,000               8.97%
            12650 Ponderosa Road
            Winfield, B.C. V4V 2G8

Common      Clay  Larson  (1)                1,000,000               4.85%
            740  Westpoint  Crt.
            Kelowna,  B.C. V1W 2Z4

Common      John Morrison (1)                  300,000               1.44%
            439 Viewcrest Dr.,
            Kelowna, B.C.
            V1W 4K1

Common      Gordon Colledge (1)                212,000               1.03%
            2213 27th Avenue
            Lethbridge, AB
            T1K 6K4

Common      Auchengrey Ltd.                   2,000,000              12.1%
            Diane Smith,
            PO Box 3321,
            Tortula, BVI.

Common      Killaloe Ltd.                     2,000,000               12.1%
            Don Murray,
            Drake Chambers,
            Tortula, BVI

===========================================================================
Common      Total Officers and Directors
            as a  Group (3 Persons)           1,512,000              7.32%
============================================================================

(1) Officer and/or director.

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


Page-43-

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company utilizes office space provided by the President of the Company at no charge.

In 1998, Donald Craig, who owns more that 5% of the issued shares of the Company, loaned $499,059 to the Company, of which $365,590 was repaid in cash. He also paid expenses and loaned money to the Company of $62,786, with the result that the Company owed him $196,255 as of June 30, 2001. The loan is non-interest bearing, payable on demand with no fixed terms of repayment. Imputed interest is calculated at 15% on the loan, because of the riskiness of the loan and that interest is charged to operations and treated as donated capital. During 2002 other shareholders loaned $3,380 to the Company to pay operating expenses, increasing all shareholders loans to $199,635.

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

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) Financial Statements and Schedules The financial statements as set forth in Item 7 of this report on Form 10-KSB are incorporated herein by reference.

Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

(b)Reports on Form 8-K. None

(c) Exhibit No.
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Specimen stock certificate. (2) 21 List of Subsidiaries

(1) Exhibits Incorporated by reference from the Company's Form 10SB filed with the SEC on February 7, 2000.

(2) Incorporated by reference from the Company's Form 10-QSB filed with the SEC on May 14, 2001.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this statement to be signed on its behalf, by the undersigned; thereunto duly authorized.

Hybrid Fuels, Inc.

Date: September 27, 2002.

By: /s/ Clay Larson                        By: /s/ John Morrison
---------------------                      ------------------------
Director, President & CEO                  Director & CFO


Page-44-

Exhibit 21

List of Subsidiaries

Hybrid Fuels USA Inc.,
Hybrid Fuels (Canada) Inc.