U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549



                                   FORM 10QSB



 x       QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
         PERIOD ENDED DECEMBER 31, 1998

         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
         FROM________ TO _______________


                         Commission file number 0-25177


                       Advanced Engine Technologies, Inc. 
                       ---------------------------------- 
        (Exact name of small business issuer as specified in its charter)


              Colorado                                      84-1358194
              --------                                      ----------
    (State or other jurisdiction of                       (IRS Employer
    incorporation or organization)                     Identification No.)


                   9909 Osuna Road NE, Albuquerque, NM 87111 
                   ----------------------------------------- 
               (Address of principal executive offices) (Zip Code)

                                 (505) 323-7341
                                 --------------
                (Issuer's telephone number, including area code)


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  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. Yes No x

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. December 31, 1998 - 21,925,000 shares
of common stock.

Transitional Small Business Disclosure Form      Yes             No    x   


<PAGE>


Part I.       Financial Information

Item 1.       Financial Statements

                                              ADVANCED ENGINE TECHNOLOGIES, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)

                                                               FINANCIAL REPORT

                                                              DECEMBER 31, 1998



<PAGE>



                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)









                                    CONTENTS

                                                                      Page

ACCOUNTANTS' REPORT                                                     1

FINANCIAL STATEMENTS

   Balance Sheet                                                        2

   Statements of Operations                                             3

   Statement of Stockholders' Equity                                    5

   Statements of Cash Flows                                             6

   Notes to Financial Statements                                        8




<PAGE>


Neff & Company LLP


                               Accountants' Report



Advanced Engine Technologies, Inc.
(A Development Stage Company)


We have compiled the accompanying balance sheet of Advanced Engine Technologies,
Inc. (a subsidiary  of OX2 Engine  (Distribution)  Ltd. and a development  stage
company) as of  December  31, 1998 and the  related  statements  of  operations,
changes  in  stockholders'  equity and cash  flows for the  quarter  and the six
months  ended  December  31, 1997 and  December  31,  1998,  and the period from
September 23, 1996  (inception)  through  December 31, 1998, in accordance  with
Statements  on  Standards  for  Accounting  and  Review  Services  issued by the
American Institute of Certified Public Accountants.

A  compilation  is limited to  presenting  in the form of  financial  statements
information  that is the  representation  of management.  We have not audited or
reviewed the accompanying financial statements and, accordingly,  do not express
an opinion or any other form of assurance on them.





/s/ Neff & Company LLP


Albuquerque, New Mexico
January 22, 1999














CERTIFIED PUBLIC ACCOUNTANTS . 7001 PROESPECT PLACE NE . ALBUQUERQUE, NM  87110
                       (505) 883-6612 . FAX (505) 884-3409




                                      -1-
<PAGE>



ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December  31, 1998



ASSETS

CURRENT ASSETS
    Cash                                                   $   285,841
    Prepaid expenses                                            15,000
                                                           -----------
           Total current assets                                300,841

FIXED ASSETS
    Equipment  and furniture                                    35,503
    Less accumulated depreciation                               (4,141)
           Total fixed assets                                   31,362

INTANGIBLE ASSETS
    Patents, copy rights and designs, net of
        accumulated amortization of $729                        43,021
                                                           -----------

           Total assets                                    $   375,224
                                                           ===========


LIABILITIES AND STOCKHOLDERS' EQUITY

COMMITMENTS AND CONTINGENCIES (Note 3)

STOCKHOLDERS' EQUITY
    Common stock-50,000,000 shares authorized,
    21,925,000 issued and outstanding; $.0001 value        $     2,192

    Additional paid-in capital                               1,574,558

    Deficit accumulated during the development stage        (1,201,526)
                                                           -----------

Total liabilities and stockholders' equity                 $   375,224
                                                           ===========


See accompanying notes and accountants' report.







                                      -2-
<PAGE>



ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Six Months Ended December 31, 1998 and 1997 and the
Period From September 23, 1996 (Inception)
Through December 31, 1998



                                                                     9/23/96
                                                                   (Inception)
                                                                     Through
                                           1998          1997        12/31/98
                                           ----          ----        --------

Operating expenses                     $   210,061       163,135       708,345

Research and development expenses          525,000             -       525,000
                                       ---------------------------------------

Income (loss) from operations             (735,061)     (163,135)   (1,233,345)

Interest income                              7,403        10,977        31,819
                                       ---------------------------------------

Net loss                               $  (727,658)     (152,158)   (1,201,526)
                                       =======================================


Basic net loss per share               $    (0.034)       (0.007)       (0.059)
                                       =======================================


Weighted average number of common
    shares outstanding                  21,654,167    21,366,201    20,506,319
                                       =======================================




See accompanying notes and accountants' report.









                                      -3-
<PAGE>


ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS (CONTINUED)
Quarter Ended December 31, 1998 and 1997



                                                   1998             1997
                                                   ----             ----

Operating expenses                             $    101,782          50,906

Research and development expenses                   525,000               -
                                               ----------------------------

Income (loss) from operations                      (626,782)        (50,906)

Interest income                                       2,443           6,624
                                               ----------------------------

Net loss                                       $   (624,339)        (44,282)
                                               ============================


Basic net loss per share                       $     (0.029)         (0.002)
                                               ============================


Weighted average number of common
    shares outstanding                           21,708,333      21,509,867
                                               ============================




See accompanying notes and accountants' report.











                                      -4-
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
Period From September 23, 1996 (Inception)
Through December 31, 1998

<TABLE>
<CAPTION>

                                                                          Equity
                                                                         (Deficit)
                                                                        Accumulated
                                                          Additional    During the
                                        Common Stock        Paid-in     Development
                                   Shares      Amount       Capital        Stage        Total
                                   ------      ------       -------        -----        -----
<S>                              <C>          <C>         <C>           <C>              <C>
Issuance of common stock
    to parent corporation for
    license rights (Note 3)      20,000,000   $  2,000            -              -         2,000

Issuance of common stock
    for services (Note 3)           600,000         60        5,940              -         6,000

Issuance of common stock
    for cash (Note 5)               499,200         50      499,150              -       499,200

Net loss                                  -          -            -       (164,233)     (164,233)
                                ----------------------------------------------------------------

Balance, June 30, 1997           21,099,200      2,110      505,090       (164,233)      342,967

Issuance of common stock
    for cash (Note 5)               500,800         50      500,750              -       500,800

Net loss                                  -          -            -       (309,635)     (309,635)
                                ----------------------------------------------------------------

Balance, June 30, 1998           21,600,000      2,160    1,005,840       (473,868)      534,132

Net loss                                  -          -            -       (103,319)     (103,319)
                                ----------------------------------------------------------------

Balance, September 30, 1998      21,600,000      2,160    1,005,840       (577,187)      430,813

Issuance of stock for assets
    and services (Note 5)           325,000         32      568,718              -       568,750

Net loss                                  -          -            -       (624,339)     (624,339)
                                ----------------------------------------------------------------

Balance, December 31, 1998       21,925,000   $  2,192    1,574,558     (1,201,526)      375,224
                                ================================================================
</TABLE>

See accompanying notes and accountants' report.


                                      -5-
<PAGE>


ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1998 and 1997
and the Period From September 23, 1996 (Inception)
Through December 31, 1998



                                                                     9/23/96
                                                                   (Inception)
                                                                     Through
                                                1998        1997     12/31/98
                                                ----        ----     --------

Reconciliation of net losses to net cash 
  provided by operations:
    Net loss                                  $(727,658)  (152,158) (1,201,526)
    Depreciation and amortization                 3,068          -       4,870
    Issuance of common stock for
      assets and services                       525,000          -     533,000
Changes in current assets and liabilities:
    Stock subscriptions receivable                   -      50,000           -
    Prepaid expenses                            (15,000)         -     (15,000)
    Accounts payable                            (31,283)         -           -
                                              --------------------------------
       Net cash flows applied to
         operating activities                  (245,873)  (102,158)   (678,656)
                                              --------------------------------

Cash flows from investing activities:
    Equipment purchases                         (13,721)    (7,166)    (35,503)
                                              --------------------------------

Cash flows from financing activities:
    Issuance of common stock                          -    456,208   1,000,000
    Loan proceeds                                     -          -      50,000
    Loan payments                                     -          -     (50,000)
                                              --------------------------------
       Net cash flows provided by
         financing activities                         -    456,208   1,000,000
                                              --------------------------------

Net increase (decrease) in cash                (259,594)   346,884     285,841

Cash at beginning of period                     545,435    323,022           -
                                              --------------------------------

Cash at end of period                         $ 285,841    669,906     285,841
                                              ================================


See accompanying notes and accountants' report.


                                      -6-
<PAGE>


ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
Quarter Ended December 31, 1998 and 1997



                                                         1998         1997
                                                         ----         ----

Reconciliation of net losses to net cash 
  provided by operations:
    Net loss                                          $(624,339)     (44,282)
    Depreciation and amortization                         2,167            -
    Issuance of common stock for
      assets and services                               525,000            -
Changes in current assets and liabilities:
    Prepaid expenses                                    (15,000)           -
                                                      ----------------------
      Net cash flows applied to
        operating activities                           (112,172)     (44,282)
                                                      -----------------------

Cash flows from investing activities:
     Equipment purchases                                (12,892)        (371)
                                                      ----------------------

Cash flows from financing activities:
     Issuance of common stock                                 -      121,000
                                                      ----------------------

Net increase (decrease) in cash                        (125,064)      76,347

Cash at beginning of period                             410,905      593,559
                                                      ----------------------

Cash at end of period                                 $ 285,841      669,906
                                                      ======================





See accompanying notes and accountants' report.







                                      -7-
<PAGE>


ADVANCED ENGINE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998



NOTE 1.  NATURE OF BUSINESS

Advanced  Engine  Technologies,  Inc. (the Company),  a subsidiary of OX2 Engine
(Distribution)  Ltd.,  was  incorporated  under the laws of  Colorado  and began
operations on September  23, 1996.  The Company was formed to acquire the rights
to manufacture, distribute and market an OX2 Engine combustion engine throughout
the United States,  Canada and Mexico.  On October 18, 1996 the Company  entered
into  a  contract  with  OX2  Engine   (Distribution)   Ltd.,  (OX2)  a  company
incorporated in the Republic of Vanatu,  whereby the Company acquired the rights
to manufacture, distribute and market the OX2 combustion engine. As part of this
contract  the Company  issued  20,000,000  shares of its common stock and was to
issue an additional  19,000,000  upon the  completion of certain tests (see Note
3).  In  addition,  OX2 has the  right to  appoint  two of the  Company's  three
directors.  As of December 31, 1998, OX2 owned  approximately  62 percent of the
Company's outstanding shares. Accordingly, the accompanying financial statements
represent the separate financial statements of a subsidiary company.

As of December 31, 1998, the Company's operations consisted of obtaining capital
and marketing the OX2 combustion engine.  Management does not expect to generate
significant sales revenue until 1999. Accordingly,  planned principal operations
have not commenced and the Company is a development stage enterprise.


NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents.  Cash and cash equivalents  include all cash balances
and highly liquid debt instruments with an original  maturity of three months or
less. The Company's cash is deposited in a Colorado financial institution and is
insured only up to $100,000 by the Federal Deposit Insurance Corporation.

Fixed  Assets.  Fixed  assets  are  stated  at  cost.  Depreciation  expense  is
calculated using the straight-line method over the estimated useful lives of the
assets, which range from 5 to 10 years.

Intangible Assets. Intangible assets are amortized on a straight-line basis over
five years. The Company annually assesses the  recoverability of the cost of its
intangible assets based on a review of projected undiscounted cash flows related
to the intangible asset.

Income  Taxes.  The Company  accounts for its income  taxes using the  liability
method.  Under this method,  deferred tax  liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and  liabilities  using enacted tax rates in effect in the years
in which the  differences  are  expected to reverse.  The Company has provided a
valuation   allowance  to  offset  the  benefit  of  any  net   operating   loss
carryforwards or deductible temporary differences.


                                      -8-
<PAGE>


NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (CONTINUED)

Advertising   Costs.  The  Company  expenses   advertising  costs  as  incurred.
Advertising costs amounted to $135 and $4,661 for the quarter ended December 31,
1998 and 1997,  respectively,  and $334 and  $18,495  for the six  months  ended
December 31, 1998 and 1997,  respectively,  and $88,690 from  September 23, 1996
(inception) to December 31, 1998.

Loss per share.  Loss per share is computed on the basis of the weighted average
number of common  shares  outstanding  during the year and did not  include  the
effect of potential  common stock as their  effect  would be  antidilutive.  The
numerator  for the  computation  is the net  loss  and  the  denominator  is the
weighted average shares of common stock outstanding.

Use of Estimates.  The  preparation of financial  statements in conformity  with
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
reporting period. Actual results could differ from those estimates.


NOTE 3.  RELATED PARTY TRANSACTIONS

In April 1996, the Company issued a convertible note to a director in the amount
of $50,000. This note was repaid in September of 1997.

The Company paid consulting fees to its President, who is also a shareholder, in
the amount of $170,228 from September 23, 1996  (inception) to December 31, 1998
including  $22,030 and $19,920 for the quarter ended December 31, 1998 and 1997,
respectively, and $41,530 and $49,870 for the six months ended December 31, 1998
and 1997, respectively.

The Company paid  administrative  fees and reimbursed expenses to a company that
is owned by one of its  shareholders in the amount of $28,884 from September 23,
1996  (inception)  to  December  31,  1998  including  $4,061 and $6,336 for the
quarter ended December 31, 1998 and 1997,  respectively,  and $10,167 and $7,649
for the six months ended December 31, 1998 and 1997, respectively.

In October 1996, the Company issued 600,000 shares of its common stock to one of
its  founders in  exchange  for his  services in  organizing  the  Company.  The
transaction  was  recorded at the  estimated  fair market  value of the services
provided ($6,000), as this was more readily determinable.





                                      -9-
<PAGE>


NOTE 3.  RELATED PARTY TRANSACTIONS (CONTINUED)

Also  in  October   1996,   the  Company   entered  into  a  contract  with  OX2
(Distributions)   Ltd.  (OX2)  whereby  the  Company   acquired  the  rights  to
manufacture,  distribute  and  market  the OX2  combustion  engine in the United
States, Canada and Mexico for the life of the world wide patent. As part of this
contract  the Company  issued  20,000,000  shares of its common stock and was to
issue an  additional  19,000,000  upon the  completion  of  emission  tests.  In
December  1998,  both  parties  agreed to cancel  the  requirement  to issue the
additional 19,000,000 shares. The Company is also to pay a royalty of 15 percent
of the gross  proceeds of its revenue in its  territory and 75 percent for sales
outside  the  territory.  In  addition,  OX2 has the right to appoint two of the
Company's three directors.  As of December 31, 1998, OX2 owned  approximately 62
percent of the Company's  outstanding  shares and OX2 had appointed one director
who is also the Company's President.


NOTE 4. INCOME TAXES

At  December  31,  1998  the  Company  had  deferred  tax  assets  amounting  to
approximately  $460,000.  The deferred tax assets  consist  primarily of the tax
benefit of net operating loss  carryforwards and are fully offset by a valuation
allowance of the same amount.

The net  change in the  valuation  allowance  for  deferred  tax  assets  was an
increase of approximately  $240,000 and $18,000 for the quarters ending December
31, 1998 and 1997, respectively. The net change is due primarily to the increase
in net operating loss carryforwards.

At  June  30,  1998  the  Company  had  net  operating  loss   carryforwards  of
approximately  $1,150,000  available to offset future state and federal  taxable
income. These carryforwards will expire in 2017 to 2019 for federal tax purposes
and 2002 to 2004 for state tax purposes.


NOTE 5.  COMMON STOCK

The Company  offered one million  shares of its common stock at the price of one
dollar per share in an offering  memorandum pursuant to Rule 504 of Regulation D
of the  Securities  Act of 1933.  The Company  sold one  million  shares on this
offering.

On August 6, 1998,  the Company  entered  into a joint  venture  agreement  with
Carroll  Shelby under which the Company is to issue 300,000 shares of restricted
common stock in exchange for the design and  production of a street vehicle that
utilizes the OX2 combustion  engine.  These shares were issued in November 1998.






                                      -10-
<PAGE>


NOTE 5.   COMMON STOCK (CONTINUED)

They were valued at $525,000 and expensed as research and development  costs. In
addition, the Company will issue an additional 250,000 shares upon completion of
the vehicle utilizing the OX2 combustion engine.

In  November  1998 the  Company  issued  25,000  shares of  restricted  stock to
purchase  patents,  copyrights,  designs  and  prototypes  to be used  with  the
Company's technology.  This transaction was valued at $43,750 and recorded as an
intangible asset.


Item 2.       Management's Discussion and Analysis or Plan of Operation

The Company plans to continue the development of prototypes and marketing during
the remainder of the 1999 fiscal year. Activities will include demonstrations to
prospective   original  equipment   manufacturers  of  products  using  internal
combustion engines, work with its joint venture partner to develop an engine for
automobile  use and  developing  additional  joint venture  partners in order to
market the engine.  While  prototypes of the OX2 engine  exist,  there can be no
assurance  the  Company  will be  successful  with its  marketing  efforts,  the
development of its joint  ventures or in the ultimate  development of the engine
for commercial applications.

The Company's cash flow  requirements  to fund these  activities and the general
operations of the Company total approximately $235,000 and include approximately
$83,000 for consulting and $40,000 for equipment, among other costs. The Company
expects to fund these costs with its  current  cash  reserves  of  approximately
$285,000.  The  Company's  cost  estimates  do not  include  provisions  for any
contingencies  or  unexpected  expenses  that  may  arise  or any  unanticipated
increases in costs. As a result, the Company's cash reserves may not be adequate
to cover the actual costs of operations  during the remainder of the 1999 fiscal
year.  Although  not  anticipated,  arrangements  have  been  made for a private
placement if required.

The Company's  objective is to sign its first  contracts  for the  production of
small  engines by the end of fiscal  year 1999 and  expects as a result to begin
generating  revenue.  There are currently no signed  contracts that will produce
revenue  and  there  can  be no  assurance  management  will  be  successful  in
negotiating  these contracts.  Should  negotiation of these contracts not occur,
the Company will require additional capital to continue its operations.

In accordance  with the patent license  agreement with its parent,  the research
and  development  required  to bring the  product to  commercial  production  is
provided by the Company's parent. In addition,  development is undertaken by its
joint venture partner as well. As a result, the Company does not expect to carry
out or fund any research and development.

The Company does not currently  have any  employees  other than the officers nor
does it expect to add any in the next year.




                                      -11-
<PAGE>

Part II.  Other Information

Item 1.   Legal Proceedings
          None

Item 2.   Changes in Securities
          None

Item 3.   Defaults Upon Senior Securities
          None

Item 4.   Submission of Matters to a Vote of Security Holders
          None

Item 5.   Other Information
          None

Item 6.   Exhibits and Reports on Form 8-K

          (a)  Exhibits:  14.2 Amendment to License Agreement with OX2 Engine

                          27  Financial Data Schedule

          (b)  Reports on Form 8-K:  None



In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.




          
Date:  February 16, 1999                  By:   /s/ Murray Bailey
                                          -------------------------------------
                                                     President
                                           (Principal Executive, Financial
                                               and Accounting Officer)








                                      -12-