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 INFORMATION ON THE COMPANY

Hybrid Fuels Inc. is a development-stage company and has had no income since the acquisition of the hybrid fuels technology in June 1998. The Company is unlikely to have any significant cash flow until after the first quarter ending September 30, 2006.

The Company acquired Hybrid Fuels, USA, Inc. on May 28, 1998, which was accounted for as a reverse takeover. All historical financial statements are those of Hybrid Fuels, USA, Inc. Since the inception date of Hybrid Fuels, USA, Inc. was January 28, 1998, this is the inception date used in the presentation of the Company's financial statements. 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, Mr. 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.

At this time the Company's intended principal business is to integrate cattle feeding and finishing with the production of wet ethanol. The main source of revenue for the Company is expected to come from the sale of finished cattle and denatured ethanol. The Company is actively pursuing other sources of revenue related to their integrated farm system.

A test facility is being constructed on a 12-acre parcel of land in Oyama, BC, Canada to demonstrate the economic feasibility of the system. A group of Hybrid Fuels, Inc. shareholders is bearing the financial burden of construction and retains legal ownership of the facility. It is expected that once the facility has been completed for the Company's intended operations, the Company will

negotiate with this group to acquire the facility on mutually agreeable terms. Once this first facility is operating, we plan to use it as a demonstration and training facility and to earn revenue from its operation.

The facility will not be run at full capacity until approximately four months have passed from the facility becoming operational. We believe that at the end of the fourth month of operations, when we sell the first group of finished cattle, we will have sufficient data to estimate revenue streams and expenses to establish a more comprehensive business plan.

It is intended that future facilities will be constructed for the Company by independent contractors on privately-owned farms after a written, contractual agreement is made between the Company and the operator (s).

THE PROPOSED FACILITIES

The proposed facilities are planned to consist of a cattle barn, ethanol-producing plant, gasifier/burner (manure/straw burning unit) and a hydroponics barley-grass growing system.

The cattle barn at the Oyama facility has been designed to accommodate 200 head of cattle and the hydroponics barley-grass growing system. Once the facility is operational, it is expected that the cattle will be fed starting with 50 head and adding another 50 approximately every four weeks until the barn is at full capacity. As we gain experience with the facility, we intend to operate the barn continuously at full capacity during the subsequent 100-day feeding cycles. At the end of each feeding cycle, the cattle will be sold at auction.

The cattle barn includes floor space for six individual pens - five occupied pens and one pen remaining empty and free of manure and bedding waste. Cattle are to be moved to a clean pen every five days on a rotational basis. The manure and bedding straw is removed from the pens and destroyed in the gasifier/burner that provides heat energy for the ethanol production and the hydroponics feed system.

In the ethanol plant, grains are fermented and then distilled to produce the wet ethanol. The heat is supplied from the burning of the used bedding straw and manure in the gasifier/burner. The ethanol production process also generates a high protein product, called "distillers mash" and a liquid byproduct called "stillage water." The mash and liquid is supplemented by barley grass and creates an excellent feed for the cattle. The expected weight gain is an average of four pounds a day per head during the planned 100-120 day feeding cycle.

Ethanol produced by the first facility in the first two to three months of its operation is expected to be used for testing purposes. Once the facility is operating at full capacity, we project that the ethanol production will be approximately 200 US gallons per day.

It is intended that the wet ethanol will be blended with a proprietary emulsifier and diesel fuel. When this newly created fuel was tested in an unaltered diesel engine at the British Columbia Institute of Technology in June 1996, it reduced particulate emissions (black smoke) by over 62% and the smog-causing nitrogen oxide (NOx) emissions by more than 22%. Researchers also noted no measurable loss of engine power when testing this fuel blend.

The hydroponics barley-grass growing system is expected to produce a ration of 10-15 pounds per day of fresh grass per animal, year round, regardless of climate. We believe each grass unit represents approximately the equivalent of 400 acres of grass growing land.

The 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. The 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 produce an average of approximately 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 absorb 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 waste destruction within the gasifier, according to the manufacturer.

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 of energy 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.

The cattle are expected to be started at a weight of between 600 and 1000 pounds and finished in the range of 1100 to 1400 pounds. The cattle are introduced into the barn in stages and thus are at various weights within the stages of the finishing cycle.

It is expected that these facilities will be operated manually by two people. These trained people are expected to be in contact with the animals several times a day, while the cattle are being fed, or moved from one pen to another. These operators are expected to 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 feedstock, 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.

CONCERNS ABOUT COMMON CATTLE FINISHING METHODS

a. THE USE OF ANTIBIOTICS AND GROWTH HORMONES

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.

b. GROUNDWATER CONTAMINATION

Typical beef operations produce manure and bedding which are expensive to dispose of and cause tremendous groundwater contamination.

From the cattlenetwork.com (Source: Dr. Mindy Spiehs, University of Minnesota Beef Team):

"Large confinement feedlots have often been viewed as the primary threat to local water supplies."

"The primary pollutants in beef manure are nitrogen, phosphorus, and pathogens. Nitrate-nitrogen can leach into ground water from stockpiled manure or silage and open lots."

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:

c. ENVIRONMENTAL IMPACT FROM USE OF FOSSIL FUELS

When coal, natural gas or oil are burned, they release gases into the atmosphere:

o Carbon monoxide (CO) is a colorless, odorless and poisonous gas produced by incomplete burning of carbon in fuels. When CO enters the bloodstream, it reduces the delivery of oxygen to the body's organs and tissues. Health threats are most serious for those who suffer from cardiovascular disease, particularly those with angina or peripheral vascular disease. Exposure to elevated CO levels can cause impairment of visual perception, manual dexterity, learning ability and performance of complex tasks. The largest emissions contribution comes from highway motor vehicles.
o Sulfur dioxide (SO2)is a primary contributor to acid deposition, or acid rain, which causes acidification of lakes and streams and can damage trees and crops. In addition, sulfur compounds in the air contribute to visibility impairment in large parts of the country. This is especially noticeable in national parks. High concentrations of sulfur dioxide (SO2)

affect breathing and may aggravate existing respiratory and cardiovascular disease. Ambient SO2 results largely from stationary sources such as coal and oil combustion, steel mills, refineries, pulp and paper mills and from nonferrous smelters.
o Nitrogen oxide (NOx) contributes to acid rain and smog, as well as health issues such as lung inflammation, immune system changes and eye irritation. NOx forms when fuel is burned at high temperatures. The two major emissions sources are transportation and stationary fuel combustion sources such as electric utility and industrial boilers.

In addition, the process of bringing fossil fuels to the surface, such as strip mining or oil exploration, can be detrimental to the surrounding habitat.
(Source: Environmental Protection Agency, epa.gov)

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

d.DECLINING FOSSIL FUEL RESERVES;
e.DECLINING FARM INCOME AND THE NUMBER OF FAMILY FARMS;

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.

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.

ETHANOL ENERGY BALANCE INFORMATION

The term "energy balance" associated with ethanol production, means the relationship or ratio between the energy in the ethanol compared to the energy used to produce the ethanol and is written as 1.5:1, 2:1, etc. Energy contained in a gallon of fuel (when referring to liquids) is measured in BTUs (British Thermal Units). Those ratios would mean 1.5 or 2 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.

The production of ethanol requires expenditure of energy and is one of the major costs. Ethanol contains approximately 80,000 BTUs per gallon. If production of that gallon requires burning of 1 gallon of diesel fuel which is rated at 125,000 BTUs per gallon then there is a negative "Energy Balance." Modern distilleries should run with approximately 2:1 favourable "Energy Balance."

Management believes that a ratio of around 4:1 is probably fairly representative of the Company's intended facilities.

In our case we recover the energy required to produce ethanol from the gasifying/burning of manure and waste bedding. Our final "energy balance" is therefore highly favourable and is as low as shown only because we include the energy costs of growing the grain and most calculations do not take this into account.

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 process is then used to promote rapid fermentation. This process, which was discovered by the Company and is not currently 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 Company 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 entire process in about 12 to 15 hours. In most typical distillation operations, the process takes approximately 60 hours.

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 feedstock 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 producing ethanol and feeding cattle, our process effectively reduces the cost of producing 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 produce the ethanol, which means the process will not incur that input energy cost. Producing ethanol also generates another potential stream of income for the Company.

The distillers grains that are left over from the ethanol-producing process have a low moisture content of around 5% and are fed as wet distillers grains (WDGs). The stillage water is also to be fed to the animals. The facilities are designed to run in a balanced state, producing 200 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, originate from 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.

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 translate into greater revenue to those who raised the animals because they represent more meat at higher grades.

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.

BEEF WITHOUT ADDED HORMONES

There is a growing market for beef that is free of added hormones or antibiotics. This beef also commands a higher price in the marketplace.

In order to access the hormone-free beef market, the Company intends to require that when animals are brought in for finishing that they are 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.

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.

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.

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 growth and use of hydroponics grass in feeding cattle is a process with minimal research data. The Company has learned that mold and fungi are real and persistent problems that can be perilous to the animals.

After months of research and testing we recognized the benefits inherent in the application of ozonated water using recently developed equipment and techniques. We believe the judicial use of ozonated water in the field of hydroponics grass will result in absolute destruction to molds, fungi and disease carrying bacteria.

We believe the use of ozonated water also offers freedom from bacterial problems associated with fermentation and this will eliminate the concerns always inherent in ethanol production.

We intend to utilize the ozone equipment in the cattle barn as well. Following removal of manure and bedding which are incinerated through gasification, the

floor of the pen will be washed with ozonated water which we believe can virtually sterilize the area and thus inhibit spread of disease. We also intend to install misting spray heads over the pens. Every few days the animals are thereby treated to prevent harmful bacterial spread.

While ozone is simply a gas composed of three oxygen atoms it has proven to be an extraordinary sanitizing agent, economical to use and is remarkably effective in direct application as well as for multi-surface cleaning and sanitation of equipment, drains, floors, chutes, tanks, barrels, etc.

The Company expects to expand the size of the cattle barn in future facilities to accommodate 400 head of cattle for economy of scale. The Company believes the additional heat energy that will be generated as a result of this expansion makes it feasible to develop renewable energy generation systems. It is expected that each facility could produce up to 1,500 litres of ethanol daily, generate up to 0.5 megawatt of power, finish up to 1,200 head of cattle annually and provide up to 5 full time jobs. The hydroponics section of the barn is designed to have the grass growing capacity equivalent to approximately 800 acres of grassland.

Efforts to improve every aspect of the whole operation continue with positive results. We believe the overall Hybrid Fuels program involving progressive and environmental sensitivity towards cattle feeding, maintenance and processing will present a chemical-free product cycle which offers a world class benchmark for the industry.

THE HYBRID FUEL

The ethanol is "de-natured" by blending about 2% emulsifier and diesel fuel into the ethanol in the vaporization column so there is no pure ethanol accessible in the plant. Each day, 200 gallons of ethanol are expected to be produced. This ethanol and chemical mixture would be stored in an appropriate tank (3500 to 5000 gallons) on site until it is collected and delivered to a mixing plant to be further blended into the final ratio.

In June of 1998, 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 fuel, 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 tests indicated that this fuel is more effective in reducing particulate and nitrogen oxide emissions from diesel fuel than any other diesel fuel mixture of which the Company is aware.

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 fuel, 10% emulsifier and 10% ethanol. Further tests are planned using various ratios. The end ratio is expected to be 70% to 80% diesel fuel, 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 blend locally and use the fuel for testing purposes. Handling and blending 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 blending plants that have the capacity to handle the production on a contract basis. The plan is for the Company to

transport the resulting chemical mixture from each plant to blending plants for further blending to achieve the appropriate ratio. This is designed to ensure control over all of the ethanol produced.

When a larger number of facilities are operating and producing sufficient quantities, the Company intends to sell the blended fuel to end users and diesel fuel distributors encompassing all industries. Ultimately the Company may consider building and operating its own blending 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 are research studies available pertaining to environmental and other benefits of ethanol-diesel blends 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 blend 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 will be conducted with the ethanol produced by the test facility in Oyama, BC, Canada.

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

At present, the Company does not have any employees. Until resources allow, the Company will continue to use consultants or independent contractors for the various tasks required to be performed on a quarter-to-quarter basis.

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. A test facility is being constructed on a 12-acre parcel of land in Oyama, BC, Canada. A group of Hybrid Fuels, Inc. shareholders is bearing the financial burden of construction and retains legal ownership of the facility. It is expected that once the facility has been completed for the Company's intended operations, the Company will negotiate with this group to acquire the facility on mutually agreeable terms. Mr. Craig has agreed to supervise construction of this 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 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 construct the buildings and to supply and install the flooring materials, pumps, tanks and other 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

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 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.

NEWS RELEASES, MARKETING AND ADVERTISING

The Company's target market for the construction of the facilities are the domestic and international farming communities from which there appears to be a strong and growing interest.

Upon the acquisition of the Oyama facility from the aforementioned shareholder group the Company intends to market their technology through such means as their website, press releases, trade journals, local newspapers and trade shows. The Company is also in contact with agencies and industry organizations whose role it is to locate and promote new opportunities for the economic benefit of farmers.

The Company plans to promote the beef produced using its process as being free of antibiotics and added hormones. 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.

COMPETITION

Oil and petroleum companies as well as alternative energy companies may 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 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.

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.

Fuel prices have been extremely volatile over the past year. Ethanol prices are closely correlated with the price of gasoline, diesel fuel and blending components associated with these fuels. In a typical ethanol facility, natural gas accounts for approximately 15 percent of ethanol production costs. However, our process does not depend on the use of fossil fuels to produce the ethanol.

We believe rising fuel prices would be a net benefit to the Company's profitability.

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.

We believe that consumers will pay more for beef that is guaranteed good quality. The Company believes that cattle which are 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.

Canada, and many other countries 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. 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 blending of wet ethanol and diesel fuel which reduces emissions, without incurring drying costs.

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.

If resources permit, the amount we anticipate spending on research and development for the fiscal year ending June 30, 2007 is approximately $250,000.

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 in the near term 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.

RISK FACTORS

The following factors have affected or could affect the Company's actual results and could cause such results to differ materially from those expressed in any forward-looking statements made by the Company. Investors should consider carefully the following risks and speculative factors inherent in and affecting the business of the Company and an investment in the Company's common stock.

1. Our cash reserves are not 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 current cash plus cash that may be 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, 2006, of $2,449,493.

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.

12. The continual shift in supply and demand factors create volatility in cattle pricing that could result in a loss on cattle finishing.

13. A test facility is being constructed on a 12-acre parcel of land in Oyama, BC, Canada. A group of Hybrid Fuels, Inc. shareholders is bearing the financial burden of construction and retains legal ownership of the facility. It is expected that once the facility has been completed for the Company's intended operations, the Company will negotiate with this group to acquire the facility on mutually agreeable terms although there is no guarantee that an acquisition agreement will be finalized.

14. Since May 2003, the Canadian beef market has suffered as a consequence of the United States limiting imports from Canada because of an isolated case of Bovine Spongiform Encephalopathy (BSE). A recurrence of BSE in Canada could potentially have an adverse effect on the Company even though the age of finished cattle raised within our controlled facilities are planned to be under the current 30-month age restriction on beef imported into the U.S.