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

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

GENERAL

Hybrid Fuels Inc. is a developmental stage company and has had no income since the acquisition of the hybrid fuels technology in June 1998.

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, 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.

Hybrid Fuels intended business is to market integrated farm-scale facilities that combine ethanol production with a beef finishing operation. This integration is to be 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.

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

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

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.

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

The hybrid fuels technology was acquired by the Company in a reverse takeover in June 1998 as described above, and a facility that was intended to be the first commercial facility was constructed near Cardston, Alberta. Improvements to the technology installed in that facility 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 facility near Cardston could begin operating, the farmer sold the land and removed the buildings and equipment without the authority to do so. Although the facility never operated, much was learned from the construction. That information has been used to refine the design that is expected to reduce construction costs and improve operating efficiency.

THE PROPOSED FACILITIES

The proposed facilities are planned to consist of a barn where the cattle are to be kept, a second building housing the ethanol making equipment and the gasifier, that 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, that is used first to make the ethanol and then to feed the animals.

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 constructed from prefabricated metal, insulated sufficiently to keep the cattle warm in cold weather and cool in warm weather. Each barn is to be divided into six pens, measuring 40 feet by 30 feet, one of which is empty and five that contain the animals. This means that there will be approximately 40 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. Based on the heat exchanger equipment we plan to use, the 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. 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 week's 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 that 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.

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.

These facilities are expected to be operated manually by two 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, the Company intends to have a policy that permits the use of antibiotics only as required on any sick animal.

In the proposed facilities, grains, that are referred to as 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, that 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.

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

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

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

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

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

Aside from the capital costs of the facility, the two major costs of ethanol production are the 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 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, that 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 head of cattle.

FEEDING WET DISTILLERS GRAINS AND STILLAGE WATER

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

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

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

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

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

THE 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. Each day, 200 gallons are expected to be produced 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. 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. 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 facility is operating, subsequent facilities are expected to be built in the vicinity of commercial mixing plants that have the capacity to handle the production 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 facilities 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.

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

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

Our fuel is different because it contains a small amount of water, and it will therefore require separate evaluation. The Company believes that the small amount of water in the 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.

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

For the short term, until resources permit, services we need to hire will be supplied by 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 supervising the building of the first facility. He has agreed to supervise construction of the first facility without remuneration until the facility is generating cash flow. The Company does not have a written employment contract with Mr. Craig.

SUPPLIERS

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

The Company intends to seek quotes from independent contractors to supply and install the buildings, the flooring materials, pumps, tanks and other "off-the-shelf" items required for each facility. 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.

GOVERNMENTAL REGULATION

Each facility 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 facilities produce ethanol, each will require a distillers license. This would require the installation of equipment in each facility that 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 facilities may be built without the ethanol equipment. If there are significant delays in obtaining the desired exemption, the Company anticipates that it will commence building facilities in the U.S.. The prototype facility 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 building permit has already been issued for the first facility.

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 facilities is the farming Communities from which there appears to be a strong and growing interest. Upon establishing the economic feasibility of the facilities the Company intends to advertise in trade journals, local newspapers 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.

COMPETITION

Major oil and petroleum companies as well as alternative energy companies will all be potential competitors of the Company. The Company is not aware of any competitors who offer farm-scale feedlot-fuel plants, although there are several competitors who produce ethanol on a very large scale basis. Generally speaking, they produce dry ethanol for the gasohol market. The 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 that contain antibiotics, hormones and toxic chemicals.

The Company plans to promote the beef produced using its process as being free of antibiotics and added hormones. As consumers become more selective about the beef they consume, 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 to make the product more easily recognizable in order to generate consumer loyalty and capitalize on brand quality.

TRENDS THAT MAY AFFECT THE COMPANY'S BUSINESS

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

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

Over the past year the Canadian beef market has suffered as a consequence of the US closing its border to all beef imports from Canada because of a case of "mad cow" disease. The US has recently permitted the resumption of beef shipments which will likely return to "pre-scare" levels over time. If beef sales do not return to earlier levels, this could have an adverse effect on the Company. However, Successful Farming Online reported in January 2000, that consumers will pay more for beef that is guaranteed good quality. The Company believes that beef fed distillers grains, without added hormones, antibiotics or protein from animal sources, will draw a positive response from health-conscious consumers looking for healthier food sources.

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

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. A recent 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) Canadian Agriculture Minister, Lyle Vanclief, at the time of that recommendation then 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 under the Democrats and Bill Clinton.

The United States and Canada are signatories to the Kyoto Emission Standards Agreement that requires them to adhere to the Kyoto Protocol commitments to reduce pollution by the year 2010, 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.

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.

Another trend that may work to our advantage is the trend of governments and health regulators to mandate environmental clean-ups and reduce pollution. Local authorities are implementing stricter environmental requirements, in particular tighter restrictions on the handling of animal waste that has been found to contaminate ground water.

In addition, with rising fuel prices in general, the price of ethanol has increased over the last few years. This trend should work to the advantage of the operators and the Company.

RESEARCH AND DEVELOPMENT

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

1. Researching efficiencies in facility construction and operation;

2. Researching new technologies; consulting with various technical researchers and agriculture officials.

PRODUCT PROTECTION

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

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, maintain or add to your investment in the Company. 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 be adversely affected. 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 in the near term with our current cash, that was obtained from loans from shareholders and/or the sale of securities. However, our cost estimates may not include enough provisions for any contingency, unexpected expenses or increases in costs that may arise.

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

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

4. We have a history of operating losses and an accumulated deficit, as of June 30, 2004, of $1,791,246.

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

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

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

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

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

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

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