General

Advanced Engine Technologies, Inc. ("we", "us" or the "Company"), a Colorado Corporation, on September 23, 1996 was formed to develop and commercialize the OX2 internal combustion engine, a uniquely designed engine. Our focus is on the development and commercial introduction of the OX2 engine and the subsequent licensing of the OX2 engine technology to approved manufacturers.

We have been granted U.S. and Australian patents for an Axial Piston Rotary Engine. In addition, we have patent registrations in countries throughout the world which have either been granted or are pending.

Our Product

AT THE PRESENT TIME ONLY THREE (3) PROTOTYPES OF THE OX2 INTERNAL COMBUSTION ENGINE ("OX2 ENGINE PROTOTYPES"), PLUS ADDITIONAL PARTS THAT CAN BE USED FOR ENGINE DEVELOPMENT OR FOR THE BUILDING OF ADDITIONAL PROTOTYPES, HAVE BEEN BUILT. THE DEVELOPMENT AND TESTING OF THE OX2 ENGINE IS ONGOING. NO OX2 ENGINES HAVE BEEN MANUFACTURED FOR PRODUCTION USE, AND NO ASSURANCE CAN BE GIVEN THAT THE OX2 ENGINE WILL BE SUCCESSFULLY DEVELOPED OR MANUFACTURED FOR COMMERCIAL APPLICATION.

Based on its design, we believe the OX2 engine will be fuel efficient, light weight, low-emission, multi-fueled and smaller and less expensive than conventional internal combustion engines. We also believe that it will not have the complex manufacturing/production requirements of conventional internal combustion engines.

The major parts of the engine prototype are: (1) housing, (2) cylinder block, (3) top piston plate, (4) lower piston plate, (5) cam track and (6) drive shaft. The moving parts are: (1) cylinder block, (2) top piston plate and (3) lower piston plate.

In August 13, 2004 we entered into an agreement to co-develop a generator unit to be used in conjunction with the OX2 engine. The development of this generator is expected to be completed by June 2005 at an anticipated expense of $325,000. As of June 30, 2004, we paid $97,500 as a deposit related to this agreement.

We expect that the OX2 engine, once completed, will have several advantages over a four stroke conventional engine. Some of these advantages are expected to include:

o The OX2 engine will have only six major components, which we believe will result in lower set-up, production and manufacturing costs than a typical conventional engine and a simplicity of design that will promote a high level of quality assurance.

o We believe the OX2 engine will have greater effective engine capacity than a typical conventional engine.

o The OX2 engine will not use a conventional crankshaft, which we believe will result in a leverage advantage over a typical conventional engine.

o The design of the OX2 engine should enable the timing to be adjusted, which we believe will produce a more effective burn of the combustible fuel being used.

o The piston speed of the OX2 engine should remain constant throughout the entire power stroke, which we believe will allow exhaust gases to be more efficiently expelled than a typical conventional engine.

In the short term, our plans are to develop the OX2 engine for commercial stationary generator applications, and in the longer term, we plan to develop the OX2 engine for commercial, marine, aircraft and/or automotive applications.

Research and Development Activities

On October 15, 2001, we entered into an agreement with OX2 Engine Development PTY, LTD, an Australian company ("OX2 LTD") and the inventor of the OX2 engine, to provide research and development products and services related to the OX2 engine. Research and development activities include continued maintenance of the first and second performing test engines as well as design and development of three additional OX2 Engine Prototypes. The agreement also calls for the design and manufacturing of new and advanced components for the OX2 Engine Prototype. We are also conducting research and development activities in Gardena, California.

We have spent $508,422 for the fiscal year ended June 30, 2004 and $513,756 for the fiscal year ended June 30, 2003, on research and development.

Sources of Income

We expect to generate income in two ways: (1) we expect to receive a licensing fee from approved manufacturers in return for the right to produce and sell the OX2 engine; license fees will be determined by territory size and market potential; and (2) we expect to receive a royalty payment for each engine produced and sold; we expect that royalty payments will be determined by engine capacity and application.

Patents

We have been granted a U.S. patent for an Axial Piston Rotary Engine (U.S. Patent No. 5,813,372). We have also been granted a patent for an Axial Piston Rotary Engine in Australia (No. PCT/AU95/00815). In addition, we have patent applications for an Axial Piston Rotary Engine pending in countries throughout the world which have either been granted, or are pending.

Employees

We have two employees, our president and our chief operating officer. We are currently evaluating the need to hire additional employees to assist in the daily operations and market placement of our product. We also engage consultants who receive fees for their consulting services, including two full time engineers hired through a company owned by Carroll Shelby. See Item 12 "Certain Relationships and Related Transactions."

Other Agreements

In June 1999, we agreed to grant 1,000,000 shares of our common stock, $0.001 par value per share ("Common Stock") to the University of California Riverside Foundation. The stock was issued in five annual installments of 200,000 shares of Common Stock each. Installments were granted in July 1999, July 2000, September 2001, September 2002 and August 2003 for a total of 1,000,000 shares. The shares were donated to provide an endowment for research funds for the College of Engineering-Center for Environmental Research and Technology. This donation is independent of our relationship with the University of California Riverside for testing of the OX2 engine and related services.

Risk Factors

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

o There can be no assurance that we will be able to develop successfully the OX2 engine. No OX2 engines have been developed or manufactured for commercial production use, and no assurance can be given that the OX2 engine will be successfully developed or manufactured in a commercial application. Testing and development on the engine are still in progress. Until further testing and research and development have been completed, we will not have a finished product for introduction into the market. We do not have an estimated completion date for such testing and research and development. Furthermore, we cannot provide any assurance that we will be successful in the ultimate development of the OX2 engine for commercial applications.

o A market for our OX2 engine may take longer to develop than anticipated or may never develop, which would adversely affect our revenues and profitability. Our OX2 engine represents an innovation in the industry for internal combustion engines. The size and nature of the internal combustion engine industry makes the introduction of changes to industry standards a complex promotional and marketing exercise. We cannot ensure that our targeted customers will purchase our engine. If the market for our engines fails to develop, or develops more slowly that anticipated, we may not be able to meet our expenses and may not achieve profitable results. In addition, we cannot provide any assurance that we will be successful with our marketing efforts or the development of future joint ventures or strategic partnerships.

o Our cash or cash equivalents reserves may not be adequate to cover our costs of operations. To date, we have covered our operating losses by privately placing securities. We expect to fund our general operations and marketing activities for 2005 with our current cash and cash equivalents reserves, which were obtained from the sale of securities and were $401,358 as of June 30, 2004. We also have a $5,700,500 stock subscription receivable from the R.E.&M. Petersen Living Trust DTD 1/17/83 (the "Petersen Trust"), which may be drawn upon at the discretion of our Board of Directors. The Petersen Trust has executed a promissory note and security agreement for the sole purpose of paying down the stock subscription receivable balance. However, our cost estimates do not include provisions for any contingencies, unexpected expenses or increases in costs that may arise. If our cash and cash equivalent reserves are exhausted, we plan to request payments on the subscription receivable as funds are required for operations.

o We may not be able to raise the capital we need. It is likely that we will need to raise additional capital at some point in the future. 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 or are not available on terms acceptable to us, we may not be able to continue the development of our product, respond to our competitors or continue our business.

o Our business depends on the protection of our intellectual property and may suffer if we are unable to protect adequately our intellectual property. Currently, we have been granted one U.S. Patent and one Australian Patent for an Axial Piston Rotary Engine. We have registered these patents in many countries and have patent registrations pending in many other countries throughout the world. We believe that our ability to establish and maintain our position in the market depends on these patents. We cannot provide any assurance that our patents will not be invalidated, circumvented or challenged, that the rights granted under the patents will give us competitive advantages or that our patent registration applications will be granted. In the future, we may also have to enforce our patents and other intellectual property rights through litigation. Any such enforcement could also result in substantial costs and could materially affect our financial condition and our business.

o If we are found to infringe on the intellectual property rights of others, we may not be able to continue the development and production of the OX2 engine, or we may have to enter into costly license or settlement agreements to be able to continue development and/or production. 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 and time-consuming and could 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 products and, ultimately, our business.

o Our business is dependent on our relationships with other parties. Research and development and testing of our engine is presently being carried out internally and in conjunction with Steven Charles Manthey, the inventor of the OX2 engine, and his companies. In addition, we have agreements with Carroll Shelby and his companies to assist in the further development, testing and promotion of our engine. Completion of such research, development and testing is essential to the success of our business. Until such research, development, and testing have been completed, we will not have a finished product to introduce to the market. Thus, if we are unable to maintain our relationships with Steven Charles Manthey and/or Carroll Shelby and their companies, our business may be adversely affected.

o We have a history of losses. We have a history of operating losses and an accumulated deficit, as of June 30, 2004, of $13,603,646. Our ability to generate revenues and profits is subject to the risks and uncertainties encountered by development stage companies.

o Our future revenues and profitability are unpredictable . We currently have no signed contracts that will produce revenue, and we do not have an estimate as to when we will be entering into such contracts. Furthermore, we cannot provide any assurance that management will be successful in negotiating such contracts.

o Rapid technological changes could adversely affect our business . The market for internal combustion engines is characterized by rapidly changing technology, evolving industry standards and changing customer demands. Thus, if we are unable to adapt to rapidly changing technologies and to adapt our product to evolving industry standards, our business will be adversely affected.

o Our Common Stock is not widely traded, which may result in illiquidity and increased volatility . 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 shareholders may find it difficult to sell their shares.

o Our principal shareholders can exercise significant control over us and could limit the ability of our other shareholders to influence the outcome of transactions requiring a shareholder vote . As of June 30, 2004 approximately 90% of our outstanding Common Stock was owned by our executive officers, directors and principal shareholders. These shareholders will have the ability to exercise influence over all matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions.