<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

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

      FOR THE  QUARTERLY  PERIOD  ENDED  SEPTEMBER 30,  2003

                        Commission File Number: 000-32217

                              O2DIESEL CORPORATION
              (Exact Name of small business issuer in its charter)

              WASHINGTON                              91-2023525
           (State or Other                          (IRS Employer
    Jurisdiction of Incorporation)               Identification No.)

                               200 EXECUTIVE DRIVE
                             NEWARK, DELAWARE 19702
                    (Address of Principal Executive Offices)

                                 (302) 266-6000
                           (Issuer's telephone number)

                                 Not Applicable

   (Former name, former address and former fiscal year, if changed since last
                                    report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[X] Yes  [ ] No

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

As of November 17, 2003, the registrant had 28,080,372 shares of Common Stock,
$0.0001 par value per share, issued and outstanding

     Transitional Small Business Disclosure Format (check one)  Yes [ ]  No [X]


<PAGE>




                              02DIESEL CORPORATION
                      FOR THE QUARTER ENDED September 30, 2003

                              INDEX TO FORM 10-QSB


                                                                       PAGE
PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements                                           F-1

Item 2.  Plan of Operation                                                1

Item 3.  Controls and Procedures                                          5

PART II

Item 1.  Legal Proceedings                                                6

Item 2.  Changes in Securities                                            6

Item 3.  Defaults Upon Senior Securities                                  6

Item 4.  Submissions of Matters to Vote of Security Holders               6

Item 5.  Other Information                                                6

Item 6.  Exhibits and Reports on Form 8-K                                 8

Signatures                                                               10



<PAGE>

                    NOTE REGARDING FORWARD LOOKING STATEMENTS

     This quarterly report contains forward-looking statements concerning
O2Diesel Corporation ("O2Diesel" or the "Registrant") and its future operations,
plans and other matters. Any statements that involve discussions with respect to
predictions, expectations, beliefs, plans, projections, objectives, assumptions
or future events or performance (often, but not always, using phrases such as
"expects", or "does not expect", "is expected", "anticipates" or "does not
anticipate", "plans", "estimates" or "intends", or stating that certain actions,
events or results "may", "could", "might", or "will" be taken or occur or be
achieved) are not statements of historical fact and may be "forward looking
statements" which include statements relating to, among other things, the
ability of O2Diesel to effectively integrate the business of AAE Technologies
International Plc into its operations and successfully compete in the fuel
additive business.

     O2Diesel cautions readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Such
forward-looking statements are based on the beliefs of O2Diesel's management as
well as on assumptions made by and information currently available to 02Diesel
at the time such statements were made. Forward-looking statements are subject to
a variety of risks and uncertainties which could cause actual events or results
to differ from those reflected in the forward-looking statements, including,
without limitation, the failure to obtain adequate financing on a timely basis
and other risks and uncertainties. Actual results could differ materially from
those projected in the forward-looking statements, as a result of either the
matters set forth or incorporated in this report generally or certain economic
and business factors, some of which may be beyond the control of O2Diesel. These
factors include adverse economic conditions, entry of new and stronger
competitors, inadequate capital, unexpected costs, failure to gain product
approval in the United States or foreign countries for the commercialization and
distribution of its products and failure to capitalize upon access to new
markets.

     O2Diesel disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.

                                EXPLANATORY NOTE

On July 15, 2003, O2Diesel declared the recommended offer ("Recommended Offer")
by O2Diesel to acquire AAE Technologies International Plc, an Irish corporation
("AAE"), unconditional in all respects. The Recommended Offer was made in
accordance with Irish law and pursuant to an exemption from the U.S. tender
offer rules provided by Rule 14d-1(c) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), provided by Rule 802 thereunder.

Under the terms of the Recommended Offer, the Registrant agreed to issue
18,000,000 shares of common stock to the shareholders of AAE in exchange for all
of the issued and outstanding equity capital of AAE. The Recommended Offer and
related transactions were reported in O2Diesel's Form 8-K filed on July 30,
2003, which is incorporated by reference in this quarterly report.

The acquisition of AAE Technologies International Plc has been accounted for as
a capital transaction followed by a recapitalization. AAE Technologies
International Plc was considered to be the accounting acquiror. Accordingly the
financial statements of AAE are now treated as the base financial statements of
O2Diesel Corporation for the current and prior periods.


<PAGE>

                          PART I. FINANCIAL INFORMATION
ITEM 1.





Financial  Statements


O2DIESEL CORPORATION
(A Development Stage Company)

Three and Nine months ended September 30, 2003 and 2002
(Unaudited)

Balance Sheets
(expressed in U.S. dollars)

<TABLE>
<CAPTION>
                                                                           September 30,                December 31,
                                                                               2003                         2002
ASSETS                                                                       Unaudited                   Unaudited
                                                                           -------------                ------------
<S>                                                                         <C>                         <C>
CURRENT ASSETS

  Cash and cash equivalents                                                 $  3,972,568                $    119,296
  Other Current Assets                                                           252,899                     134,584
  Prepaid expenses                                                               198,431                        --
  Deferred Financing Costs                                                       516,788                        --
                                                                            ------------                ------------
     Total current assets                                                      4,940,686                     253,880

PROPERTY AND EQUIPMENT
  Office equipment                                                               108,226                      76,591
  Fuel and Test equipment                                                         52,731                       1,699
                                                                            ------------                ------------
                                                                                 160,957                      78,290
Less accumulated depreciation                                                    (71,979)                    (52,082)
                                                                            ------------                ------------
                                                                                  88,978                      26,208

OTHER LONG TERM ASSET                                                            115,182                        --
                                                                            ------------                ------------

TOTAL ASSETS                                                                $  5,144,847                $    280,088
                                                                            ============                ============

LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES

  Accounts payable                                                          $    828,251                $    739,812
  Accrued expenses                                                             1,202,851
  Bridge Loan                                                                  1,677,506
  Bank Debt                                                                                                  804,333
                                                                            ------------                ------------
  Total current liabilities                                                    3,708,608                   1,544,145

TOTAL LIABILITIES                                                              3,708,608                   1,544,145

STOCKHOLDER'S EQUITY (DEFICIT)

  Common stock: 100,000,000 Common Shares                                          2,555                     678,929
     authorized with a par value of $0.0001;
     25,546,313 issued and outstanding. (Note: 6)

Additional paid-in capital                                                    11,161,306                   5,109,601
Deficit accumulated during the development stage                              (9,715,830)                 (7,040,449)
Cumulative Foreign Currency Adjustment                                           (11,792)                    (12,138)
                                                                            ------------                ------------

TOTAL STOCKHOLDERS EQUITY                                                      1,436,239                $ (1,264,057)

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                   $  5,144,847                $    280,088
                                                                            ============                ============

</TABLE>

                                      F-1
   (The accompanying notes are an integral part of the financial statements)
<PAGE>

O2 Diesel Corporation
(A Development Stage Company)
Statements of Operations
(expressed in U.S. dollars)
(unaudited)


                      CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                               Accumulated from
                                                   4/14/2000
                                               Date of Inception          Three Months Ended                Nine Months Ended
                                                 to 9/30/2003        9/30/2002        9/30/2003        9/30/2002        9/30/2003
                                               -----------------    -----------------------------    ------------------------------
<S>                                              <C>                <C>              <C>              <C>              <C>
REVENUE
Sales                                            $     42,237       $     42,237     $       --       $     42,237     $       --
Cost of Goods Sold                                     57,633             46,253             --             57,633
                                                 ------------       -----------------------------     -----------------------------
                GROSS PROFIT                          (15,396)            (4,016)            --            (15,395)            --

Expenses:
  Salaries and Wages                                2,348,663            146,092          379,305          327,736          788,889
  Selling and marketing                             2,539,076            137,944          585,304          166,332          770,313
  Research and development programs (net)             598,970             72,801           87,271           89,502           76,212
  General and administrative                        4,557,798            170,094          347,684          534,081        1,063,188
  Interest expense                                     88,337             14,981            5,412           41,377           39,627
  Interest and Miscellaneous income                  (290,207)              (359)          (3,596)            (393)         (30,217)

    INCOME (LOSS) BEFORE INCOME TAXES              (9,858,032)          (545,570)      (1,401,381)      (1,174,030)      (2,708,013)

Foreign income taxes                                 (142,202)           (12,409)           4,646          (90,618)         (44,769)

               Net (Loss) per period             $ (9,715,830)      $   (533,161)    $ (1,406,027)    $ (1,083,412)    $ (2,663,243)
                                                 ============       =============================     =============================
               Basic Net (Loss) per share                                  (0.04)           (0.07)           (0.07)           (0.16)
Weighted Average Shares                                               14,620,000       19,833,377       14,620,000       16,340,414

</TABLE>


                                      F-2
   (The accompanying notes are an integral part of the financial statements)


<PAGE>

O2 Diesel Corporation
(A Development Stage Company)
Statements of Cash Flows
(expressed in U.S. dollars)
(unaudited)

<TABLE>
<CAPTION>
                                                           Nine Months Ended                Nine Months Ended
                                                              9/30/2003                         9/30/2002
                                                              ---------                         ---------

<S>                                                     <C>             <C>             <C>           <C>
NET LOSS FOR THE PERIOD                                                 (2,663,243)                   (1,083,412)
Depreciation                                               19,897                         30,509
Increase in Accounts Payable & Accrued Expenses           774,502                        210,941
Increase in Accounts Receivable & Prepaids               (316,746)                       500,327
                                                        ---------                       --------
CASH FROM OPERATING ACTIVITIES                                             477,653                       741,777

Net proceeds from Private Placement                     4,271,420                             --
Bridge Loan                                             1,677,506                             --
Proceeds from AAE Option Shares Sold                    1,208,095                       --------
Retirement of Foreign Bank Debt in GBP                   (804,333)
                                                        ---------
CASH FLOWS FROM FINANCING ACTIVITIES                                     6,352,688            --

Goodwill                                                 (115,182)
Asset Additions                                           (82,667)                       (41,063)
CASH FLOWS FOR INVESTING ACTIVITIES                     ---------         (197,849)     --------         (41,063)

Difference in exchange rates                                              (115,977)                      (31,530)
INCREASE IN CASH                                                         3,853,272                      (414,228)

BEGINNING CASH BALANCE                                                     119,296                       533,524

                                                                       -----------                    ----------
ENDING CASH BALANCE                                                      3,972,568                       119,296
                                                                       ===========                    ==========
Supplemental Disclosure:

Cash paid for interest: $38,047

Cash paid for income taxes: None

Non-cash Transactions: Conversion of Bridge loan to common stock at 9/30/03, $2,322,500
</TABLE>


                                      F-3
   (The accompanying notes are an integral part of the financial statements)

<PAGE>
O2 Diesel Corporation
(A Development Stage Company)
Statement of Stockholders' Deficit
From April 14, 2000 (Date of Inception) to September 30, 2003
(expressed in U.S. dollars)

<TABLE>
<CAPTION>
                                                                                                                           Deficit
                                                                                                                         Accumulated
                                                                                    Additional                            During the
                                                          Common Stock              Paid - In             Total          Development
                                                      Shares       Par Value         Capital             Capital            Stage
                                                        #              $                $                   $                 $
                                                  ---------------------------------------------------------------------------------

<S>                                                <C>             <C>             <C>                <C>              <C>
Balance - April 14, 2000 (Date of Inception)

  Stock issued at $0.01 per share                   43,008,772      430,088         (509,051)            (78,963)

  Net loss for the period                                                                                                 (393,812)

  Paid In Capital and Loss of Predecessor                                           4,201,034          4,201,034        (4,210,925)

  Foreign Exchange Adjustment                                                                                               (2,560)

Balance - September 30, 2001                        43,008,772      430,088         3,691,983          4,122,071        (4,607,297)
                                                  ---------------------------------------------------------------------------------
  Net loss for the period                                                                                                 (563,759)

  Foreign Exchange Adjustment                                                                                               (1,916)

Balance - December 31, 2001                         43,008,772      430,088         3,691,983          4,122,071        (5,172,972)
                                                  ---------------------------------------------------------------------------------

  Stock issued at $0.01 per share                   24,884,149      248,841         1,417,618          1,666,459

  Net loss for the period                                                                                               (1,871,953)

  Foreign Exchange Adjustment                                                                                               (7,662)

Balance - December 31, 2002                         67,892,921      678,929         5,109,601          5,788,530        (7,052,587)
                                                  ---------------------------------------------------------------------------------

  Stock issued at $0.01 per share                    3,286,427       32,864           160,470            193,334

  Net loss, Six Months Ended June 30, 2003                                                                              (1,257,216)

  Options Excercised                                 7,650,048       76,500         1,131,595          1,208,095

Balance - June 30, 2003                             78,829,396      788,294         6,401,666          7,189,959        (8,309,803)
                                                  ---------------------------------------------------------------------------------

  Acquisition and Cancellation of AAE Int'l PLC
    shares                                         (78,829,396)    (788,294)          788,294                  0

  DVI Shares outstanding at acquisition 7/15/03      6,900,000          690                                  690

  Issuance of DVI Shares for AAE at $0.0001
    per share                                       17,234,646        1,723                                1,723

  Private Placement at $0.0001 per share             1,411,667          141         1,719,171          1,719,312

  Shares Subscribed                                                                 2,322,500          2,322,500

  Net loss for the three month period                                                                                   (1,406,027)

  Currency Translation                                                                (70,324)           (70,324)          (11,792)

Balance - September 30, 2003 (unaudited)            25,546,313        2,555        11,161,307         11,163,861        (9,727,622)
                                                  ---------------------------------------------------------------------------------
</TABLE>




                                       F-4
   (The accompanying notes are an integral part of the financial statements)

<PAGE>
                   Explanatory Notes to Financial Statements

O2 Diesel Corporation
(A Development Stage Company)
Notes to the Financial Statements
(expressed in U.S. dollars)

1.       Nature of Operations and Business Acquisition

      O2 Diesel Corporation is the successor parent company to the AAE group of
      companies. The AAE group consists of the following companies: AAE
      Technologies International Plc, an Irish company incorporated on April 14,
      2000 ("AAE"), is the parent company of AAE Holdings Plc, AAE Technologies
      Inc. and AAE Research and Development Ltd. AAE Holdings Plc was
      incorporated in the United Kingdom on October 30, 1998, and is the parent
      company of AAE Technologies Limited, a company incorporated in the United
      Kingdom, on April 24, 1997. AAE Technologies Inc. (name changed to
      O2Diesel Inc on May 20, 2003) was incorporated in Delaware on August 12,
      1999. AAE Research and Development Ltd. was incorporated as an Irish
      company on April 14, 2000 and has been inactive since inception. AAE
      acquired control of AAE Holdings Plc in an exchange for its shares in
      April 2001. O2Diesel Corporation (the "Company") was incorporated in the
      State of Washington on April 24, 2000. The Company's previous business was
      to investigate new business opportunities, including the marketing and
      distribution of vitamins, minerals, nutritional supplements, and other
      health and fitness products in the States of Nevada and Utah. With the
      completion of the Recommended Offer to acquire AAE, the Company abandoned
      its interest in marketing and selling health and fitness products, and now
      intends to pursue only the business of AAE. Both O2Diesel and AAE were
      development stage companies at the time the Recommended Offer closed.


      On July 15, 2003, the Company declared the Recommended Offer to acquire
      all of the issued and outstanding share capital of AAE in exchange for
      18,000,000 shares of its common stock unconditional in all respects.
      Immediately prior to closing the AAE acquisition, the former President of
      the Company contributed 7,720,000 shares of the Company's common stock to
      it for cancellation. As a result of these transactions the former AAE
      shareholders acquired control of the combined companies, which will result
      a new business direction for O2Diesel. The acquisition of AAE has been
      accounted for as a capital transaction followed by a recapitalization. AAE
      was considered to be the accounting acquiror. Accordingly, the financial
      statements of AAE are now treated as the base financial statements of
      O2Diesel Corporation for the current and prior periods.


      As a condition of closing the Recommended Offer, the Company had
      undertaken to complete a Private Placement (the "Private Placement") to
      raise a minimum of $5,000,000 at a minimum price per share of $1.50. In
      order to assist the Company in satisfying its obligation to complete the
      Private Placement, a lender loaned an amount (the "July Bridge Loan") to
      the Company equal to the difference between $5,000,000 and the aggregate
      amount of subscriptions received by the Company as of the date of the
      loan, which was July 10, 2003. As part of the terms of the July Bridge
      Loan, the Company issued a convertible non-interesting bearing note (the
      "Convertible Note") in the amount of $4,000,000. Previously, the Company
      received proceeds of $1,000,000 under two bridge loans (the "March Bridge
      Loans"), in the amounts of $50,000 and $950,000 on March 19, 2003 and
      March 29, 2003, respectively. Under the terms of the July Bridge Loan, the
      March Bridge Loans were canceled and made part of the July Bridge Loan. In
      addition, the Company received new proceeds of $3,000,000. To the extent
      that the Convertible Note did not require repayment, it was convertible
      into common shares of the Company at a per share price of $1.50.


      Pursuant to the terms of the July Bridge Loan, the Company was obligated
      to pay the proceeds of any subscriptions received from the Private
      Placement until August 10, 2003 (extended to September 30, 2003) to the
      holder of the Convertible Note to the extent the total proceeds from the
      Private Placement and the Bridge Loans exceeded $5,000,000. As of
      September 30, 2003, the Company had received subscriptions of $2,677,500
      from the Private Placement, in which cash of $2,447,500 was received as of
      September 30, 2003 and $230,000 was received after that date. As of
      September 30, 2003 the Company had also received cash of $4,000,000 from
      the three bridge loans. Accordingly, as of September 30, 2003, the
      extended date of the July Bridge Loan, the Company was obligated to pay
      $1,667,500 in cash and to issue 1,548,333 shares of its common stock to
      the Holder of the Convertible Note.

                                     F-5
<PAGE>

             Explanatory Notes to Financial Statements (continued)

      AAE is a fuel additive development and marketing company incorporated in
      Ireland. Since inception, AAE began the development of a proprietary
      additive product designed to enable ethanol to be blended with diesel fuel
      to produce a clean burning and efficiently blended diesel fuel. AAE is
      completing product development, obtaining regulatory approvals as required
      and beginning the commercialization of its product via its wholly owned
      regional subsidiaries and strategic partnerships. AAE's primary products
      are AAE05 and O2Diesel(TM).

      AAE, together with its exclusive North American marketing partner Octel
      Starreon LLC, is developing commercial markets for its fuel additive
      through sales of AAE05 and O2Diesel(TM) (AAE's branded ethanol-diesel
      blend) initially in the U.S. and Canadian markets. O2Diesel(TM), which is
      now available in certain North American markets, is formulated using AAE's
      and Octel Starreon's proprietary additive technologies and is a stable
      ethanol-diesel fuel blend with enhanced water and temperature tolerance.
      Octel Starreon LLC is a fuel additive manufacturer and marketer in the
      United States, and is a joint venture between U.K. based Octel Corporation
      and U.S. based Starreon Corporation, both of which are leading companies
      in the fuel additive industry. Tests conducted using O2Diesel(TM) have
      shown that it displays significantly reduced emissions of visible smoke,
      nitrogen oxides, carbon monoxide, and particulate matter in a range of
      diesel engine applications.

      Research and Development: AAE and Cognis Deutschland GmbH & Co. KG
      ("Cognis") have an agreement for the joint development of AAE05 and other
      co-solvency additive products as well as joint ownership of patents
      covering such products and product applications. Cognis has the worldwide
      rights to manufacture, and AAE has the worldwide rights to market and sell
      such additive products.

      Both the Company and AAE were development stage companies at the time of
      the closing of the Recommended Offer. The ability of the Company to emerge
      from the development stage with respect to its new principal business
      activity is dependent upon its ability to generate significant revenue
      from AAE's business. There is no guarantee that the Company will be able
      to sell any of its products at a profit. There may be doubt regarding the
      Company's ability to continue as a going concern.

2.  Summary of Significant Accounting Policies

     (a)  Year end

            The Company's fiscal year end is December 31.

     (b)  Cash and Cash Equivalents

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

     (c)  Long-lived Assets

            In accordance with SFAS No. 144, "Accounting for the Impairment or
            Disposal of Long Lived Assets", the carrying value of intangible
            assets and other long-lived assets is reviewed on a regular basis
            for the existence of facts or circumstances that may suggest
            impairment. The Company recognizes an impairment when the sum of the
            expected undiscounted future cash flows is less than the carrying
            amount of the asset. Impairment losses, if any, are measured as the
            excess of the carrying amount of the asset over its estimated fair
            value.


                                      F-6

<PAGE>
             Explanatory Notes to Financial Statements (continued)

2.   Summary of Significant Accounting Policies (continued)

     (d)  Foreign Exchange

            Current monetary assets and liabilities of the Company, which are
            denominated in foreign currencies, are translated at the exchange
            rate in effect at the balance sheet dates. Revenues and expenses are
            translated at rates of exchange prevailing on the transaction dates.
            Exchange gains or losses on the realization of current monetary
            assets and the settlement of current monetary liabilities are
            recognized currently to operations. Translation adjustments relating
            to investments in foreign subsidiaries are accounted for in
            accordance with the provisions of SFAS No.52. As such, translation
            adjustments are not included in determining net income for the
            period but are disclosed and accumulated in a separate component of
            consolidated equity until sale or until complete or substantially
            complete liquidation of the net investment in the foreign entity
            takes place.

     (e)  Revenue Recognition

            Revenue from the sales of product by the Company will be recognized
            and recorded upon the passage of title of the product to the
            customer. Sales of the Company's product will also be made by its
            exclusive sales agent for the USA and Canada. On these sales, the
            Company will be paid a share of the gross profit realized from each
            sale to the end user. The Company will record revenue earned under
            the agreement with its sales agent upon notification of a completed
            sale to the end user.

            These policies are prospective in nature, as the Company has not yet
            generated substantial amounts of revenue from commercial sales
            transactions.

     (f)    Basic and Diluted Net Income (Loss) per Share

            The Company computes net income (loss) per share in accordance with
            SFAS No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires
            presentation of both basic and diluted earnings per share (EPS) on
            the face of the income statement. Basic EPS is computed by dividing
            net income (loss) available to common shareholders (numerator) by
            the weighted average number of common shares outstanding
            (denominator) during the period. Diluted EPS gives effect to all
            dilutive potential common shares outstanding during the period
            including stock options, using the treasury stock method, and
            convertible preferred stock, using the if-converted method. In
            computing Diluted EPS, the average stock price for the period is
            used in determining the number of shares assumed to be purchased
            from the exercise of stock options or warrants. Diluted EPS excludes
            all dilutive potential common shares if their effect is anti
            dilutive.

     (g)    Use of Estimates

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

     (i)    Financial Instruments

            The carrying value of cash, accounts payable, accrued liabilities
            and notes payable approximate fair value due to the relatively short
            maturity of these instruments.

                                     F-7

<PAGE>
             Explanatory Notes to Financial Statements (continued)

2.  Summary of Significant Accounting Policies (continued)

     (j)    Recent Accounting Pronouncements

            In December 2002, the FASB issued SFAS No. 148, "Accounting for
            Stock-Based Compensation - Transition and Disclosure," which amends
            SFAS No. 123 to provide alternative methods of transition for a
            voluntary change to the fair value based method of accounting for
            stock-based employee compensation. In addition, SFAS No. 148 expands
            the disclosure requirements of SFAS No. 123 to require more
            prominent disclosures in both annual and interim financial
            statements about the method of accounting for stock-based employee
            compensation and the effect of the method used on reported results.
            The transition provisions of SFAS No. 148 are effective for fiscal
            years ended after December 15, 2002. The disclosure provisions of
            SFAS No. 148 are effective for financial statements for interim
            periods beginning after December 15, 2002. The adoption of this
            standard currently has no effect on the Company's results of
            operations and financial position as the Company has no stock-based
            employee compensation. The Company will adopt the disclosure
            requirements of SFAS No. 148 if stock-based compensation is awarded
            to employees. See note 9 for a discussion of the Company's intention
            to adopt a Stock-Based Compensation Plan.

            FASB has also issued SFAS No. 145, 146, 147, 149 and 150 but these
            pronouncements will not have any effect on reporting the results of
            operations of the Company. Therefore a description of each and their
            respective impact on the Company's reported results have not been
            included in this report.

     (k)    Interim Financial Statements

            These interim unaudited financial statements have been prepared on
            the same basis as the annual financial statements and in the opinion
            of management, reflect all adjustments, which include only normal
            recurring adjustments, necessary to present fairly the Company's
            financial position, results of operations and cash flows for the
            periods shown. The results of operations for such periods are not
            necessarily indicative of the results expected for a full year or
            for any future period.

3.    Government Appropriations

            O2Diesel has received an appropriation of $1,107,734 from the US
            Department of Energy ("DOE") to test its fuel additive as well as
            its blended fuel, O2Diesel(TM) This appropriation is managed for the
            DOE by the National Renewable Energy Laboratory ("NREL"). Under the
            terms of the appropriation, O2Diesel is reimbursed by NREL for 80%
            of its costs incurred in completing the Statement of Work required
            under this program. O2Diesel charges all expenses as incurred to
            operations and accrues all monies receivable under the appropriation
            as a reduction to expense.

4.     Deferred Financing and Business Acquisition Costs

            The Company has charged all accrued legal, accounting, and other
            related costs incurred in connection with the acquisition of AAE and
            the Private Placement to paid in capital. In addition, the Company
            has charged all similar costs incurred in connection with financing
            efforts that are in process at the date of this report to an asset
            account called Deferred Financing Costs.

5.     Notes Payable

            (a) O2Diesel received $100,000 from a company controlled by the
            former President of the O2Diesel pursuant to a note payable secured
            by all corporate property bearing interest at 12% and due on demand.
            The note plus accrued interest of $29,000 was repaid on July 18,
            2003.

            (b) The Company received proceeds of $1,000,000 in March 2003 from
            notes issued in exchange for two bridge loans. It received a further
            $3,000,0000 from the issuance of a non-interest bearing Convertible
            Note in conjunction with the Private Placement. Under the terms of
            the Convertible Note, the two notes issued for the March 2003 bridge
            notes were cancelled and made part of the Convertible Note. The
            Convertible Note matured September 30,2003. As of that date the
            Holder was owed $1,677,500, and the Company had an obligation to
            issue 1,548,333 shares of its common stock at a price of $1.50 per
            share to the Holder.


                                     F-8

<PAGE>
             Explanatory Notes to Financial Statements (continued)

6.     Common Shares

            As part of the Private Placement, the Company as of September 30,
            2003 had received proceeds of $2,447,500 and had issued 1,411,667
            shares of its common stock. Following September 30, 2003, the
            Company received additional proceeds of $230,000 from the Private
            Placement and by October 31,2003 it had issued an additional 373,333
            shares of its common stock. In total, the Company, by the end of
            October 2003, had received subscriptions and proceeds of $2,677,500
            from the Private Placement and had issued 1,785,000 shares of its
            common stock at a per share price of $1.50.


            As of September 30, 2003 the Company had issued 17,234,646 shares of
            its common stock to former shareholders of AAE in exchange for AAE
            shares. In October 2003, the Company issued a further 612,393 shares
            of its common stock to former AAE shareholders bringing the total
            shares issued in exchange for AAE shares to 17,847,039. Under the
            terms of the Convertible Note, the Company as of September 30, 2003
            was obligated to issue 1,548,333 shares of its common stock to the
            Holder of the Note. .


7.     Related Party Transactions

            (a) A company controlled by the Chairman of the Board provides
            office space, accounting and other services to AAE at a cost of
            approximately $2,300 per month. For the three and nine months ended
            September 30, 2003, the Company paid $6,731 and $20,439,
            respectively, to the company controlled by the Chairman ($8,457 and
            $15,752 for the three and nine months ended September 30, 2002).

            (b) The Company accrued $29,000 in interest owing on a note payable
            to a company controlled by the former President of the Company.
            Interest of $6,000 was charged to operations during the nine months
            ended September 30, 2003 (2002 $9,000). The principal and interest
            for this note were paid in full on July 18, 2003.


8.      Pro forma Information for acquisition of AAE


            O2Diesel, in exchange solely for its common stock, acquired
            approximately all of the outstanding shares of AAE. As part of the
            acquisition, control of the combined companies passed to the former
            shareholders of AAE. Accordingly, AAE is treated as the accounting
            acquiror in the transaction and its financial statements are treated
            as the base financial statements for the current and prior periods.
            For accounting purposes, this transaction is being accounted for as
            a capital transaction followed by a recapitalization of AAE rather
            than a purchase of AAE by O2Diesel. The table below presents pro
            forma combined revenues, net income and earnings per share. The pro
            forma amounts combine O2Diesel's results with AAE's consolidated
            results for the nine months ended September 30, 2002 and September
            30, 2003.


            The pro forma information is presented for illustrative purposes
            only and is not necessarily indicative of the operating results or
            financial position that would have occurred had the transaction
            between AAE and O2Diesel occurred as of January 31, 2002 or during
            the periods presented nor is it necessarily indicative of the future
            financial position or operating results. Pro forma earnings per
            share were computed based on the average number of shares
            outstanding as of September 30, 2003.


                                     F-9

<PAGE>
             Explanatory Notes to Financial Statements (continued)

<TABLE>
<CAPTION>
                                                Pro Forma Results
                                    -----------------------------------------
                                    Nine months ended       Nine months ended
                                    September 30,2002       September 30,2003
                                    -----------------       -----------------
<S>                                   <C>                     <C>
    Sales                             $      7,430            $           -

    Net Losses                        $ (2,230,090)           $  (3,037,479)



                                            EPS                     EPS
                                            ---                     ----
    Net Losses                        $   (2,230,090)         $  (3,037,479)

    Net loss per share                $        (0.11)         $       (0.15)

    Weighted Average Shares               19,833,377             19,833,377
</TABLE>


9.     Commitments

      The Company intends to establish a stock-based compensation and option
      plan ("Plan") for the benefit of key employees, consultants, advisors and
      directors. It is anticipated the Plan will permit the grant of both
      tax-qualified and non-qualified stock options. Subject to the approval by
      the Board of Directors and the Shareholders, the Company intends to grant
      stock options to acquire approximately 5,825,000 shares of its common
      stock to certain of its directors, officers, key employees and advisors.
      It is expected that the options granted will consist of both tax-qualified
      and non-qualified options.

10.     Subsequent Events

      On October 10, 2003 the Company received an appropriation (the
      "Appropriation") of $1,000,000 from the Department of Defense (the "DOD")
      to test the Company's fuel additive and its O2Diesel(TM) fuel in
      non-strategic vehicles operated by the US Air Force at Nellis Air Force
      Base in Las Vegas, Nevada ("Nellis"). Under the terms of the
      Appropriation, a third party is to be paid $200,000 to administer the
      Appropriation on behalf of the DOD. The remaining $800,000 will be used to
      fund the test program at Nellis. In addition, the Company has been
      informed it will be awarded follow-on appropriations of approximately
      $3,500,000 to continue the tests under the DOE and DOD programs.


                                     F-10

<PAGE>
ITEM 2.      PLAN OF OPERATION

OVERVIEW


     O2Diesel Corporation is the successor parent company to the AAE group of
companies. The AAE Group consists of the following companies: AAE Technologies
International Plc, an Irish company incorporated on April 14, 2000, is the
parent company of AAE Holdings Plc, AAE Technologies Inc. and AAE Research and
Development Ltd. AAE Holdings Plc was incorporated in the UK on October 30,
1998, and is the parent company of AAE Technologies Limited, a company
incorporated in the UK on April 24, 1997. AAE Technologies Inc. (name changed to
O2Diesel Inc on May 20, 2003) was incorporated in Delaware, U.S.A. on August 12,
1999. AAE Research and Development Ltd. was incorporated in Ireland on April 14,
2000, and has been inactive since inception. AAE Technologies International Plc
acquired control of AAE Holdings Plc in an exchange for its shares in April
2001. O2Diesel Corporation herein (the"Company") was incorporated in the State
of Washington, U.S.A. on April 24,2000. The Company's previous business was to
investigate new business opportunities, including the marketing and distribution
of vitamins, minerals, nutritional supplements, and other health and fitness
products in the States of Nevada and Utah. With the completion of the
Recommended Offer, the Company abandoned its interest in marketing and selling
health and fitness products, and now intends to pursue only the business of AAE.
Both O2Diesel and AAE were development stage companies at the time the
Recommended Offer closed.

     O2Diesel commenced a Recommended Offer to acquire all of the issued and
outstanding ordinary shares of AAE under the terms of a Recommended Offer
Document, dated June 16, 2003. On or about June 18, 2003, O2Diesel mailed the
Recommended Offer Document to the shareholders of AAE and submitted the
Recommended Offer Document to The Securities and Exchange Commission on Form CB.

     On July 11, 2003, O2Diesel declared the Recommended Offer unconditional in
respect to acceptances, and on July 15, 2003, under the terms of the Recommended
Offer, O2Diesel agreed to issue 18,000,000 common shares of its capital stock
for 100% of the shares of AAE. As of July 11, 2003, shareholders holding
approximately 87% of AAE's issued and outstanding ordinary shares had accepted
the Recommended Offer. The Recommended Offer remained open until July 31, 2003
to accept additional shares tendered by shareholders of AAE. As of September 30,
2003, all remaining shares of AAE had been acquired by O2Diesel pursuant to a
compulsory acquisition transaction under Irish law.

     Following completion of the Recommended Offer, control of the combined
companies passed to the former shareholders of AAE, and AAE became a
wholly-owned subsidiary of O2Diesel. Accordingly AAE was considered the
accounting acquiror. Thus, for accounting purposes, the Recommended Offer is
being accounted for as a capital transaction accompanied by a recapitalization
of AAE, rather than a purchase business combination. The historical financial
statements of AAE are now the base financial statements of O2Diesel Corporation
for the current and prior periods.


RESULTS OF OPERATION

     The financial statements of O2Diesel are prepared in accordance with United
States Generally Accepted Accounting Principles. The following management
discussion and analysis is qualified in its entirety by, and should be read in
conjunction with, the financial statements and notes thereto, included elsewhere
in this quarterly report.

Revenues: O2Diesel has not had any significant revenues from operations since
inception.


Expenses: During the three and nine month periods ended September 30, 2003,
O2Diesel had total expenses of $1,404,977 and $2,738,230, respectively. Material
expenses included (i) staffing expenses of $379,305 during the three months
ended September 30, 2003 ($146,092 for the same period in 2002) and $788,889
during the nine months ended September 30, 2003 ($327,736 for the same period in
2002); staffing expenses increased in the second and third quarters in
anticipation of new financing to begin selling and marketing efforts (ii) market
preparation and related expenses of $585,304 during the three months ended
September 30, 2003 ($137,944 for the same period in 2002) and $770,313 during
the nine months ended September 30, 2003 ($166,332 for the same period in 2002);
Included in marketing expense for the nine months ended September 30,2003 is a
charge of $500,000 for a sponsorship fee incurred for an auto racing team and
the right to receive logo signage for a twenty-four month period, (iii)
consulting expenses of $219,177 during the three months ended September 30,
2003, ($9,393 for the same period in 2002) and $379,798 during the nine months
ended September 30,2003 ($17,675 for the same period in 2002); (iv) professional
fees of $133,079 during the three months ended September 30, 2003 of which
$127,079 were charged to the cost of raising new finance ($11,864 for the same
period in 2002) and $323,720 during the nine months ended September 30, 2003
($57,180 for the same period in 2002); professional fees increased substantially
in 2003 over 2002 due to higher accruals for audit and related fees and (v)
insurance expense of $46,717 during the three months ended September 30, 2003
($29,740 for the same period in 2002) and $108,319 during the nine months ended
September 30, 2003 ($55,204 for the same period in 2002).


                                      1

<PAGE>

Financial and Other Income/(Loss): O2Diesel had net interest expense of $1,683
during the three months ended September 30, 2003 ($12,634 for the same period in
2002) and $ 38,047 during the nine months ended September 30, 2003 ($34,303 for
the same period in 2002. Interest expense declined in the third quarter as a
result of all interest bearing loans being repaid in July 2003.

Net Loss: O2Diesel had a net loss of $1,406,027 for the three months ended
September 30, 2003 ($533,161 for the same period in 2002) and $2,663,243 for the
nine months ended September 30, 2003 ($1,083,412 for the same period in 2002).
The Company began to hire employees in May 2003 in anticipation of raising new
funds to begin its marketing and sales efforts. Much of the increased costs are
due to the new employees and their related costs for travel, entertainment and
business promotion meetings.

As a result of the Recommended Offer, O2Diesel believes that its historical
spending levels are not indicative of its expected future spending levels
because it is undertaking the implementation of the AAE business plan. O2Diesel
anticipates that the increased spending on intellectual property, marketing,
staffing and other general operating and administrative expenses will continue
into the future periods. For these reasons, O2Diesel believes its expenses,
losses, and deficit accumulated during the development stage will continue
during the last quarter of 2003 and into calendar year 2004, as the operations
of AAE and O2Diesel are consolidated.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2003, O2Diesel had current assets consisting of cash and
cash equivalents of $4,159,577, and current liabilities of $3,708,608, for net
working capital of $450,969 at September 30, 2003. During the nine months ended
September 30, 2003, O2Diesel generated cash of $3,853,272, all of which was
received from the sale of the company's shares in the Private Placement, the
exercise of options to acquire AAE shares immediately prior to completion of the
Recommended Offer and from the proceeds of a Bridge Loan. Cash of $82,667 was
used to purchase fixed assets.

The Company had no revenues from operations during the three and nine months
ended September 30,2003. It does not anticipate generating significant revenues
until it can successfully implement the business plan of AAE. The Company
currently has no external sources of liquidity or commitments for additional
financing. Historically, the Company has raised capital through equity
financings, bridge loans and advances made by executive officers of the Company.

As a condition of closing the Recommended Offer, the Company undertook to
complete a Private Placement (the "Private Placement") to raise a minimum of
$5,000,000 at a minimum price per share of $1.50. In order to assist the Company
to satisfy its obligation to complete the Private Placement, a lender loaned the
Company an amount (the "July Bridge Loan") equal to the difference between
$5,000,000 and the aggregate amount of subscriptions received by the Company as
of the date of the loan, which was July 10, 2003. As part of the terms of the
July Bridge Loan, the Company issued a convertible non-interesting bearing note
( the "Convertible Note") in the amount of $4,000,000. Previously, the Company
had received proceeds of $1,000,000 under two bridge loans (the "March Bridge
Loans"), in the amounts of $50,000 and $950,000 on March 19, 2003 and March 29,
2003, respectively. Under terms of the July Bridge Loan, the March Bridge Loans
were canceled and made part of the July Bridge Loan. The Company also received
new proceeds of $3,000,000 from the July Bridge Loan. Pursuant to the terms of
the July Bridge Loan, the Company was obligated to pay the proceeds of any
subscriptions received from the Private Placement until August 10, 2003
(extended to September 30, 2003) to the holder of the Convertible Note to the
extent the total proceeds from the Private Placement and Bridge Loans exceeded
$5,000,000. As of September 30, 2003, the Company had received subscriptions of
$2,677,500 from the Private Placement. Cash proceeds of $2,447,500 were received
as of September 30, 2003 and $230,000 was received after that date. The Company
had also received cash of $4,000,000 from the three bridge loans. Accordingly,
as of September 30, 2003, the extended date of the July Bridge Loan, the Company
was obligated to pay $1,667,500 in cash and to issue 1,548,333 shares of its
common stock to the Holder of the Convertible Note.

With the proceeds from the Private Placement and its other financing sources,
and assuming its current levels of spending, O2Diesel anticipates that it will
have sufficient working capital to fund its operations through February 28,
2004.

In connection with the Recommended Offer, O2Diesel also committed to use its
best efforts to complete a non-brokered private placement of equity to raise
$3,500,000 by offering and selling shares of its common stock at a price of not
less than $1.50 per share (the "Follow-on Private Placement"). Proceeds from the
Follow-On Private Placement, if any, are to be used to fund the acquisition of a
fuel distribution business.


                                      2

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES (continued)

O2Diesel has also taken steps to raise additional financing to fund AAE's
business plan. As of the date of this Report, the Company is seeking to complete
the due diligence and other actions required for it to obtain a listing on the
Alternative Investment Market (AIM) of the London Stock Exchange. As part of
this listing, the Company expects to raise financing through a public offering
and sale of its common shares to be traded on AIM. There can be no assurance
that additional funds, if any, will be available on terms acceptable to
O2Diesel.

PLAN OF OPERATION

The completion of the Recommended Offer resulted in a change of control of
O2Diesel. Anthony Dean-Smith, Alan Rae, David Koontz, Karim Jobanputra and
Hendrik Rethwilm were appointed as Directors of O2Diesel; Alan Rae was appointed
President and Chief Executive Officer and David Koontz was appointed Chief
Financial Officer and Secretary of O2Diesel. Eric Boehnke resigned as a
Director, President, Treasurer and Secretary of O2Diesel effective July 15,
2003.

For the next six to nine months, the Company anticipates it will continue to
incur losses as a result of expenses associated with implementing the business
plan of AAE, which include incurring costs to continue both the research and
development, and commercialization of its additive product, AAEO5, and its
blended fuel, O2Diesel(TM).

AAE'S FUEL ADDITIVE BUSINESS

AAE is a fuel additive development and marketing company incorporated in
Ireland. Since its inception, AAE began developing a proprietary additive
product designed to enable ethanol to be blended with diesel fuel to produce a
clean burning and efficiently blended diesel fuel. AAE is completing
development, obtaining regulatory approvals as required and beginning
commercialization of its product via its wholly owned regional subsidiaries and
strategic partnerships. AAE's primary products are AAE05 and O2Diesel(TM).

AAE, together with its exclusive North American marketing partner Octel Starreon
LLC, is developing commercial markets for its fuel additive through sales of
O2Diesel(TM) (AAE's branded ethanol-diesel blend) initially in the US and
Canadian markets. O2Diesel(TM) which is now available in certain North American
markets, is formulated using AAE's and Octel Starreon's proprietary additive
technologies and is a stable ethanol-diesel fuel blend with enhanced water and
temperature tolerance. Octel Starreon LLC is a fuel additive manufacturer and
marketer in the United States, and is a joint venture between U.K. based Octel
Corporation and US based Starreon Corporation, both of which are leading
companies in the fuel additive industry.

Tests conducted using O2Diesel(TM) have shown that it displays significantly
reduced emissions of visible smoke, nitrogen oxides, carbon monoxide, and
particulate matter in a range of diesel engine applications.

         Research and Development: AAE and Cognis have an agreement for the
joint development of AAE05 and other co-solvency additive products as well as
joint ownership of patents for such products and product applications. Cognis
has worldwide rights to manufacture, and AAE has the worldwide rights to market
and sell additive products developed under the AEE/Cognis agreement.

Commercialization and Marketing: O2Diesel is focusing its initial
commercialization and marketing activities in the United States and Brazil. The
Company's 5-year plan, assuming adequate financing is available, is to establish
itself simultaneously in North America and Brazil and then to expand - through a
network of strategic alliances to key markets in Asia, South America and Europe
targeting:

     -    Urban truck and bus fleets

     -    Agricultural & construction equipment

     -    Mobile and/or stationary power generators

     -    Railroads

     -    Government fleets: (state, provincial and federal)


                                      3

<PAGE>
AAE'S FUEL ADDITIVE BUSINESS (continued)

         North America (including Mexico and Canada)

North America is the largest and most diverse transportation fuel market in the
world, with total annual consumption of diesel fuel in the range of 98 billion
gallons. Diesel fuel is used in a wide array of urban and highway trucks,
railroads, marine vessels, agricultural and construction equipment, and military
vehicles.

According to a recent U.S. Department of Energy (DOE) estimate, diesel fuel
usage in the US is about 64 billion gallons. Diesel powered vehicles and
equipment are used to transport about 94% of all domestic freight and diesel
fuel is used by the vast majority of heavy-duty vehicles and other equipment
operating throughout the U.S.

Initially, O2Diesel has targeted the three largest diesel fuel markets in the
United States with diminished air quality, high diesel fuel consumption, and
large urban areas. These are: California, Texas, and the Northeastern states.

Supported by federal and state incentives available for fuel ethanol, the
Company estimates that it will be able to price its product to be competitive
with other technologies that provide cleaner burning fuels for the on and off
road market.

MEXICO: Mexico City's extremely polluted plateau prompted government air quality
officials to approach several fuel technology companies, including AAE, to
propose solutions. As a result, successful engine emission testing of
O2Diesel(TM) was completed, leading to an expanded demonstration program which
is expected to commence sometime in 2004.

         South America

BRAZIL: O2Diesel`s commercial rollout in Brazil is expected to be accelerated
through its partnerships with some of Brazil's largest sugar producers and
related industry partners, certain of which the Company has been working with
since inception. O2Diesel anticipates that the first phase of commercialization
will be implemented by the beginning of the second quarter of 2004.

         Asia

PEOPLE'S REPUBLIC OF CHINA: China is a net importer of diesel fuel. Introducing
technology that permits ethanol to be blended with diesel fuel is expected to
reduce China's dependence on petroleum imports. The increased use of ethanol
blended with diesel fuel should act as an incentive to expand ethanol production
as exhibited by China's completion of the world's largest fuel ethanol plants in
Guangxi province.


INDIA:  India has a general shortage of domestically produced diesel fuel
coupled with an abundance of locally produced ethanol feedstock, sugarcane.

THAILAND: Thailand has an active biofuels industry, which has led to the
acceptance of fuel ethanol for use in  its transport and other
sectors.

         European Union

There is minimal fuel ethanol production in the European Union (EU), although
several countries have introduced renewable fuel incentives. These incentives
have motivated the sugar industry and others to consider fuel ethanol production
in the EU. At present, 70% of all transport motor fuel sold in the EU is
imported.

Research and Development: AAE and Cognis have an agreement for the joint
development of co-solvency additive products as well as joint ownership of
patents covering such products. Cognis has worldwide rights to manufacture, and
AAE has the worldwide rights to market and sell such additive products. O2Diesel
anticipates that Cognis will continue research and development efforts on
co-solvency additive products during the next twelve months.


                                      4

<PAGE>
AAE'S FUEL ADDITIVE BUSINESS (continued)

Acquisition of Plant, Property and Equipment: In connection with the Recommended
Offer, O2Diesel committed to use its best efforts to complete a non-brokered
private placement of equity to raise $3,500,000 in a Follow-on Private Placement
to fund the acquisition of a fuel distribution business. As of the date of this
report, O2Diesel had begun the Follow-On Placement, and had also commenced
preliminary negotiations to acquire a fuel distribution business.

Employees: Prior to the Recommended Offer, O2Diesel had no employees. Under the
terms of the Recommended Offer, O2Diesel executed employment agreements with
Alan Rae to be O2Diesel's President and Chief Executive Officer and David Koontz
to be O2Diesel's Chief Financial Officer. The terms of the employment agreements
are described in O2Diesel's current report on Form 8-K filed with the Securities
and Exchange Commission on July 30, 2003. As of September 30, 2003, O2Diesel and
its subsidiaries had 7 employees, including 1 engaged in technical services, 3
engaged in sales and marketing, 1 engaged in business development and regulatory
affairs and 2 executive officers. During the next twelve months, O2Diesel
anticipates that it will hire an additional 11 employees, including 1 technical
services employee, 3 sales and marketing employees, 1 business development
employee, 2 management employees and 5 administrative employees.

O2Diesel anticipates that it will continue to operate at a loss for the
foreseeable future

ITEM 3.      CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. O2Diesel's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of
02Diesel's disclosure controls and procedures (as such term is defined in Rules
13a-15 and 15d-15 under the Exchange Act) as of the end of the period covered by
this quarterly report (the "Evaluation Date"). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, O2Diesel's disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to O2Diesel required to be included in its reports
filed or submitted under the Exchange Act.


CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the most recent
fiscal quarter, there have not been any significant changes in the Company's
internal controls over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect internal
controls over financial reporting.


                                      5

<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS.

None.

ITEM 2.      CHANGES IN SECURITIES.

During the quarter ended on September 30, 2003 O2Diesel received subscriptions
for 1,785,000 shares of its common stock offered in the Private Placement at
$1.50 per share. In addition, the Convertible Note for $4,000,000 issued by the
Company in conjunction with the Private Placement matured on September 30,2003.
Pursuant to the terms of this Note, an amount of $2,322,500 was convertible into
1,548,333 shares of the company's common stock at $1.50 per share. In this same
period, the Company issued 17,234,646 shares of its common stock and subsequent
to September 30, 2003 it issued a further 612,393 shares of its common stock to
complete the acquisition of all the outstanding shares of AAE. The shares of
common stock issued in the Private Placement and to be issued in exchange for
the Convertible Note were issued in reliance upon the exception from the
registration requirements available under Regulation S as promulgated under the
Securities Act. No commissions or fees were paid in connection with the
offerings. Additional information regarding the Company's issuance of
unregistered securities during the past three fiscal years is contained in the
Company's annual reports on Form 10-KSB for the year ended December 31, 2002
under "Item 5. Market for Common Equity and Related Shareholder Matters - Recent
Sale of Unregistered Securities" filed with the United States Securities and
Exchange Commission. The information contained under Item 5. "Market for Common
Equity and Related Shareholder Matters - Recent Sale of Unregistered Securities"
of the Company's annual report on Form 10-KSB for the year ended December 31,
2002 is hereby incorporated by reference to this report.

On July 15, 2003, O2Diesel declared the Recommended Offer unconditional in all
respects. The Offer was made in accordance with Irish law and pursuant to an
exemption from the registration requirements of the Securities Act provided by
Rule 802 thereunder. AAE was a foreign private issuer at the commencement of the
Recommended Offer and no more than 10% of its issued and outstanding share
capital was held by persons resident in the United States. Under the terms of
the Recommended Offer, O2Diesel will issue up to 18,000,000 shares of its common
stock to the shareholders of AAE in exchange for all of the issued and
outstanding equity capital of AAE. As of the date of this report, O2Diesel had
issued 17,847,039 shares of its common stock to AAE shareholders that had
accepted the Recommended Offer or whose shares had been compulsorily acquired in
reliance upon the exemption from the registration requirements of the Securities
Act provided by Rule 802 thereunder. The Recommended Offer transactions were
reported in O2Diesel's Form 8-K filed on July 30,2003,incorporated herein by
reference.


     SUBSEQUENT CHANGES IN SECURITIES

None.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5.  OTHER INFORMATION.

         O2Diesel completed transactions in connection with the Recommended
Offer which were reported in O2Diesel's current report on Form 8-K filed on July
30, 2003.

       In addition to the transactions and terms described above, the
       Recommended Offer had the following material terms:

       The shares of O2Diesel common stock issuable under the Recommended Offer
       are subject to the following restrictions:

       (a)  all shares issued by O2Diesel in connection with the Recommended
          Offer are subject to a 1-year contractual hold period;


                                      6

<PAGE>
Item 5 (continued)

       (b) all AAE shareholders are required to place 10% of the shares issued
       by O2Diesel in the Recommended Offer into escrow for 12 months as
       security for the indemnification obligations of AAE (the "Indemnity
       Escrow"); and

       (c) Certain major AAE shareholders (Anthony Dean-Smith and Quarryside
       Ltd., a trust in which Alan Rae is a beneficiary, collectively, the
       "Major Shareholders") were required to place all of their shares issued
       by O2Diesel in the Recommended Offer into escrow for 18 months as
       security for their respective indemnification obligations to O2Diesel.


       On June 30, 2003, the board of directors took action by written consent,
       effective on the later of the closing of the Recommended Offer or the
       expiration of the 10 day waiting period under Rule 14f-1 of the Exchange
       Act, to expand the board of directors to consist of 6 directors and to
       appoint five persons to fill the newly created vacancies on the board of
       directors: Anthony Dean Smith, Alan Rae and David Koontz were designated
       by the Key Shareholders and Karim Jobanputra and Hendrik Rethwilm were
       designated by O2Diesel's board of directors.

       On July 11, 2003, O2Diesel entered into an Option and Escrow Agreement
       with a shareholder of O2Diesel, under which the shareholder granted
       O2Diesel an option to purchase 1,000,000 shares of Company common stock
       at an exercise price of $0.20 per share. The option is exercisable only
       if AAE enters into an agreement to acquire a fuel distribution business
       within six months and AAE fails to complete the acquisition within eight
       months solely because the Follow-On Private Placement is not completed by
       O2Diesel.

       On August 18, 2003 the Company and BASF Aktiengesellschaft ("BASF")
       signed a Memorandum of Understanding ("MOU") under which it is intended
       that BASF will purchase and market the Company's additive for sale
       outside of NAFTA. Under terms of the MOU, which is effective for 180
       days, the Company and BASF are to develop a joint marketing and technical
       support plan that will run for three years. It is anticipated that BASF
       will use its resources outside of the NAFTA countries to assist the
       Company to expand its penetration of markets in Asia, South America and
       Europe.

       The Company received a letter dated September 23, 2003 from the
       California Air Resources Board ("the Carb Letter") that verified the
       emission reductions available under the Company's O2Diesel(TM) fuel.


                                      7


<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

     (a)  Exhibits

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.        DESCRIPTION

<S>                <C>
  3.1(1)           Articles of Incorporation

  3.2(3)           Articles of Amendment to Change Corporation Name to O2Diesel Corporation

  3.3(1)           Bylaws

  4.1(1)           Specimen Stock Certificate

  4.2(1)           Stock Subscription Agreement

  4.3(2)           $100,000 Promissory Note

 10.1(1)           License Agreement

 10.2(1)           Assignment of License

 10.3(4)           Support Agreement

 10.4(4)           Indemnity Escrow Agreement

 10.5(4)           Option and Escrow Agreement

 10.6(4)           Contribution and Cancellation Agreement (previously filed as Exhibit 4)

 10.7(4)           Waiver Agreement (previously filed as Exhibit 5)

 10.8(4)           Loan Agreement (previously filed as Exhibit 6)

 10.9(4)           Form of Convertible Note (previously filed as Exhibit 7)

 10.10(4)          Form of Employment Agreement between O2Diesel and Alan Rae
                   (previously filed as Exhibit 8)

 10.11(4)          Form of Employment Agreement between O2Diesel and David Koontz
                   (previously filed as Exhibit 9)

 10.12(4)(5)       Cooperation agreement between Cognis and AAE (previously filed as Exhibit 10)

 10.13             Letter dated September 23, 2003 from the California Air Resources Board.

 10.14             Memorandum of Understanding between BASF Aktiengesellschaft and O2Diesel
                   Corporation dated August 18, 2003.

 31.1              Sarbanes Oxley Act of 2002 Rule 302 Certifications

 32.1              Sarbanes Oxley Act of 2002 Rule 906 Certifications

</TABLE>


     (1)  Previously filed as an exhibit to the Company's registration statement
          on Form SB-2 on June 30, 2000, as amended September 19, 2000, November
          3, 2000 and December 22, 2000.
     (2)  Previously filed as an exhibit to the registrant's annual report on
          Form 10-KSB on March 29, 2002.
     (3)  Previously filed as an exhibit to the registrant's current report on
          Form 8-K on June 9, 2003.
     (4)  Previously filed as an exhibit to the registrant's current report on
          Form 8-K on July 30, 2003.
     (5)  O2Diesel has applied for confidential treatment with respect to
          certain portions of this Agreement, which have been omitted, pursuant
          to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


                                      8

<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)

          (b)  Reports on Form 8-K.

     -    O2Diesel filed the following current reports on Form 8-K during the
          quarter ended September 30, 2003:

     -    Current report on Form 8-K filed on July 14, 2003 related to the
          declaration of Recommended Offer unconditional with respect to
          acceptances.

     -    Current report on Form 8-K filed on July 16, 2003 related to the
          declaration of Recommended Offer unconditional in all respects.

     -    Current report on Form 8-K filed on July 16, 2003 related to the
          initial closing of Recommended Offer.

     -    Current report on Form 8-K/A filed on September 29, 2003 related to
          the change of control of O2Diesel pursuant to the acquisition of AAE
          Technologies International, Plc.


                                      9


<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.


                                             O2DIESEL CORPORATION
                                             (Registrant)


Date:   November 19, 2003                      By:  /s/ Alan Rae
                                             ------------------------------
                                             Alan Rae
                                             Chief Executive Officer
                                             (Principal Executive Officer)

Date:   November 19, 2003                     By:  /s/ David Koontz
                                             ------------------------------
                                             David Koontz
                                             Chief Financial Officer
                                             (Principal Financial Officer)



                                      10