##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED March 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from to to
 Commission File Number: 001-32228
 O2DIESEL CORPORATION
  Delaware
(State or Other
Jurisdiction of Incorporation)
    
    91-2023525
(IRS Employer
Identification No.)
 þ o    o þ     o o      o þ




---



##### 



Item 1. Financial Statements
    
    
    F-1Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    1Item 3. Controls and Procedures
    
    
    10PART IIItem 1. Legal Proceedings
    
    
    10Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    10Item 3. Defaults Upon Senior Securities
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11Item 5. Other Information
    
    
    11Item 6. Exhibits and Reports on Forms 8-K
    
    
    12Signatures
    
    
    12




---



##### 



Consolidated Balance Sheet
March 31, 2006
 ASSETSCURRENT ASSETSCash
    
    $
    510,836Restricted cash
    
    
    3,619,281Accounts receivable
    
    
    6,750Due from related parties
    
    
    37,981Other receivables
    
    
    169,758Unbilled appropriations receivable
    
    
    71,069Inventory
    
    
    185,388Prepaid
expenses, parts and deposits
    
    
    217,146Total current assets
    
    
    4,818,209FURNITURE AND EQUIPMENTOffice furniture equipment
    
    
    188,684Fuel and test equipment
    
    
    184,056372,740Less accumulated depreciation
    
    
    (151,102
    )221,638TOTAL ASSETS
    
    $
    5,039,847LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    762,620Accrued expenses
    
    
    193,592Due to
related parties
    
    
    240,437Deferred grants
    
    
    495,195Deferred marketing program
    
    
    342,222Other current liabilities
    
    
    882Total current liabilities
    
    
    2,034,948TOTAL LIABILITIES
    
    
    2,034,948STOCKHOLDERS EQUITYPreferred stock: par value of $0.0001; 20,000,000 shares authorized;
1,550,000 issued and outstanding
    
    
    155Common stock: par value of $0.0001; 100,000,000 shares authorized;
48,261,249 issued and outstanding
    
    
    4,826Additional paid-in capital
    
    
    30,463,672Unearned compensation
    
    
    (275,675
    )Accumulated other comprehensive income
    
    
    7,992Deficit accumulated during the development stage
    
    
    (27,196,071
    )Total stockholders equity
    
    
    3,004,899TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    5,039,847
  F-1




---



##### 



Consolidated Statements of Operations
 October 14, 2000(inception)Three months ended March 31,
    
    through2006
    
    2005
    
    March 31, 2006RevenueAdditive Related Sales
    
    $
    38,125
    
    
    $
    15,244
    
    
    $
    309,385Sponsorship Income
    
    
    12,747
    
    
    
    
    
    
    
    76,74950,872
    
    
    
    15,244
    
    
    
    386,134Expenses:Cost of goods sold
    
    
    28,085
    
    
    
    9,501
    
    
    
    235,025Selling and marketing
    
    
    244,850
    
    
    
    434,210
    
    
    
    6,873,973Product testing and government grants, net
    
    
    37,337
    
    
    
    160,724
    
    
    
    1,410,102General and administrative
    
    
    1,526,213
    
    
    
    1,093,916
    
    
    
    19,658,564Total operating expense
    
    
    1,836,485
    
    
    
    1,698,351
    
    
    
    28,177,664Operating loss
    
    
    (1,785,613
    )
    
    
    (1,683,107
    )
    
    
    (27,791,530
    )Other income (expense):Interest (expense)
    
    
    (1,645
    )
    
    
    (6,298
    )
    
    
    (115,945
    )Interest income
    
    
    3,177
    
    
    
    2,938
    
    
    
    72,000Foreign currency gain, net
    
    
    69,592
    
    
    
    
    
    
    
    173,271Other (expense)/income, net
    
    
    (3,297
    )
    
    
    (454
    )
    
    
    320,491Total other income (expense)
    
    
    67,827
    
    
    
    (3,814
    )
    
    
    449,817Loss before provision (benefit) for income
taxes
    
    
    (1,717,786
    )
    
    
    (1,686,921
    )
    
    
    (27,341,713
    )Benefit for income taxes
    
    
    
    
    
    
    
    
    
    
    145,642Net loss
    
    
    (1,717,786
    )
    
    
    (1,686,921
    )
    
    
    (27,196,071
    )Deemed dividend to preferred
shareholders
    
    
    (3,325,199
    )
    
    
    
    
    
    
    (3,944,071
    )Net loss allocable to common
stockholders
    
    $
    (5,042,985
    )
    
    $
    (1,686,921
    )
    
    $
    (31,140,142
    )Net loss per common share
(basic and diluted)
    
    $
    (0.11
    )
    
    $
    (0.06
    )
    
    $
    (0.99
    )Weighted average shares of common
shares outstanding
    
    
    46,891,018
    
    
    
    29,150,823
    
    
    
    55,520,921Recapitalization resulting from the AAE
Technologies International PLC acquisition
    
    
    
    
    
    
    
    
    
    
    (24,127,707
    )Weighted average shares of common
shares outstanding  giving effect to the
recapitalization
    
    
    46,891,018
    
    
    
    29,150,823
    
    
    
    31,393,214
  F-2




---



##### 



Consolidated Statement of Changes in Stockholders (Deficit) Equity
October 14, 2000 (Inception) through March 31, 2006
 Common
    
    AdditionalPreferred Stock
    
    Common Stock
    
    Unearned
    
    Stock
    
    Paid - InShares
    
    Amount
    
    Shares
    
    Amount
    
    Compensation
    
    Subscribed
    
    CapitalBalance at October 14, 2000 (Inception)Common stock issued in exchange for
interest in wholly
owned subsidiaries
    
    
    
    
    
    $
    
    
    
    
    43,008,772
    
    
    $
    430,088
    
    
    $
    
    
    
    $
    
    
    
    $
    3,603,415Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued on various dates
during 2001
    
    
    
    
    
    
    
    
    
    
    24,181,038
    
    
    
    241,810
    
    
    
    
    
    
    
    
    
    
    
    1,268,031Balance at December 31, 2001
    
    
    
    
    
    
    
    
    
    
    67,189,810
    
    
    
    671,898
    
    
    
    
    
    
    
    
    
    
    
    4,871,446Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued at $0.225 per
share on various
dates during 2002
    
    
    
    
    
    
    
    
    
    
    703,282
    
    
    
    7,033
    
    
    
    
    
    
    
    
    
    
    
    515,657Balance at December 31, 2002
    
    
    
    
    
    
    
    
    
    
    67,893,092
    
    
    
    678,931
    
    
    
    
    
    
    
    
    
    
    
    5,387,103Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued on various dates
during 2003
    
    
    
    
    
    
    
    
    
    
    555,556
    
    
    
    5,556
    
    
    
    
    
    
    
    
    
    
    
    119,444Common stock issued for consulting
services
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    43,000Common stock issued for remaining
interest in
subsidiaries on July 15, 2003
    
    
    
    
    
    
    
    
    
    
    4,356,200
    
    
    
    43,562
    
    
    
    
    
    
    
    
    
    
    
    46,323Common stock issued upon exercise of
stock options on
various dates during 2003
    
    
    
    
    
    
    
    
    
    
    8,670,881
    
    
    
    86,709
    
    
    
    
    
    
    
    
    
    
    
    1,131,595Recapitalization resulting from AAE
acquisition on July 15,
2003
    
    
    
    
    
    
    
    
    
    
    (56,928,690
    )
    
    
    (814,283
    )
    
    
    
    
    
    
    
    
    
    
    814,283Common stock issued at $1.50 per share
on various dates
during 2003
    
    
    
    
    
    
    
    
    
    
    3,333,333
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    4,999,667Expenses related to 2003 issuance of
common stock and
recapitalization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (795,650
    )Subscriptions for 754,900 shares of
common stock at
$1.50 per share on various dates
during 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,132,350
    
    
    
    Balance at December 31, 2003
    
    
    
    
    
    
    
    
    
    
    28,080,372
    
    
    
    2,808
    
    
    
    
    
    
    
    1,132,350
    
    
    
    11,745,765Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued at $1.50 per share
on various dates
in 2004
    
    
    
    
    
    
    
    
    
    
    1,070,451
    
    
    
    107
    
    
    
    
    
    
    
    (1,132,350
    )
    
    
    1,535,770Preferred stock issued on various
dates during 2004
    
    
    1,550,000
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,478,609Balance at December 31, 2004
    
    
    1,550,000
    
    
    
    155
    
    
    
    29,150,823
    
    
    
    2,915
    
    
    
    
    
    
    
    
    
    
    
    18,760,144Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued for consulting
services
    
    
    
    
    
    
    
    
    
    
    63,750
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    63,094Warrants issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135,000Common stock
issued at $0.70 per share
on various dates
in 2005
    
    
    
    
    
    
    
    
    
    
    7,515,981
    
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    4,832,439Common stock
issued at $0.7125 per
share on various
dates in 2005
    
    
    
    
    
    
    
    
    
    
    3,228,070
    
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    2,090,178Common stock
issued at $0.564 per share
on various dates
in 2005
    
    
    
    
    
    
    
    
    
    
    6,419,840
    
    
    
    642
    
    
    
    
    
    
    
    
    
    
    
    3,599,658Balance at December 31, 2005
    
    
    1,550,000
    
    
    
    155
    
    
    
    46,378,464
    
    
    
    4,637
    
    
    
    
    
    
    
    
    
    
    
    29,480,513Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued via exercise of
warrants on various
dates in 2006
    
    
    
    
    
    
    
    
    
    
    1,864,035
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    592,505Common stock issued for consulting
services
    
    
    
    
    
    
    
    
    
    
    18,750
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    14,623Fair value of unvested stock options
upon adoption of
SFAS 123 R
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (376,031
    )
    
    
    
    
    
    
    376,031Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,356
    
    
    
    
    
    
    
    Balance at March 31, 2006
    
    
    1,550,000
    
    
    $
    155
    
    
    
    48,261,249
    
    
    $
    4,826
    
    
    $
    (275,675
    )
    
    
    
    
    
    $
    30,463,672
  F-3




---



##### 



Consolidated Statement of Changes in Stockholders (Deficit) Equity
October 14, 2000 (Inception) through March 31, 2006
 DeficitCommon
    
    Accumulated
    
    Accumulated
    
    TotalStock
    
    Other
    
    During the
    
    StockholdersSubscriptions
    
    Comprehensive
    
    Development
    
    EquityReceivable
    
    Income (Loss)
    
    Stage
    
    (Deficit)Balance at October 14, 2000 (Inception)Common stock issued in exchange for interest in wholly
owned subsidiaries
    
    $
    
    
    
    $
    
    
    
    $
    (4,138,684
    )
    
    $
    (105,181
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (1,406,709
    )
    
    
    (1,406,709
    )Foreign currency translation adjustment
    
    
    
    
    
    
    (4,476
    )
    
    
    
    
    
    
    (4,476
    )Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,411,185
    )Common stock issued on various dates during 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,509,841Balance at December 31, 2001
    
    
    
    
    
    
    (4,476
    )
    
    
    (5,545,393
    )
    
    
    (6,525
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (1,712,803
    )
    
    
    (1,712,803
    )Foreign currency translation adjustment
    
    
    
    
    
    
    (74,085
    )
    
    
    
    
    
    
    (74,085
    )Comprehensive loss:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,786,888
    )Common stock issued at $0.225 per share on various
dates during 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522,690Balance at December 31, 2002
    
    
    
    
    
    
    (78,561
    )
    
    
    (7,258,196
    )
    
    
    (1,270,723
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (4,230,296
    )
    
    
    (4,230,296
    )Foreign currency translation adjustment
    
    
    
    
    
    
    179,689
    
    
    
    
    
    
    
    179,689Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,050,607
    )Common stock issued on various dates during 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Common stock issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000Common stock issued for remaining interest in
subsidiaries on July 15, 2003
    
    
    
    
    
    
    
    
    
    
    (409,614
    )
    
    
    (319,729
    )Common stock issued upon exercise of stock options on
various dates during 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,218,304Recapitalization resulting from AAE acquisition on July 15,
2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued at $1.50 per share on various dates
during 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000,000Expenses related to 2003 issuance of common stock and
recapitalization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (795,650
    )Subscriptions for 754,900 shares of common stock at
$1.50 per share on various dates during 2003
    
    
    (180,000
    )
    
    
    
    
    
    
    
    
    
    
    952,350Balance at December 31, 2003
    
    
    (180,000
    )
    
    
    101,128
    
    
    
    (11,898,106
    )
    
    
    903,945Net loss
    
    
    
    
    
    
    
    
    
    
    (6,728,014
    )
    
    
    (6,728,014
    )Foreign currency translation adjustment
    
    
    
    
    
    
    (97,446
    )
    
    
    
    
    
    
    (97,446
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,825,460
    )Common stock issued at $1.50 per share on various dates
in 2004
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    583,527Preferred stock issued on various dates during 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,478,764Balance at December 31, 2004
    
    
    
    
    
    
    3,682
    
    
    
    (18,626,120
    )
    
    
    140,776Net loss
    
    
    
    
    
    
    
    
    
    
    (6,852,165
    )
    
    
    (6,852,165
    )Foreign currency translation adjustment
    
    
    
    
    
    
    2,329
    
    
    
    
    
    
    
    2,329Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,849,836
    )Common stock issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,100Warrants issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135,000Common stock
issued at $0.70 per share on various dates
in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,833,191Common stock
issued at $0.7125 per share on various
dates in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,090,500Common stock
issued at $0.564 per share on various dates
in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,600,300Balance at December 31, 2005
    
    
    
    
    
    
    6,011
    
    
    
    (25,478,285
    )
    
    
    4,013,031Net Loss
    
    
    
    
    
    
    
    
    
    
    (1,717,786
    )
    
    
    (1,717,786
    )Foreign currency translation adjustment
    
    
    
    
    
    
    1,981
    
    
    
    
    
    
    
    1,981Comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,715,805
    )

Common stock issued via exercise of warrants on various
dates in 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    592,692Common stock issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,625Fair value of unvested stock options upon adoption of
SFAS 123 R
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,356Balance at March 31, 2006
    
    
    
    
    
    $
    7,992
    
    
    $
    (27,196,071
    )
    
    $
    3,004,899
  F-4




---



##### 



Consolidated Statements of Cash Flows
 October 14, 2000Three Months Ended March 31,
    
    (inception) through2006
    
    2005
    
    March 31, 2006Cash
flows from operating activitiesNet loss
    
    $
    (1,717,786
    )
    
    $
    (1,686,921
    )
    
    $
    (27,196,071
    )Adjustments
to reconcile loss to net cash used in operating activities:Depreciation
    
    
    20,916
    
    
    
    16,110
    
    
    
    217,553Amortization
    
    
    
    
    
    
    
    
    
    
    7,786Write off of patent
    
    
    
    
    
    
    
    
    
    
    337,329Write off of obsolete inventory
    
    
    
    
    
    
    
    
    
    
    5,925Loss(Gain) on sale/disposal of furniture & equipment
    
    
    850
    
    
    
    
    
    
    
    (8,666
    )Non cash contributions
    
    
    1,564
    
    
    
    
    
    
    
    1,564Common stock and warrants issued for consulting services
    
    
    14,625
    
    
    
    
    
    
    
    217,725Amortization of unearned compensation
    
    
    100,356
    
    
    
    
    
    
    
    100,356Changes in
operating assets and liabilities:Accounts receivable
    
    
    6,750
    
    
    
    12,717
    
    
    
    (6,750
    )Due from/(to) related parties
    
    
    83,731
    
    
    
    61,700
    
    
    
    202,456Other receivables
    
    
    (50,457
    )
    
    
    63,529
    
    
    
    (169,758
    )Inventory, prepaid expenses and other current assets
    
    
    (73,999
    )
    
    
    45,812
    
    
    
    (479,528
    )Accounts payable
    
    
    158,296
    
    
    
    (90,139
    )
    
    
    762,620Accrued expenses
    
    
    (68,881
    )
    
    
    3,350
    
    
    
    193,592Deferred grants
    
    
    199,099
    
    
    
    73,097
    
    
    
    495,195Deferred marketing program
    
    
    (64,811
    )
    
    
    
    
    
    
    342,222Other current liabilities
    
    
    882
    
    
    
    141,306
    
    
    
    (10,276
    )Cash flows used in operating activities
    
    
    (1,388,865
    )
    
    
    (1,359,439
    )
    
    
    (24,986,726
    )Cash flows from investing activitiesRestricted cash
    
    
    (66,121
    )
    
    
    
    
    
    
    (3,619,281
    )Purchase of furniture and equipment
    
    
    (41,702
    )
    
    
    (3,395
    )
    
    
    (432,831
    )Proceeds from sale of furniture & equipment
    
    
    
    
    
    
    
    
    
    
    11,900Purchase of patent
    
    
    
    
    
    
    
    
    
    
    (345,115
    )Cash flows used in investing activities
    
    
    (107,823
    )
    
    
    (3,395
    )
    
    
    (4,385,327
    )Cash flows from financing activitiesNet proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    5,478,764Net proceeds from private placement
    
    
    
    
    
    
    1,299,517
    
    
    
    2,916,027Net proceeds from issuance of common stock
    
    
    592,692
    
    
    
    
    
    
    
    21,486,117(Repayments) / borrowings of bank debt
    
    
    
    
    
    
    (2,508
    )
    
    
    Cash flows provided by financing activities
    
    
    592,692
    
    
    
    1,297,009
    
    
    
    29,880,908Effect of exchange rate changes on cash
    
    
    1,981
    
    
    
    (839
    )
    
    
    1,981Net (decrease) increase in cash
    
    
    (902,015
    )
    
    
    (66,664
    )
    
    
    510,836Cash at beginning of period
    
    
    1,412,851
    
    
    
    1,172,250
    
    
    
    Cash at end of period
    
    $
    510,836
    
    
    $
    1,105,586
    
    
    $
    510,836Cash paid for interest
    
    $
    1,645
    
    
    $
    1,878
    
    
    $
    106,593Cash paid for income taxes
    
    None
    
    None
    
    None
 
 F-5




---



##### 



1. The Company and Basis of Presentation
 The Company
      Basis of Presentation
      F-6




---



##### 



$2.0 and $3.0 Million Private Placements
       $2.3 Million Private Placement
     F-7




---



##### 



$3.6 Million Private Placement
 
  Warrants
  2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Cash and Cash Equivalents
  Restricted Cash
  Fair Value of Financial Instruments
  Concentration of Credit Risk and Allowance for Doubtful Accounts
  Inventories
  F-8




---



##### 



Furniture and Equipment and Depreciation
  
  Accounting for Impairment of Long-Lived Assets
  Financial Instruments
  Revenue Recognition
    Shipping and Handling Costs
  Advertising Expenses
  Research and Development Costs
  F-9




---



##### 



Product Test and Demonstration Appropriations
  Net Loss Per Common Share (Basic and Diluted)
  Accounting for Stock-Based Compensation
       F-10




---



##### 



Three MonthsEndedMarch 31, 2005Net Loss Allocable to Common Shareholders
    
    $
    (1,686,921
    )Additional Compensation Expense
    
    $
    (306,914
    )Pro Forma Net Loss Allocable to Common Shareholders
    
    $
    (1,993,835
    )Pro Forma Net Loss Per Common Share (basic and diluted)
    
    $
    (0.07
    )
 Income Taxes
  Use of Estimates
  Foreign Subsidiaries
   F-11




---



##### 




  Segment Reporting
  Impairment of Intellectual Property Rights
  Interim Financial Statements
  3. Government Appropriations
 Appropriation from the U.S. Department of Energy (1)
  Appropriation from the U.S. Department of Energy (2)
  F-12




---



##### 



Appropriation from the U.S. Department of Energy (3)
  Appropriation from the U.S. Department of Defense (1)
  Appropriation from the U.S. Department of Defense (2)
  Appropriation from the U.S. Department of Defense (3)
  Appropriation from the U.S. Department of Defense (4)
  F-13




---



##### 



4. Other Receivables
 March 31, 2006Other ReceivablesITC Appropriation
    
    $
    41,196NREL Appropriation
    
    
    117,767Reimbursement of patent legal expenses
    
    
    10,795$
    169,758
 5. Accrued Expenses
 March 31, 2006Accrued LiabilitiesLegal and professional
    
    $
    67,243Investor Relations
    
    
    45,193Other
    
    
    81,156$
    193,592
 6. Deferred Financing and Business Acquisition Costs
   7. Income Taxes
   Income taxesNet operating loss carryforwards
    
    $
    7,570,000Deferred revenue
    
    
    235,000Accrued expenses
    
    
    175,000Total deferred tax assets
    
    
    7,980,000Valuation allowance
    
    
    (7,980,000
    )Net deferred tax assets
    
    $
    
  F-14




---



##### 



8. Stockholders Equity
 Recapitalization
   Issuances of Common Stock
   $2.0 and $3.0 Million Private Placements
   F-15




---



##### 



$2.3 Million Private Placement
      $3.6 Million Private Placement
 
  F-16




---



##### 



Issuances of Preferred Stock
          F-17




---



##### 



Warrants
   Options
   Director
    
    
    200,000Employees & Consultants
    
    
    1,200,0001,400,000
   Weighted AveWeighted Ave
    
    RemainingShares
    
    Exercise Price
    
    Contractual TermOutstanding at January 1, 2004
    
    
    500,000
    
    
    $
    1.50Granted in 2005
    
    
    5,450,000
    
    
    $
    1.50
    
    
    
    9.8Exercised in 2005Forfeited or ExpiredOutstanding at December 31, 2005
    
    
    5,950,000
    
    
    $
    1.50
    
    
    
    9.7Granted During the Three Months Ended March 31, 2006Exercised During the Three Months Ended March 31,
2006Forfeited or ExpiredOutstanding at March 31, 2006
    
    
    5,950,000
    
    
    $
    1.50
    
    
    
    9.4Exercisable at March 31, 2006
    
    
    5,950,000
    
    
    $
    1.50
    
    
    
    9.4
 Restricted Stock Awards
  F-18




---



##### 



Common Shares Outstanding
    
    
    
    
    
    
    48,261,249Reserved For Future IssuanceOptions Granted to officers and directors
    
    
    5,950,000Options Promised Director, Employees and Consultants
    
    
    1,400,000Unvested Restricted stock to employees and consultants
    
    
    537,500If Converted Preferred Stock
    
    
    15,500,000Warrants
    
    
    8,575,288
    
    
    
    31,962,788Total shares issued and outstanding and reserved for future issuance
    
    
    
    
    
    
    80,224,037
  9. Related Party Transactions
    10. Commitments
 Operating leases
   2006
    
    $
    70,2742007
    
    
    83,7752008
    
    
    78,680Total
    
    $
    232,729
  Truck Loan
  F-19




---



##### 



11. Subsequent Events
       F-20




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 OVERVIEW
 Business Plan
 Overview
         1




---



##### 



2




---



##### 



3




---



##### 




   Operations
   4




---



##### 



Ø
    
    Current and projected quantity of diesel fuel consumption;Ø
    
    High-population centers under strict air quality regulations;Ø
    
    Municipal transit and school bus fleets with an emphasis on public policy and a positive environmental image;Ø
    
    Large concentrations of urban-based, centrally fueled fleets of trucks and buses;Ø
    
    Off-road construction equipment;Ø
    
    Diesel equipment used by port facilities and large-scale mining operations;Ø
    
    Military installations in non-combat vehicles.
      5




---



##### 



TM TM
      Cash Requirements, Liquidity and Risk Factors
  6




---



##### 



7




---



##### 



$592,692
   8




---



##### 



Research & Development
       9




---



##### 



Employees
   ITEM 3. CONTROLS AND PROCEDURES.
   PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS.
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 Changes to Common Stock
   10




---



##### 




  SUBSEQUENT CHANGES IN SECURITIES
         ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  ITEM 5. OTHER INFORMATION.
  11




---



##### 



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
  Exhibit No.
    
    Description16.1
    
    Letter of Ernst & Young LLP,
dated March 23, 2006(1)31.1
    
    Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(2)31.2
    
    Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(2)32.1
    
    Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002(2)
 
 (1)
    
    Previously filed as an exhibit to the Companys Current
report on Form 8-K on March 29, 2006, and incorporated
herein by reference.(2)
    
    Filed herewith. 12. SIGNATURES
  O2DIESEL CORPORATION
(Registrant)Date: May 15, 2006
    By:
    /s/ Alan RaeAlan RaeChief Executive Officer
(Principal Executive Officer)Date: May 15, 2006
    By:
    /s/ David H. ShipmanDavid H. ShipmanChief Financial Officer
(Principal Financial and Accounting Officer) 12