<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 December 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, California 90064
--------------------------------------------------------------------------------
                   (Address of Principal Executive Offices)


                                 (310)914-9599
--------------------------------------------------------------------------------
               (Insurer'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>

                    APPLICATION 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:

     33,455,000 shares of common stock, $0.001 par value per share, as of
February 12, 2002.

     Transitional Small Business Disclosure Format (check one):

Yes  _____   No    X
                 -----

                                      -2-
<PAGE>

                                    Part I
                             FINANCIAL INFORMATION

Item 1.    Financial Statements.

                                      -3-
<PAGE>

                                              ADVANCED ENGINE TECHNOLOGIES, INC.
                                                   (A DEVELOPMENT STAGE COMPANY)
                                                                        CONTENTS
                                       As of June 30, 2001 and December 31, 2001
                                                                     (unaudited)
============================================================================


FINANCIAL STATEMENTS                                             Page

     Balance Sheets                                               5

     Statements of Operations                                     6

     Statements of Cash Flow                                      7

     Notes to Financial Statements                                8 - 12

                                      -4-
<PAGE>

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

<TABLE>
<CAPTION>

ASSETS                                                                           December 31,          June 30,
                                                                                     2001                2001
                                                                                 ------------        ------------
<S>                                                                              <C>                 <C>
CURRENT ASSETS:                                                                    (unaudited)
          Cash and equivalents                                                   $    468,951        $    176,225
          Due from related party                                                       21,000              21,000
          Other current assets                                                         49,209              20,021
                                                                                 ------------        ------------
              Total current assets                                                    539,160             217,246
                                                                                 ------------        ------------
          Property and equipment, net                                                  53,568              62,528
          Patents, net of accumulated amortization of $411,414                      1,204,223           1,214,313
               (unaudited) and  $331,983                                         ------------        ------------

          Total assets                                                           $  1,796,951        $  1,494,087
                                                                                 ============        ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

          Accounts payable and accrued expenses                                  $     98,202        $     64,095
                                                                                 ------------        ------------
               Total current liabilities                                               98,202              64,095
                                                                                 ------------        ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

     Common stock-50,000,000 shares authorized, 33,230,000
         issued and outstanding, $.001 par value as of
         June 30, 2001; 33,430,000 issued and outstanding,
         $.001 par value as of December 31, 2001 (unaudited)                           33,430              33,230
     Additional paid-in capital                                                    18,480,320          17,550,520
     Shares receivable under stock repurchase agreement                               (30,000)                 --
     Committed common stock under grant agreement                                   1,860,000           2,790,000
     Subscription receivable                                                       (9,000,000)        (10,000,000)
     Deferred costs under grant agreement                                          (2,247,000)         (2,712,000)
     Deficit accumulated during the development stage                              (7,398,001)         (6,231,758)
                                                                                 ------------        ------------
          Total stockholders' equity                                                1,698,749           1,429,992
                                                                                 ------------        ------------
Total liabilities and stockholders' equity                                       $  1,796,951        $  1,494,087
                                                                                 ============        ============
</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 Six Months Ended December 31, 2001 and 2000 (unaudited)
and for the Period From September 23, 1996 (Inception)
to December 31, 2001 (unaudited)

<TABLE>
<CAPTION>
                                                                                                                  September 23,
                                                          For the                        For the                      1996
                                                    Three Months Ended              Six Months Ended               (Inception)
                                                       December 31,                    December 31,                  Through
                                                     -----------------               -----------------
                                                   2001             2000             2001           2000        December 31, 2001
                                               -----------      -----------      -----------      -----------   -----------------
                                               (unaudited)      (unaudited)      (unaudited)      (unaudited)       (unaudited)
<S>                                          <C>                <C>              <C>             <C>            <C>
Expenses:
  Operating                                  $   266,611        $   244,157      $   458,011     $   394,471        $ 2,764,330
  Research and development                       183,948             37,379          246,194          86,812          2,371,593
  Stock grant                                    232,500            232,500          465,000         465,000          2,403,000
  Write-off of patent                                 --                 --               --              --             23,332
                                             -----------        -----------      -----------     -----------        -----------
Total expenses                                   683,059            514,036        1,169,205         946,283          7,562,255
                                             -----------        -----------      -----------     -----------        -----------

Loss from operations                            (683,059)          (514,036)      (1,169,205)       (946,283)        (7,562,255)
Interest income                                    1,474             17,172            2,962          31,072            164,254
                                             -----------        -----------      -----------     -----------        -----------
Net loss                                     $  (681,585)       $  (496,864)     $(1,166,243)    $  (915,211)       $(7,398,001)
                                             ===========        ===========      ===========     ===========        ===========
Basic and diluted net loss per share         $     (0.02)       $     (0.02)     $     (0.03)    $     (0.03)       $     (0.30)
                                             ===========        ===========      ===========     ===========        ===========
Weighted average number of common shares      33,430,000         33,150,000       33,347,778      30,272,222         24,375,299
 outstanding                                 ===========        ===========      ===========     ===========        ===========
</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 Six Months Ended December 31, 2001 and 2000 (unaudited)
and for the Period From September 23, 1996 (Inception)
to December 31, 2001 (unaudited)


<TABLE>
<CAPTION>
                                                                          For the
                                                                     Six Months Ended                  September 23,
                                                                        December 31,                       1996
                                                                                                        (Inception)
                                                                     -----------------
                                                                                                          Through
                                                                2001                  2000           December 31, 2001
                                                             -----------            ----------       -----------------
                                                             (unaudited)            (unaudited)          (unaudited)
<S>                                                          <C>                    <C>              <C>
Reconciliation of net losses to net
 cash used in operations:
    Net loss                                                 $(1,166,243)           $ (915,211)          $(7,398,001)
    Stock grant expense                                          465,000               465,000             2,403,000
Adjustments to
 reconcile net loss to
 net cash used in operating activities
    Depreciation and amortization                                 91,852                95,650               516,042
    Issuance of common stock for
      assets and services                                              -                     -               714,250
    Stock options issued for services                                  -                     -                 9,500
    Write off of patents                                               -                     -                23,332
(Increase) decrease in
    Other current assets                                         (29,188)               17,576               (49,206)
    Due from related party                                             -                 5,000               (21,000)
Increase (decrease) in
    Accounts payable and accrued expenses                         34,107                16,822                98,203
                                                             -----------            ----------           -----------

    Net cash flows used in
      operating activities                                      (604,472)             (315,163)           (3,703,880)
                                                             -----------            ----------           -----------

Cash flows from investing activities:
    Purchase of intangible asset                                 (69,341)                    -            (1,659,387)
    Purchase of property and equipment                            (3,461)                    -              (137,782)
                                                             -----------            ----------           -----------
    Net cash flows used in
      investing activities                                       (72,802)                    -            (1,797,169)
                                                             -----------            ----------           -----------

Cash flow from financing activities:
    Proceeds from issuance of common stock                             -                     -             5,000,000
    Proceeds from stock subscription receivable                1,000,000                     -             1,000,000
    Proceeds from note payable                                         -                     -               500,000
    Repayment of notes payable                                         -                     -              (500,000)
    Redemption of common stock                                   (30,000)                    -               (30,000)
                                                             -----------            ----------          -----------

    Net cash flows provided by
      financing activities                                       970,000                     -             5,970,000
                                                             -----------            ----------           -----------

    Net increase (decrease) in cash and equivalents              292,726              (315,163)              468,951
    Cash and equivalents, at beginning of period                 176,225             1,026,990                     -
                                                             -----------            ----------           -----------
    Cash and equivalents, at end of period                   $   468,951            $  711,827           $   468,951
                                                             ===========            ==========           ===========
</TABLE>

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

                                      -7-
<PAGE>

Advanced Engine Technologies, Inc.
Notes to Financial Statements
December 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 sublicense agreement with OX2 Engine
(Distribution) LTD, a company incorporated under the laws of the Republic of
Vanuatu ("OX2D"), pursuant to which the Company acquired the rights to
manufacture, distribute and market the OX2 combustion engine in the NAFTA
countries.  Pursuant to the terms of said sublicense agreement, the Company
issued 20,000,000 shares of its common stock to OX2D and agreed to pay a 15%
royalty on the gross proceeds generated from actual sales of the OX2 engine.  In
addition, the sublicense agreement provided that the Company would issue an
additional 19,000,000 shares of common stock to OX2D upon completion of certain
emission testing.  In December 1998, the parties agreed to rescind the
obligation of the Company to issue these additional 19,000,000 shares of common
stock to OX2D.

     In May 1999, pursuant to a four-party agreement among and between the
Company, OX2D, OX2 Intellectual Property Inc. and Advanced Engine Technology PTY
Ltd., the Company acquired the worldwide patent rights for the OX2 combustion
engine for $1,500,000.  This agreement superseded and terminated the October
1996 sublicense agreement.  The Company has assumed responsibility for worldwide
patent maintenance and enforcement, as well as engine development,
manufacturing, marketing and sales activities.

     On October 15, 2001, the Company entered into an agreement with OX2 Engine
Development PTY, LTD, an Australian company ("OX2 LTD"), and the inventor of the
OX2 engine to provide research and development products and services related to
the OX2 engine ("R and D Agreement").  Research and development activities will
include continued maintenance of the first and second performing test engines as
well as design and development of three additional OX2 test engines.  In
addition, the agreement calls for the design and manufacturing of new and
advanced components for the test engines.  In consideration for this agreement
the Company will repurchase from the inventor, or his affiliates, 240,000 shares
of common stock of the Company at $2 per share.  The Company has allocated $.50
of the $2.00 per share repurchase price to the redemption of common shares and
the remaining $1.50 per share to research and development expense.  The $.50
common share redemption price is based on the fair market value of the common
shares as of the date of the R and D Agreement.  In addition, the Company has
contracted with the OX2 engine inventor to provide consulting and product
development services for the sum of eighty thousand dollars ($80,000) per annum.
As of December 31, 2001, the Company has paid for the repurchase of 60,000
shares of common stock under the R and D Agreement.  For the three and six
months ended December 31, 2001, the Company has paid $20,000 in connection with
consulting and product development services under this agreement.

                                      -8-
<PAGE>

Advanced Engine Technologies, Inc.
Notes to Financial Statements
December 31, 2001

     As of December 31, 2001, the Company's operations consisted of marketing,
testing and developing the OX2 combustion engine for the commercial applications
and raising any necessary capital investments.  Management does not expect to
generate significant sales revenue during the year ending June 30, 2002.
Accordingly, planned principal operations have not commenced, and the Company is
a development stage enterprise.

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 three months and six months ended December 31,
2001 are not necessarily indicative of results for the entire fiscal year ending
June 30, 2002.

     The information with respect to the three months and six months ended
December 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 for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset 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.

                                      -9-
<PAGE>

Advanced Engine Technologies, Inc.
Notes to Financial Statements
December 31, 2001

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 carry forward 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.

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.

Recently Issued Accounting Pronouncements
-----------------------------------------

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."  This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets.  This statement replaces SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets

                                      -10-
<PAGE>

Advanced Engine Technologies, Inc.
Notes to Financial Statements
December 31, 2001

to be Disposed of," the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations -Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business, and
amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
to eliminate the exception to consolidation for a subsidiary for which control
is likely to be temporary. The Company does not expect the adoption of SFAS No.
144 to have a material impact on its financial position or results of operation.

Reclassification
----------------

     In the statement of operations for the three months ended September 30,
2001, as originally filed, $35,000 of rental expense was classified as an
operating expense rather than as a research and development expense.  This
amount has now been reclassified as research and development expense in the
statement of operations for the six months ended December 31, 2001.

NOTE 3- STOCKHOLDERS' EQUITY

Stock Grant Agreement
---------------------

     In June 1999, the Company agreed to issue 1,000,000 shares of restricted
common stock to the University of California Riverside Foundation in five annual
installments of 200,000 shares each.  The donated stock is to provide an
endowment for research funds for the College of Engineering Center for
Collaborative Research on the development of advanced engine technologies.  For
financial statement presentation purposes, the stock under the grant agreement
is treated as committed stock until its issuance.  The first, second and third
installments were issued in July 1999, July 2000 and September 2001,
respectively.

     Expense in the grant is being recognized ratably over a five-year period as
upon an estimated fair value at the date of the grant of $4.65 per share.  This
estimate of its fair value is based upon the tracking price of the stock on the
grant date of $7.75 per share, less a 40% discount because the stock was
restricted, the Company's stock had a very low trading volume at the time of the
grant agreement and the Company was still in the development stage.  During the
period from September 23, 1996 (inception) to December 31, 2001, the Company
recognized total expense on the stock grant of $2,403,000, including $232,500
and $465,000, respectively, for the three months and six months ended December
31, 2001 and 2000.

     During the quarter ended December 31, 2001, in accordance with the
Company's agreement with OX2 LTD. (see Note 1) the Company repurchased 60,000
shares of its common stock for $2 per share.  These repurchased shares are held
in trust and have not been returned to the Company.  The repurchase of these
shares is shown as shares receivable under stock repurchase agreement on the
December 31, 2001 balance sheet and as research and development expense on the
December 31, 2001 statement of operations.

                                      -11-
<PAGE>

Advanced Engine Technologies, Inc.
Notes to Financial Statements
December 31, 2001

NOTE 4 - RELATED PARTY TRANSACTIONS

     The Company paid research and development costs and rent to a company owned
by its current President in the amount of $70,825 (unaudited) for the three
months ended December 30, 2001 and $125,030 (unaudited) for the six months ended
December 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 December 31, 2001.

     At December 31, 2001, the Company had an outstanding receivable from its
Secretary of $21,000 for reimbursement of remodeling costs on office space that
the Company and its Secretary share.

     The Company shares office space with a legal corporation in which its
Secretary is a principal, which also serves as part of the Company's legal
counsel.  The Company incurred legal fees, rent and other reimbursement costs of
$29,978 (unaudited) for the three months ended December 31, 2001 and $60,977
(unaudited) for the six months ended December 31, 2001.

     For the three and six months ended December 31, 2001, the Company paid OX2
LTD. $20,000 in connection with consulting and product development services
(see Note 1).  In addition the Company paid for the repurchase of 60,000 shares
of common stock from a member of the Board of Directors who wholly owns OX2 LTD.

NOTE 5 - RESTATEMENT OF THE DECEMBER 31, 2000 FINANCIAL STATEMENTS

     The financial statements for the three months and six months ended December
31, 2000 have been restated from the originally filed financial statements to
reflect greater expense recognition in those years in connection with the June
1999 stock grant agreement with the University of Riverside Foundations (see
Note 3 for a description of the agreement and the accounting related to the
agreement).  Specifically, upon reevaluation of the agreement, current
management has concluded that the fair value of the committed common stock on
the date of the agreement was $4,650,000, and not $1,500,000 as originally
valued.  This increase in the fair value of the committed common stock on the
date of the grant agreement impacts the expense recognition on the stock grant
agreement because the expense which is recognized over a five-year period is
based upon the fair value of the committed common stock on the date of the stock
grant agreement.  Originally, the financial statements for the three and six
months ended December 31, 2000 reflected $0 and $300,000, respectively, of
research and development expense associated with this grant.  As a result of the
foregoing, the financial statements for the three and six months ended December
31, 2000 have been restated to reflect stock grant expense of $232,500 and
$465,000, respectively.  Also, the originally filed December 31, 2000 financial
statements classified the expense on the stock grant as research and development
expense, whereas, the restated financial statements present the expense as
"stock grant expense."

                                      -12-
<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, 2001.

     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, 2001
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.

     At the present time only prototypes of the OX2 internal combustion engine,
plus additional parts that can be used for engine development or for the
building of additional prototypes, have been built.  The development and testing
of prototypes are ongoing.  No

                                      -13-
<PAGE>

OX2 engines have been manufactured for production use, and no assurance can be
given that the OX2 engine will be successfully developed or manufactured for
commercial application.

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

     We plan to continue the research and development of our OX2 engine
prototypes during the 2002 fiscal year. In October 2001, we entered into a new
development agreement with Steven Charles Manthey, the inventor of the OX2
engine, and OX2 Engine Development PTY LTD. The new development agreement
supercedes and replaces the May 2000 development agreement between the Company
and Mr. Manthey and accelerates and enhances the research and development
products and services related to the OX2 engine provided by Mr. Manthey and his
companies. Research and development activities will include continued
maintenance of the first and second performance test engines as well as design
and development of three additional OX2 test engines. In addition, the
development agreement calls for the design and manufacturing of new and advanced
components for the test engines. As consideration for the products and services
to be provided pursuant to the new development agreement, we have agreed to
repurchase from Mr. Manthey, or his nominee, up to 240,000 shares of common
stock of the Company at a purchase price of $2 per share. In addition, we have
agreed to pay Mr. Manthey consulting fees in the amount of $80,000 per year.

     We have an agreement with the University of California, Riverside ("UCR"),
that provides that UCR will continue to provide engine testing and related
services to the Company, with particular emphasis on testing related to
emissions. These services are being provided 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 and testing
activities in Gardena, California.

     Assuming the completion of the necessary research and development required
to complete our product and assuming that the tests of our OX2 prototypes are
successful, we will attempt to introduce the OX2 engine into the market.
Marketing activities will 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, marine and/or aircraft applications.

     We expect that our cash flow requirements to fund general operations in
fiscal year 2002 will total between approximately $1,500,000 and $2,000,000,
including outside consulting fees and expenditures for equipment. We expect to
fund these costs with our cash or cash equivalent reserves, which were $468,951
as of December 31, 2001. The Company also has available a $9,000,000 secured
promissory note that can be drawn upon at any time at the
discretion of the Board of Directors.

                                     -14-
<PAGE>

Our cost estimates do not include provisions for any contingencies or unexpected
expenses that may arise or any unanticipated increases in costs.

     Our net loss since inception (September 23, 1996) is $7,398,001.

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

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

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

     .    There can be no assurance that we will be able to develop successfully
          ----------------------------------------------------------------------
          the OX2 engine.  No OX2 engines have been developed or manufactured
          --------------
          for 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 and/or Stanford Research Institute
          ("SRI"). Until further testing and research and development have been
          completed, we will not have a finished product for introduction into
          the market. We do not have an estimated completion date for the
          testing and 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 or cash equivalent 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 2002 with our current cash and cash
          equivalents, which were obtained from the sale of securities. However,
          our cost estimates do not include provisions for any contingence,
          unexpected expenses or increases in costs that may arise.

                                      -15-
<PAGE>

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

     .    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 and one
          --------
          Australian Patent for an Axial Piston Rotary Engine. We have
          successfully registered these patents in many countries and have
          patent registrations pending in many other countries throughout the
          world. We believe that our ability to establish and maintain our
          position in the market depends on these patents. We cannot provide
          assurance that our patents will not be invalidated, circumvented or
          challenged, that the rights granted under the patents will give us
          competitive advantages or that our patent registrations 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 noninfringing 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
          internally and in conjunction with Steven Manthey, the inventor of the
          OXZ engine, and his companies, as well as UCR and SRI. In addition, we
          have a joint venture agreement with Carroll Shelby to further develop
          and promote our engine. Completion of the research and development and
          testing is essential to the success of our business. Until such
          testing and 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, SRI, Steven Charles
          Manthey and Carroll Shelby, our business may be adversely affected.

     .    We have a history of losses.  We have a history of operating losses
          ---------------------------
          and an accumulated deficit, as of December 31, 2001, of $7,398,001.
          Our ability to generate revenues and profits is subject to the risks
          and uncertainties encountered by development stage companies.

                                      -16-
<PAGE>

     .    Our future revenues and profitability are unpredictable. We currently
          -------------------------------------------------------
          have no signed contracts that will produce revenue, and we do not have
          an estimate as to when we will be entering into such contracts.
          Furthermore, we cannot provide 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
          --------------------------------------------------------
          December 31, 2001, approximately 75% 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.

                                      -17-
<PAGE>

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

     None.

                                      -18-
<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:  February 14, 2002                By:  /s/  Carroll Shelby
                                        ---------------------------------------
                                        Carroll Shelby, President and Director

Date:  February 14, 2002                By:  /s/  M. Neil Cummings
                                        ---------------------------------------
                                        M. Neil Cummings, Secretary