<PAGE>

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

                                  FORM 10-QSB

(Mark One)

[X]  Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

For the quarterly period ended March 31, 2001

[_]  Transition report under Section 13 or 15(d) of the Securities Exchange Act

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           (I.R.S. Employer
         Incorporation or Organization)           Identification No.)

         11150 W. Olympic Boulevard, Suite 1050 Los Angeles, CA 90064
         ------------------------------------------------------------
                   (Address of Principal Executive Offices)

                                 (310) 914-1849
                ------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

         _______________________________________________________________
         (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 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  X         No ___
            ---
<PAGE>

                    APPLICABLE ONLY TO ISSUERS INVOLVED IN
                       BANKRUPTCY PROCEEDINGS DURING THE
                             PRECEDING FIVE YEARS

     Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.

         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:

     33,150,000 shares of common stock, $0.001 par value per share, as of March
31, 2001.

     Transitional Small Business Disclosure Format (check one):

         Yes             No  x
<PAGE>

                         Part I. FINANCIAL INFORMATION

Item 1.   Financial Statements.

                                      -2-
<PAGE>

                                              ADVANCED ENGINE TECHNOLOGIES, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                            FINANCIAL STATEMENTS
                                                         AS OF JUNE 30, 2000 AND
                                                  MARCH 31, 2001 (UNAUDITED) AND
                                             FOR THE THREE AND NINE MONTHS ENDED
                                             MARCH 31, 2001 AND 2000 (UNAUDITED)

                                      -3-
<PAGE>

                                              ADVANCED ENGINE TECHNOLOGIES, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                                        CONTENTS
                                    June 30, 2000 and March 31, 2001 (unaudited)

================================================================================

                                                                          Page
FINANCIAL STATEMENTS

     Balance Sheets                                                         5

     Statements of Operations                                               6

     Statements of Cash Flows                                             7 - 8

     Notes to Financial Statements                                        9 - 14

                                      -4-
<PAGE>

                                              ADVANCED ENGINE TECHNOLOGIES, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                                  BALANCE SHEETS
                                    June 30, 2000 and March 31, 2001 (unaudited)

--------------------------------------------------------------------------------

                                    ASSETS

<TABLE>
<CAPTION>
                                                                                   March 31,           June 30,
                                                                                      2001               2000
                                                                                ---------------    ----------------
                                                                                 (unaudited)
<S>                                                                            <C>                <C>
Current assets
     Cash and cash equivalents                                                  $       455,932    $      1,026,990
     Due from related parties                                                            43,295              22,768
     Prepaid expenses                                                                     5,192              26,000
                                                                                ---------------    ----------------

         Total current assets                                                           504,419           1,075,758

Property and equipment, net                                                              64,156              87,684
Patent rights, net of accumulated amortization of $291,482
     (unaudited) and $177,353                                                         1,230,237           1,344,365
Patent, copyrights, and designs, net of accumulated
     amortization of $20,417 (unaudited) and $13,854                                     23,333              29,896
                                                                                ---------------    ----------------

                      Total assets                                              $     1,822,145    $      2,537,703
                                                                                ===============    ================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

     Accounts payable and accrued expenses                                      $       101,943    $        120,359
                                                                                ---------------    ----------------

         Total current liabilities                                                      101,943             120,359
                                                                                ---------------    ----------------

Commitments and contingencies

Stockholders' equity
     Common stock, $0.001 par value
         50,000,000 shares authorized
         33,150,000 (unaudited) and 22,950,000 shares
              issued and outstanding                                                     33,150              22,950
     Subscription receivable                                                        (10,000,000)                  -
     Additional paid-in capital                                                      16,231,100           5,941,300
     Deficit accumulated during the development stage                                (4,544,048)         (3,546,906)
                                                                                ---------------    ----------------
                  Total stockholders' equity                                          1,720,202           2,417,344
                                                                                ---------------    ----------------

                      Total liabilities and stockholders' equity                $     1,822,145    $      2,537,703
                                                                                ===============    ================
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      -5-
<PAGE>

                                              ADVANCED ENGINE TECHNOLOGIES, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                        STATEMENTS OF OPERATIONS
     For the Three and Nine Months Ended March 31, 2001 and 2000 (unaudited) and
     for the Period from September 23, 1996 (Inception) to March 31, 2001
     (unaudited)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                         For the
                                                                                       Period from
                                   For the                          For the            September 23,
                              Three Months Ended               Nine Months Ended            1996
                                   March 31,                       March 31,          (Inception) to
                        ----------------------------    ----------------------------     March 31,
                             2001           2000             2001           2000            2001
                        ------------    ------------    ------------    ------------    ------------
                         (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)
<S>                     <C>             <C>             <C>             <C>           <C>
Expenses

   Operating            $    206,744    $    139,105    $    601,215    $    872,561    $  2,399,646
   Research and
     development              48,523         476,863         435,335         476,863       2,301,711
                        ------------    ------------    ------------    ------------    ------------
       Total expenses        255,267         615,968       1,036,550       1,349,424       4,701,357
                        ------------    ------------    ------------    ------------    ------------

Loss from
   operations               (255,267)       (615,968)     (1,036,550)     (1,349,424)     (4,701,357)

Other income
   Interest income             8,336          30,628          39,407          49,319         157,308
                        ------------    ------------    ------------    ------------    ------------
Net loss                $   (246,931)   $   (585,340)   $   (997,143)   $ (1,300,105)   $ (4,544,049)
                        ============    ============    ============    ============    ============

Basic and diluted
   loss per share       $      (0.01)   $      (0.03)   $      (0.03)   $      (0.06)   $      (0.20)
                        ============    ============    ============    ============    ============

Weighted-average
   shares
   outstanding            33,150,000      22,937,500      30,667,518      22,829,166      23,004,070
                        ============    ============    ============    ============    ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      -6-
<PAGE>

                                             ADVANCED ENGINE TECHNOLOGIES, INC.
                                                  (A DEVELOPMENT STAGE COMPANY)
                                                       STATEMENTS OF CASH FLOWS
    For the Three and Nine Months Ended March 31, 2001 and 2000 (unaudited) and
for the Period from September 23, 1996 (Inception) to March 31, 2001 (unaudited)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                      For the
                                                                                                    Period from
                                          For the                            For the                September 23,
                                     Three Months Ended                   Nine Months Ended             1996
                                          March 31,                          March 31,             (Inception) to
                             ---------------------------------  ---------------------------------     March 31,
                                   2001              2000             2001              2000            2001
                             ---------------   ---------------  ----------------  ---------------  ----------------
                               (unaudited)       (unaudited)       (unaudited)      (unaudited)       (unaudited)
<S>                          <C>               <C>               <C>              <C>              <C>
Cash flows from
operating activities
  Net loss                    $ (246,931)       $ (585,340)      $ (997,143)      $ (1,300,105)     $ (4,544,049)
  Adjustments to
  reconcile net loss to
  net cash used in
  operating activities
    Depreciation and
      amortization                48,569            49,687          144,220            149,061           382,064
    Issuance of
      common stock
      for assets and
      services                         -            87,500          300,000            387,500         1,264,250
    (Increase)
    decrease in
      Due from related
        parties                  (22,295)          (19,664)         (17,295)           (19,664)          (43,295)
      Prepaid expenses                 -            (1,000)          17,576              7,216            (5,192)
    Increase
    (decrease) in
      Accounts
        payable and
        accrued
        expenses                 (35,238)                -          (18,416)            (2,881)          101,943
                              ----------        ----------       ----------         ----------        ----------

Net cash used in
operating activities            (255,895)         (468,817)        (571,058)          (778,873)       (2,844,279)
                              ----------        ----------       ----------         ----------        ----------
</TABLE>


The accompanying notes are an integral part of these financial statements.

                                      -7-
<PAGE>

                                              ADVANCED ENGINE TECHNOLOGIES, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                        STATEMENTS OF CASH FLOWS

 For the Three and Nine Months Ended March 31, 2001 and 2000 (unaudited) and
 for the Period from September 23, 1996 (Inception) to March 31, 2001
 (unaudited)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                              For the
                                                                                            Period from
                                   For the                            For the               September 23,
                             Three Months Ended                   Nine Months Ended             1996
                                   March 31,                          March 31,            (Inception) to
                        -----------------------------    -----------------------------        March 31,
                             2001          2000             2001              2000              2001
                        ------------     ------------    -------------    ------------      ------------
                         (unaudited)      (unaudited)      (unaudited)    (unaudited)        (unaudited)
<S>                        <C>          <C>              <C>              <C>               <C>
Cash flows from
investing activities
   Purchase of
     intangible asset    $         -    $         -      $           -    $    (96,592)     $ (1,565,469)
   Purchase of property
     and equipment                 -        (12,332)                 -         (18,099)         (134,320)
                        -------------    ------------    -------------    ------------      ------------

Net cash used in
investing activities               -        (12,332)                 -        (114,691)       (1,699,789)
                        -------------    ------------    -------------    ------------      ------------

Cash flows from
financing activities
   Proceeds from
     issuance of
     common stock                  -              -                  -       2,000,000         5,000,000
                        -------------    ------------    -------------    ------------      ------------

Net cash provided by
financing activities               -              -                  -       2,000,000         5,000,000
                        -------------    ------------    -------------    ------------      ------------

Net increase (decrease)
in cash                     (255,895)      (481,149)         (571,058)       1,106,436           455,932

Cash, beginning of
period                       711,827      2,149,380         1,026,990          561,795                 -
                        -------------    ------------    -------------    ------------      ------------

Cash, end of period      $   455,932    $ 1,668,231      $    455,932    $   1,668,231      $    455,932
                        =============    ============    =============    ============      ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      -8-
<PAGE>

ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001

NOTE 1 - DESCRIPTION OF BUSINESS

     Advanced Engine Technologies, Inc. (the "Company") 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
combustion engine throughout the United States, Canada, and Mexico. On October
18, 1996, the Company entered into a contract with OX2 Engine (Distribution), a
company incorporated in the laws of the Republic of Vanuatu, whereby the Company
acquired the rights to manufacture, distribute, and market the OX2 combustion
engine. Performance under this contract required the Company to immediately
issue 20,000,000 shares of its common stock, plus an additional 19,000,000
shares upon the completion of certain emission tests. In December 1999, both
parties agreed to cancel the requirement to issue the additional 19,000,000
shares. As of June 30, 1998, OX2 Engine (Distribution) owned approximately 62%
of the Company's outstanding shares.

         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 than the fair market
value of the stock.

         In addition, in October 1996, the Company entered into a contract with
OX2 Engine (Distribution), 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 worldwide patent. As part of this
contract, the Company issued 20,000,000 shares of its common stock to OX2 Engine
(Distribution) and was to issue an additional 19,000,000 upon the completion of
emission tests. The Company was also to pay a royalty of 15% of the gross
proceeds of its revenue. In December 1998, both parties agreed to rescind and
terminate the requirement to issue the additional 19,000,000 shares. In May
1999, the Company acquired the worldwide patent and manufacturing rights to the
OX2 engine in a four-party agreement between the Company, OX2 Engine
(Distribution), OX2 (Intellectual Property), and Advanced Engine Technology PTY
Ltd. The Company has assumed responsibility for patent maintenance and
enforcement, as well as engine development, manufacturing, marketing and sales
activities.

     A dispute arose related to the shares originally owned by OX2 Engine
(Distribution). As a result, two lawsuits were filed which included the Company
as a defendant. The suits seek to have the disputed shares surrendered to the
Company and the stock records amended to reflect OX2 Engine (Distribution) as
the beneficial owner of these shares. In August 2000, the Company accepted the
surrender of 10,713,238 shares of its common stock, which it subsequently
deposited with the court. As a result, the Company's legal counsel expects the
Company to be dismissed from the litigation.

     In May 1999, the Company acquired the worldwide patent rights for the OX2
engine pursuant to a written agreement with OX2 Engine (Distribution), OX2
(Intellectual Property), and Advanced Engine Technology PTY Ltd. The Company
has assumed responsibility for worldwide patent maintenance and enforcement, as
well as engine development, manufacturing, marketing, and sales activities.

     As of March 31, 2001, the Company's operations consisted of marketing,
testing, and developing the OX2 combustion engine for commercial applications
and raising any necessary capital investments. Management does not expect to
generate significant sales revenue during the year ending June 30, 2001.
Accordingly, planned principal operations have not commenced, and the Company is
a development stage enterprise.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern Issues
--------------------

     In connection with its June 30, 2000 financial statements, the Company
received a report from its independent auditors that included an explanatory
paragraph which described the Company's uncertainty to continue as a going
concern. These consolidated

                                      -9-
<PAGE>

ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

financial statements contemplate the ability to continue as such and do not
include any adjustments that might result from this uncertainty.

Interim Unaudited Financial Information
---------------------------------------

         The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to fairly state the Company's financial
position, the results of operations, and cash flows for the periods presented.
The results of operations for the nine months ended March 31, 2001 are not
necessarily indicative of results for the entire fiscal year ending June 30,
2001.

         The information with respect to the nine months ended March 31, 2001
and 2000 is unaudited.

Development Stage Enterprise
----------------------------

         The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." The Company is devoting substantially all of its
present efforts to establish a new business, and its planned principal
operations have not yet commenced. All losses accumulated since inception have
been considered as part of the Company's development stage activities.

Comprehensive Income
--------------------

         The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did not have
any of the items of comprehensive income in any period presented.

Impairment of Long-Lived Assets
-------------------------------

         The Company reviews long-lived assets to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset

                                     -10-
<PAGE>

ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, the Company would recognize an impairment loss based on the estimated
fair value of the asset.

Stock-Based Compensation
------------------------

     SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current implicit
value accounting method specified in Accounting Principles Bulletin ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," to account for stock
-based compensation issued to employees. The Company has elected to use the
intrinsic value based method and has disclosed the pro forma effect of using the
fair value based method to account for its stock-based compensation.

Income Taxes
------------

     The Company uses the asset and liability method of accounting for income
taxes. The asset and liability method accounts for deferred income taxes by
applying enacted statutory rates in effect for periods in which the difference
between the book value and the tax bases of assets and liabilities are scheduled
to reverse. The resulting deferred tax asset or liability is adjusted to reflect
changes in tax laws or rates. Because the Company has incurred losses from
operations, no benefit is realized for the tax effect of the net operating loss
carryforward and software development costs capitalized for tax purposes due to
the uncertainty of its realization.

Loss per Share
--------------

     Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. Because the Company has
incurred net losses, basic and diluted loss per share are the same.

                                     -11-
<PAGE>

ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NOTE 3 - STOCKHOLDERS' EQUITY

         The Company offered 1,000,000 shares of its common stock at $1 per
share in an offering memorandum pursuant to Rule 504 of Regulation D of the
Securities Act of 1933. The Company sold 499,200 shares as of June 30, 1997 and
500,800 during the year ended June 30, 1998. As of June 30, 1997, the Company
had stock subscribed in the amount of $74,000 that was recorded as a receivable
and subsequently received during the year ended June 30, 1998.

         On August 6, 1998, the Company entered into a joint venture agreement
with Carroll Shelby under which the Company was to issue 300,000 shares of
restricted common stock in exchange for services related to possible future
applications of the engine in a street vehicle that utilizes the OX2 combustion
engine. These shares were issued in November 1998. 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 additional tasks relating
to applications in a vehicle utilizing the OX2 combustion engine. Subsequent to
this transaction, Carroll Shelby was appointed to the Board of Directors.

         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.

         In April 1999, the Company issued 400,000 shares of common stock for
$2,000,000 in a private placement. During the third quarter of 1999, the Company
issued an additional 400,000 shares of common stock to the same party for
$2,000,000 in a private placement.

         In June 1999, the Company agreed to issue 1,000,000 shares of its
common stock to the University of California Riverside Foundation. The stock is
to be issued in five annual installments of $200,000 shares each. The first and
second installments were

                                     -12-
<PAGE>

ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001


NOTE 3 - STOCKHOLDERS' EQUITY (Continued)

issued in July 1999 and 2000. The donated stock is to provide an endowment for
research funds for the College of Engineering Center for Environmental Research
and Technology.

         In January 2000, the Company issued 25,000 shares of common stock in
exchange for services related to the performance testing of the OX2 engine. This
transaction was valued at $87,500 and was charged to expense.

         In August 2000, the Company entered into a subscription agreement with
a current shareholder to issue 10,000,000 shares at $1 per share in a private
placement. On September 6, 2000, the Company issued the stock under subscription
in exchange for an irrevocable letter of credit in the amount of $10,000,000.
The Board of Directors may draw on this letter of credit at its discretion. No
interest is being earned at March 31, 2001.

         In addition, in August 2000, the Company adopted a stock option plan
and reserved 5,000,000 shares for the plan. As of March 31, 2001, no stock
options had been granted.

NOTE 4 - RELATED PARTY TRANSACTIONS

         The Company paid consulting fees to its former President, who is also a
stockholder and former director, in the amount of $293,503 (unaudited) for the
period from September 23, 1996 (inception) to March 31, 2001, including $29,945
(unaudited) for the three months ended March 31, 2001, and $3,200 (unaudited)
and $69,725 (unaudited) for the nine months ended March 31, 2001 and 2000,
respectively.

         The Company paid administrative fees and reimbursed expenses to a
company that is owned by one of its stockholders in the amount of $117,693
(unaudited) for the period from September 23, 1996 (inception) to March 31,
2001, including $10,871 (unaudited) for the three months ended March 31, 2000,
and $16,123 (unaudited) and $35,820 (unaudited) for the nine months ended March
31, 2001 and 2000, respectively.

         The Company has paid research and development costs and rent to a
company owned by its current President in the amount of $262,621 (unaudited) for
the period from September 23, 1996 (inception) to March 31, 2001, including
$97,608 (unaudited) for the three months ended March 31, 2001, and $138,184
(unaudited) for the nine months ended March 31, 2001. In addition, starting in
May 2000, a monthly salary of $5,000 is paid to the President, who is also a
stockholder and director.


                                      -13-
<PAGE>

ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001


NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)

         The Company has paid or accrued legal fees and reimbursed expenses,
including rent, to a company that is owned by its Secretary in the amount of
$314,531 (unaudited) for the period from September 23, 1996 (inception) to March
31, 2001, including $26,944 (unaudited) for the three months ended March 31,
2001, and $123,547 (unaudited) for the nine months ended March 31, 2001.

         The Company has paid for services to a company that is a stockholder in
the amount of $71,956 (unaudited) for the period from September 23, 1996
(inception) to March 31, 2001.

         In May 2000, the Company paid engine development costs to an individual
who is a stockholder of OX2 in the amount of $300,000.

         The Company has an outstanding receivable from its Secretary relating
to the cost of building out office space which the Company now uses as its
corporate headquarters. The Company determined that it did not require as much
office space as it originally belieived it needed, but this determination was
not made until after the cost had been incurred. Under these circumstances, the
Company's Board agreed with its Secretary that the Company would receive a pro
rata reimbursement of such costs. The receivable reflects this reimbursement,
and at March 31, 2001 is $21,000.

         The Company has an outstanding receivable from a company owned by its
current President. The receivable at March 31, 2001 was $22,295 (unaudited).

                                     -14-
<PAGE>

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

Cautionary Statement
--------------------

         You should read the following discussion and analysis in conjunction
with the Financial Statements and related Notes thereto contained elsewhere in
this Form 10-QSB ("Report"). The information in this Report is not a complete
description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various
disclosures made by us in this Report and in our other reports filed with the
SEC, including our Annual Report on Securities and Exchange Commission ("SEC")
Form 10-KSB for the year ended June 30, 2000.

         The section entitled "Risk Factors" set forth in this Report and
similar discussions in our Annual Report on Form 10-KSB for the year ended June
30, 2000 and in our other SEC filings, discuss some of the important risk
factors that may affect our business, results of operations and financial
condition. You should carefully consider those risks, in addition to the other
information in this Report and in our other filings with the SEC, before
deciding to invest in our company or to maintain or increase your investment.

         This Report contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to predict. Therefore, our actual results
could differ materially and adversely from those expressed in any
forward-looking statements as a result of various factors. Moreover, neither we
nor any other person assumes responsibility for the accuracy and completeness of
the forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.

Overview
--------

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

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

                                      -15-
<PAGE>

         At the present time only a prototype of the OX2 internal combustion
engine, plus additional parts that can be used for engine development or for the
building of additional prototypes, has been built. The development and testing
of the prototype are ongoing. No OX2 engines have been manufactured for
production use, and no assurance can be given that the OX2 engine will be
successfully developed or manufactured.

Plan of Operation
-----------------

         We plan to continue the research and development of our OX2 engine
prototype during the 2001 fiscal year. We currently have an agreement with
Steven Manthey, the inventor of the OX2 engine, which provides that Mr. Manthey
will continue to develop and maintain the OX2 engine prototype. We have an
agreement with the University of California, Riverside ("UCR"), which provides
that it will continue to conduct research and development on the OX2 engine
prototype, in conjunction with us. The research and development at UCR are being
conducted under the guidance of Dr. Joseph Norbeck (of the CE-CERT program at
UCR) and Dr. Roberta Nichols, one of our consultants. We are also conducting
research and development activities in Gardena, California.

         Assuming the completion of the necessary research and development
required to complete our product, and assuming the tests of our OX2 prototype
are successful, we will attempt to introduce the OX2 engine into the market.
Such marketing activities include demonstrations to prospective original
equipment manufacturers of products using internal combustion engines and the
development of additional joint venture partners to assist in marketing the
engine.

         In the shorter term, our plans are to develop an engine for stationary
generator applications, and in the longer term, we plan to develop an engine for
automobile and/or aircraft applications.

         We expect that our cash flow requirements to fund general operations in
2001 will total approximately $1,500,000, including outside consulting fees and
expenditures for equipment. We expect to fund these costs with our cash or cash
equivalent reserves, which were $455,932 as of March 31, 2001. The Company also
has available a $10,000,000 Letter of Credit that can be drawn upon at any time
at the discretion of the Board of Directors. Our cost estimates do not include
provisions for any contingencies or unexpected expenses that may arise or any
unanticipated increases in costs. As a result, our cash reserves may not be
adequate to cover the actual costs of operations in the 2001 fiscal year, in
which event we will be required to raise additional capital. Historically, we
have obtained cash through private placements of securities.

         Our net loss since inception (September 23, 1996) is $4,544,049.

         Currently, there are no signed contracts that will produce revenue, and
we can provide no assurance that management will be successful in negotiating
these contracts.

                                      -16-
<PAGE>

Risk Factors
------------

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

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

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

 .    Our cash reserves may not be adequate to cover our costs of operations. To
     ----------------------------------------------------------------------
     date, we have covered our operating losses by privately placing securities.
     We expect to fund our general operations and marketing activities for 2001
     with our current cash reserves, which were obtained from the sale of
     securities. However, our cost estimates do not include provisions for any
     contingencies, unexpected expenses or increases in costs that may arise.

 .    We may not be able to raise the capital we need. It is likely that we will
     -----------------------------------------------
     need to raise additional capital at some point in the future. If additional
     funds are raised through the issuance of equity, our shareholders'
     ownership will be diluted. There can be no assurance that additional
     financing will be available on terms favorable to us or at all. If funds
     are not available or are not available on terms acceptable to us, we may
     not

                                      -17-
<PAGE>

     be able to continue the development of our product, respond to our
     competitors or continue our business.

 .    Our business depends on the protection of our intellectual property and
     -----------------------------------------------------------------------
     may suffer if we are unable to adequately protect our intellectual
     ------------------------------------------------------------------
     property.  Currently, we have been granted one U.S. Patent for an Axial
     --------
     Piston Rotary Engine.  We have one patent application pending in Australia
     for an Axial Piston Rotary Engine.  We also have patent applications
     pending in countries throughout the world.  We believe that our ability to
     establish and maintain our position in the market depends on these patents.
     We cannot provide assurance that our patent will not be invalidated,
     circumvented or challenged, that the rights granted under the patents will
     give us competitive advantages or that our patent applications will be
     granted.

 .    If we are found to infringe on the intellectual property rights of others,
     -------------------------------------------------------------------------
     we may not be able to continue the development and production of our
     --------------------------------------------------------------------
     engine, or we may have to enter into costly license or settlement
     -----------------------------------------------------------------
     agreements.  Third parties may allege infringement by us with respect to
     ----------
     past, current or future intellectual property rights.  Any claim of
     infringement, regardless of merit, could be costly, time-consuming and
     require us to develop non-infringing technology or enter into royalty,
     licensing or settlement agreements.  These agreements could be on terms
     unfavorable or unacceptable to us and could significantly harm the
     development of our product and, ultimately, our business.  In the future,
     we may also have to enforce our patent and other intellectual property
     rights through litigation.  Any such enforcement could also result in
     substantial costs and could materially affect our financial condition and
     our business.

 .    Our business is dependent on our relationships with other parties.
     -----------------------------------------------------------------
     Research, development and testing of our engine is being carried out in
     conjunction with UCR.  Steven Manthey, the inventor of the engine, is also
     actively participating in the research and development.  In addition, we
     have a joint venture agreement with Carroll Shelby to further develop and
     promote our engine.  Completion of the research, development and testing
     is essential to the success of our business.  Until such testing, research
     and development have been completed, we will not have a finished product
     to introduce to the market.  Thus, if we are unable to maintain our
     relationships with UCR, Steven Manthey and Carroll Shelby, our business
     will be adversely affected.

 .    We have a history of losses. We have a history of operating losses and an
     ---------------------------
     accumulated deficit, as of March 31, 2001, of $4,544,049. Our ability to
     generate revenues and profits is subject to the risks and uncertainties
     encountered by development stage companies.

 .    Our future revenues and profitability are unpredictable. We currently have
     -------------------------------------------------------
     no signed contracts that will produce revenue, and we do not have an
     estimate as to when we

                                      -18-
<PAGE>

     will be entering into such contracts. Furthermore, we cannot provide
     assurance that management will be successful in negotiating such contracts.

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

 .    Our common stock is not widely traded, which may result in illiquidity and
     --------------------------------------------------------------------------
     increased volatility. Our common stock is not widely traded, and, as a
     --------------------
     result, the prices quoted for our stock may not reflect its fair market
     value. Because of the low volume of trading in our common stock, our
     stockholders may find it difficult to sell their shares.

 .    Our principal stockholders can exercise significant control over us and
     -----------------------------------------------------------------------
     could limit the ability of our other stockholders to influence the outcome
     --------------------------------------------------------------------------
     of transactions requiring a shareholder vote. As of March 31, 2001,
     --------------------------------------------
     approximately 74.884% of our outstanding common stock is owned by our
     executive officers, directors and principal stockholders. These
     stockholders will have the ability to exercise influence over all matters
     requiring approval by our stockholders, including the election of directors
     and approval of significant corporate transactions.

                          Part II. OTHER INFORMATION

Item 1.   Legal Proceedings.

          None.

Item 2.   Changes in Securities and Use of Proceeds.

          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.

          None.

                                     -19-
<PAGE>

                                  SIGNATURES

         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.

                                     Advanced Engine Technologies, Inc.
                                     ----------------------------------
                                                 (Registrant)


Date:  May 21, 2001                  By: /s/ Carroll Shelby
       ------------                      ------------------------------
                                         Carroll Shelby, President

Date:  May 21, 2001                  By: /s/ M. Neil Cummings
       ------------                      ------------------------------
                                         M. Neil Cummings, Secretary

                                      -20-