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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION    FORM 10-KSB (Mark one) [X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 2003  
 For the transition Period from            to             .  Commission file number: 000-32217  O2Diesel Corporation   Washington
    
    91-2023525(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 100 Commerce Drive Suite 301 Newark, Delaware
    
    19713(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number: (302) 266-6000 Securities registered under Section 12(b) of the Exchange Act: (Title of Class)
    
    Name of exchange on

which registered
  None
    
    None
 Securities registered underSection 12(g) of the Exchange Act:
    
    Common Stock, $0.0001 par value
 (Title of class) Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
     
[x]            No     [   ] Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]




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Registrants revenues for its most recent fiscal year: $12,204 The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 26, 2004, computed by the average bid and asked price as of
March 26, 2004, at which the stock was sold, was $87,876,000, assuming solely
for purposes of this calculation that all directors and executive officers of
the issuer are affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. On March 26, 2004, the registrant had 28,969,772 shares of common stock, $0.0001
par value per share, issued and outstanding. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes o No x DOCUMENTS INCORPORATED BY REFERENCE Certain portions of
the registrants Proxy Statement to be filed in connection with its 2004 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Report; provided, however, that the Compensation
Committee Report, the Audit Committee Report, the graph showing the performance of the Companys stock and
any other information in such Proxy Statement that is not required to be included in this Annual Report on Form
10-KSB shall not be incorporated herein or filed for the purposes of the Securities Act of 1933 or the
Securities Exchange Act of 1934. Other documents incorporated by reference are listed in the Exhibit Index.




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O2DIESEL CORPORATION INDEX TO
ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2003  
 PART
            I
        
        PAGEItem 1
            Description of Business
        
        
        
        1Item 2
            Description of Property
        
        
        
        7Item 3
            Legal Proceedings
        
        
        
        8Item 4
            Submission of Matters to a Vote of Security Holders
        
        
        
        8PART
            IIItem 5
            Market for Common Equity and Related Stockholder Matters
        
        
        
        8Item 6
            Plan of Operation
        
        
        
        9Item 7
            Consolidated Financial Statements
        
        
        
        12Item 8
            Changes In Accountants
        
        
        
        12Item 8A Control and Procedures
        
        
        
        12PART
            IIIItem 9
            Directors, Executive Officers, Promoters and Control Persons; Compliance
            With Section 16(a) of the Exchange Act
        
        
        
        12Item 10
            Executive Compensation
        
        
        
        12Item 11
            Security Ownership of Certain Beneficial Owners and Management and
            Related Stockholders Matters
        
        
        
        13Item 12
            Certain Relationships and Related Transactions
        
        
        
        13Item 13
            Exhibits and Reports on Form 8-K
        
        
        
        13Item 14
            Principal Accountant Fees and Services
        
        
        
        14SIGNATURESExhibit
            IndexCERTIFICATIONSExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 99.3Exhibit 99.4




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NOTE REGARDING FORWARD LOOKING STATEMENTS This annual report on Form 10-KSB contains forward-looking statements
concerning O2Diesel Corporation (O2Diesel, the Company or the Registrant)
and the Companys future operations, plans and other matters. Any statements
that involve discussions with respect to predictions, expectations, beliefs,
plans, projections, objectives, assumptions or future events or performance
(often, but not always, using phrases such as expects, or does not expect,
is expected, anticipates or does not anticipate, plans, estimates or
intends, or stating that certain actions, events or results may, could,
might, or will be taken or occur or be achieved) are not statements of
historical fact and may be forward looking statements which include
statements relating to, among other things, the ability of O2Diesel to
effectively integrate the business of AAE Technologies International Plc into
O2Diesels operations and successfully compete in the fuel additive and fuel
distribution businesses. O2Diesel cautions readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Such
forward-looking statements are based on the beliefs of O2Diesels management as
well as on assumptions made by and information currently available to
02Diesel
at the time such statements were made. Forward-looking statements are subject
to a variety of risks and uncertainties which could cause actual events or
results to differ from those reflected in the forward-looking statements,
including, without limitation, the failure to obtain adequate financing on a
timely basis and other risks and uncertainties. Actual results could differ
materially from those projected in the forward-looking statements, as a result
of either the matters set forth or incorporated in this report generally or
certain economic and business factors, some of which may be beyond the control
of O2Diesel. These factors include adverse economic conditions, entry of new
and stronger competitors, inadequate capital, unexpected costs, failure to gain
product approval in the United States or foreign countries for the
commercialization and distribution of our products and failure to capitalize
upon access to new markets. O2Diesel disclaims any obligation subsequently to
revise any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events. -i-




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PART I 
 Item 1. Description Of Business (a) Form and Year of Organization; Recent
    Exchange Offer Transaction O2
    Diesel Corporation (O2Diesel or the Company) is a
    development stage company and has developed a proprietary additive product
    designed to improve the performance of distillate liquid transportation fuels
    by facilitating the addition of ethanol as an oxygenate to these fuels. To
    date, the Companys operations have been primarily focused on raising
    capital, performing product tests and demonstrations and
    bringing its product to market. O2Diesel Corporations predecessor, Dynamic Ventures, Inc., was incorporated in
the State of Washington on April 24, 2000. Dynamic Ventures, Inc. changed its
name to O2 Diesel Corporation effective June 10, 2003, in contemplation of the
reverse acquisition of AAE Technologies International Plc (AAE). On July 15,
2003, O2Diesel Corporation acquired all of the issued and outstanding share
capital of AAE in exchange for 17,847,039 shares of its common
stock (the Offer). As a result of this transaction, the former shareholders
of AAE acquired control of the combined companies. The acquisition of AAE has
been accounted for as a capital transaction followed by a recapitalization as
AAE was considered to be the accounting acquirer. Accordingly, the consolidated financial
statements of AAE are now treated as the base financial statements of O2 Diesel
Corporation for all periods presented. In conjunction with the Offer, the Company completed a private placement of its
common stock whereby it issued 3,333,333 shares of common stock at $1.50 per
share. Of the $5.0 million raised, approximately $800,000 was used to pay the
costs of the reverse acquisition and private placement, $1.0 million was used
to repay a bridge loan that was made in contemplation of the transaction, and
the balance of $3.2 million is being used to fund the ongoing developmental
activities of the Company. Subsequent
    to the Offer and during 2003, the Company undertook an effort to raise an
    additional $3.5 million through a follow-on private placement. As of
    December 31, 2003, the Company received subscriptions for 754,900 shares
    of its common stock at $1.50 per share. Subsequent to December 31, 2003
    and through the date of these financial statements, the Company received additional
    subscriptions for 330,884 shares at $1.50 per share. (b) Business of O2Diesel Principal Products and Markets: O2Diesel has developed a proprietary additive product designed to improve the
performance of distillate liquid transportation fuels by facilitating the
addition to these fuels of ethanol, which is an oxygenate. More specifically,
the Companys core product, O2D05, is a fuel additive that can be made from
soybean oil, other vegetable oils, or animal fats. The additive stabilizes and
enhances the blending of fuel grade ethanol with diesel fuel. Blending O2D05
with ethanol and various grades of diesel fuel in turn creates a proprietary
clean burning fuel called O2Diesel. Extensive testing in the laboratory and
in real world trials has been carried out on O2D05 and O2Diesel. These tests
have demonstrated that the use of the fuel by itself or in combination with
other emissions control devices can produce significant and verifiable
reductions in emissions. As an example, test data from a wide range of tests
has shown the following reductions in emissions:  
    
    Up to a 70% reduction in visible smoke;
    
    Up to a 46% reduction in particulate matter;
    
    Up to a 30% reduction in carbon monoxide; and
    
    Up to a 6% reduction of oxides of nitrogen. By way of background, fuel ethanol has been blended with gasoline for over 25
years in the U.S. and even longer in Brazil, with the combined benefits of
improving air quality, reducing the use of petroleum based fuels and
stimulating the demand for agricultural products. Because of the
incompatibility of diesel fuel and ethanol in a stand-alone environment, it has
not been practical to combine ethanol and diesel fuel. The Companys product,
O2D05, is a blend of diesel fuel and ethanol that requires little change to
either the delivery systems for transportation fuels or to the infrastructure
of vehicles and equipment that may use the new fuel. As an example, O2D05 may
be splash blended with ethanol and diesel to create O2Diesel. -1-




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The Company has identified the U.S., Canada and Brazil as our first target
markets. O2Diesels strategy, with the support and resources of our commercial
partners, is to create end-user demand from large, centrally fueled on and
off-road fleets of diesel fuel users. Potential customers in the U.S. and Canada include:  
    
    Urban truck and delivery fleets;
    
    Construction equipment fleets;
    
    Mobile or stationary power generators;
    
    Railroads;
    
    Municipal transit authorities (public and private);
    
    Government fleets (municipal, state, and federal);
    
    School buses;
    
    Military (non-tactical) vehicles; and
    
    Port logistical equipment. The U.S. market for diesel fuel is large and growing. It has been estimated
by the International Energy Agency that the current use of diesel fuel in the
U.S. now exceeds 59 billion gallons per annum, of which it is believed that
centrally fueled fleets use in excess of 16 billion gallons annually. Basic to the success of the Companys sales program is the availability of
abundant supplies of fuel grade ethanol. According to statistics compiled by
the Renewable Fuels Association, seven new ethanol plants were completed in the
U.S. in 2003 bringing the number of ethanol plants located throughout 19 states
in the U.S. to 72. For 2003, U.S. domestic ethanol plants produced
approximately 2.8 billion gallons of ethanol and had the capacity to produce
about 3.1 billion gallons. Production capacity is predicted to rise to 5
billion gallons by 2005, according to a January 2003 study conducted by the
California Energy Commission. At present, the Company does not anticipate any
supply problems in securing sufficient amounts of ethanol for sales in the U.S.
and Canada. The Company has been active in Brazil for nearly three years in laying the
groundwork for the introduction of our product to the Brazilian market. Brazil
is one of the pioneers in the use of ethanol and has a long history of
manufacturing ethanol as a by-product from the production of sugar. Due to the
low cost and availability of ethanol, Brazils transportation sector has used
large amounts of this renewable fuel for the last three decades. Fuel ethanol
has become an important fuel in Brazil due to its positive effects on the
creation of jobs in the sugar industry and as a means of reducing the countrys
dependence on imported diesel fuel, of which Brazil is a net importer.
Moreover, both the government and the sugar producers have sought various means
to increase the demand for sugar and sugar derivatives. We believe that the
foregoing factors make Brazil a good market for the commercial introduction of our
products. As a means of launching O2D05 and O2Diesel, the Company has formed an alliance
with a large commodities trading firm in Brazil that specializes in trading
sugar and alcohol. According to recent market studies, approximately 8.2 billion gallons of diesel
fuel are consumed by Brazils transport sectors. As in the U.S. market,
O2Diesel will initially target centrally fueled fleets for trucks and buses as
our first customers. Consumption of diesel fuel by these fleets is estimated to
be about 2.5 billion gallons on an annual basis. More specifically, the first
customers for O2Diesels product are anticipated to be truck fleets of the
companies that own and operate sugar plantations and sugar/alcohol mills. -2-




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To summarize, the potential customers for launching O2Diesel include the
following:  
    
    Trucks  sugar / alcohol mills
    
    Trucks  transport companies; and
    
    Buses  large municipalities. Later, the Company will seek to widen its
market to include:  
    
    Trucks  non-transport companies, and
    
    Buses  intercity. In the U.S. and Canada, the Company expects to distribute our product, O2D05,
directly to jobbers. Jobbers is a fuel industry term for companies that have
a supply infrastructure that facilitates the purchase, blending, storage and
delivery of fuel, which may include O2Diesel. After completing the blending
process, jobbers will sell O2Diesel to their customers. Jobbers will be
responsible for delivery of the fuel using their own transportation fleets,
common carriers or fuel trucks of their customers. For the U.S., Canada and Brazil, the Company intends to sell O2Diesel to large
centrally fueled fleets of vehicles and equipment, where the user has its own
refueling infrastructure. In these cases, the Company must arrange to deliver
O2Diesel to the customers central fueling location. In limited situations,
O2D05 by itself may be sold to central fleet type customers, but in these
cases, the customer must have the proper facilities to blend diesel fuel with
fuel grade ethanol and additive. In most situations, the Company will be
responsible for delivery of the final fuel, O2Diesel, to large fleet users.
To accomplish this, the Company will need to establish a reliable network of
suppliers of ethanol and transportation services, and in limited situations,
suppliers of diesel fuel. For this type of customer, the methods of
distribution will be substantially the same for the U.S., Canada and Brazil,
with the exception that there are only a few companies in Brazil that deliver
petroleum fuels to the end users. Thus, the Company will have fewer choices in
establishing a distribution infrastructure for Brazilian sales. Competitive business conditions and position in the marketplace: In general, competition to the O2Diesel technology may be split into three
categories:  1.
    
    ethanol-diesel blended fuel technologies (e-diesel);2.
    
    exhaust after treatment technologies; and3.
    
    other fuels. Within the first category of e-diesel fuel technologies, there are a number of
competitor companies that have or are attempting to develop fuel additives to
compete with O2D05. Based on limited market information, the Company
believes that, even though some of the competing technologies are owned by
larger and better financed corporations, none of the technologies are as
advanced as that of O2D05. Moreover, the Company believes that due to the
higher blend ratios of the competing additives to that of O2D05, most of the
competitors e-diesel fuels may be more expensive than O2Diesel. Other cost
effective diesel fuel additive technologies such as detergents and metallic
combustion improvers are still subject to significant regulatory issues that
may affect their commercial viability. Various exhaust after treatment technologies are available in the marketplace
to reduce emissions. Many of these technologies that may compete with
O2Diesel are designed for use on new vehicles, and, as such, may take in
excess of 5 years to have an impact on emissions over a large vehicle
population. In addition, these technologies have higher implementation costs
including the cost of vehicle retrofits, which may also be expensive. The
Company does not view exhaust after treatment technologies as being in direct
competition to O2Diesel. Moreover, the Company intends to explore testing and
working with one or more manufacturers of these technologies to confirm whether
additional benefits can be achieved when the two technologies are used
together. -3-




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Other fuels include Ultra-Low Sulfur Diesel (ULSD) and bio-diesel. Beginning
in mid-2006 the diesel fuel specifications for the U.S. will change to require
the use of ULSD for all on-highway use. ULSD is defined as
having less than 15 parts per million sulfur, and this low level is necessary to
allow exhaust after treatment technologies to work effectively. ULSD is more
expensive than regular diesel and is in limited supply in the U.S. because of a
lack of refinery capacity. ULSD is available mostly in California, Texas and
the Northeast. The Company believes that our product, O2Diesel, may also work
effectively with ULSD in a manner that enhances the benefits of exhaust after
treatment technologies. As a long-term strategy, the Company believes that we
should work with refiners and distributors of ULSD as a means of broadening the
market for O2Diesel. Bio-diesel is a biomass-derived fuel similar in composition and performance to
conventional low sulfur diesel. It has been designated by the Department of
Energy as an alternative fuel and is mostly sold as a 20vol% blend with
regular diesel fuel. Bio-diesel has some excellent fuel characteristics, but it
also has a number of significant drawbacks that make it unlikely this fuel
will become widely used. Among bio-diesels drawbacks are its cost, lack of
availability and limited emissions benefits. Below is a table which gives a brief overview of the advantages and
disadvantages of the broad ranges of technologies that may be considered as
competing technologies. (This summary is not intended to be inclusive of all
competing technologies.) Lower EmissionsOptions
    
    Advantages
    
    DisadvantagesBio-diesel
    
    Renewable content
    
    Variable quality, low
availability and high priceExhaust after
Treatment
Technology
    
    Effective; may be
required for 2007
model vehicles
    
    High cost, owner resistance
and most must be used in
conjunction with ULSDUltra Low Sulfur
Diesel
    
    No alteration to
infrastructure;
Enables
after-treatment
technology; Important
long-term player
    
    Long lead in time; low
availability and more
expensive than regular
dieselGas to Liquid &
Fischer Tropsch
    
    Clean base and low
cost materials
    
    High cost, long lead time
and price volatilityHydrogen Gas/Fuel
cells
    
    Ultra clean vehicles
    
    Still at early research stageDiesel-Water
emulsions
    
    Reduces both PM and NOx
    
    Poor fuel stability, reduced
power and high cost
 In Brazil, there are both domestic and foreign companies seeking to develop an
ethanol diesel blending additive, but the Company believes that none of these
potential competitors are very far advanced in perfecting their respective
technologies. Sources and availability of raw materials: O2Diesel
    has a cooperation agreement with Cognis Deutschland GmbH (Cognis)
    for the manufacture and marketing of the Companys additive globally.
    Cognis has manufacturing facilities in each country in which we intend to
    sell our product. According to Cognis, these plants have sufficient capacity
    to produce enough product to allow us to meet our budgeted sales for the United
    States, Canada and Brazil for the next twelve months. While the information
    for O2D05 is proprietary in nature, Cognis has informed the Company that Cognis
    does not anticipate there will be any shortages of raw material over the next
    twelve months. Dependence on one or a few major customers: As
    of the end of 2003, the Company was in the development stage. We reported
    sales of only $12,204 in 2003. Beginning in 2004, we expect to begin selling
    our products in commercial volumes. Only then will the Company start to develop
    the necessary customer profile to affirmatively state that we will not be
    dependent on just one or even a few major customers. However, given the usage
    of diesel fuel in the Companys target markets, U.S., Canada and Brazil,
    the drive of local and national governments to press for cleaner air -4-




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legislation, and the need for our potential customers to comply with
legislative requirements to use cleaner burning fuels, the Company believes it
is unlikely that we will be dependent in any of our target markets on one or even a
few large customers. Notwithstanding the foregoing, we have no sales history
and cannot know for certain what our likely customer base will be or if one
will develop at all. It is possible that the logistics of distributing O2Diesel may cause the
Company to be dependent on a few large companies. For example, in Brazil, the
fuel distribution network is very concentrated among a few very large
companies. Thus, it is possible that the Company could become dependent on one
or two large distributors for the sale of O2Diesel in Brazil. Patents/Trademarks: As part of our cooperation agreement with Cognis, we and Cognis are the joint
owners of all patents covering both the use and composition of O2D05. Patent
applications have been filed in twelve countries for O2D05, including the U.S.,
Canada, Brazil, and Europe. For this purpose, Europe is counted as one
country. As such, the patent application for Europe covers 20 countries,
including the more populous countries of the U.K., France, Germany, Italy and
Spain. The patent applications for the U.S. Brazil and Canada are pending. All
legal costs associated with preparing, filing and administering the jointly
owned patents are shared equally by the Company and Cognis.
As part of the strategy of protecting our intellectual property position, the Company also has a number
of patents that have been issued that relate to the predecessor technology of O2D05. As a strategic measure,
the Company continues to fund all costs necessary to maintain these patents. The Company has filed trademark registration applications in the U.S. and the
European Union for a mark which includes the words and numbers O2Diesel as well
as a figurative logo of the words. Government Approvals: In the U.S., O2Diesel is subject to regulation at the federal, state and
local levels. In addition, organizations such as the American Society for
Testing & Material (ASTM) and the National Conference on Weights & Measures
(NCWM) set uniform industry product quality standards and test methods which
are often adopted by legislative bodies and regulatory agencies. These laws and regulations can and do change and these changes may favor or
disfavor one product over another. This is particularly true in the case of
incentives that are either available or are becoming available for the expanded
use of cleaner-burning fuels like O2Diesel or other emissions reduction
technologies. In the U.S., O2Diesel is in the process of obtaining the necessary regulatory
approvals at various levels of government. At the federal level, the primary
regulatory body from which the necessary approvals are required is the U.S.
Environmental Protection Agency (EPA) which, among other things, regulates
the on-highway use of motor fuels. The process of becoming a registered fuel
for on-highway use is complex, costly and time-consuming. In 2003, O2Diesel
completed a substantial portion of the process leading to registration when an
independent laboratory completed all testing necessary to demonstrate that
O2Diesel met the EPAs Tier 1 Health Effects Testing requirements. There
is a second battery of test protocols required to comply with the EPAs Tier
2 Health Effects requirements. It is unclear whether the Tier 2 tests will
have to be completed. If Tier 2 testing is required, completing all of the
test protocols could require substantial expense. In general, Tier 1 tests are
designed to measure and confirm emissions data and their effects on human
health. Tier 2 tests are intended to measure the same factors but to a much
greater degree and in a more thorough manner. Pending satisfaction of the EPAs Health Effects Testing requirements, O2Diesel may be sold for
on-highway use under the grant of a broad EPA experimental fuel waiver from
the on-highway fuel/fuel additive registration requirement. States set strict requirements for the sale and distribution of motor fuels,
and provide certain incentives for the use of cleaner-burning fuels. States
provide disincentives for dirtier fuels, often in the form of monetary
penalties. With the exception of the State of California, which is permitted
to set stricter state standards, all state motor fuel regulations are
ultimately governed by EPA policies set forth in the Clean Air Act. In 2003, O2Diesel achieved regulatory recognition (known as verification) in
California granted by the Air Resources Board (ARB) for O2Diesel as an
alternative diesel fuel, thus making the fuel eligible for state and local
incentives. During this same period, the Division of Measurement Standards
(DMS) of the California Department of Food & Agriculture designated O2Diesel
as a developmental engine fuel which is a requirement for a fuel to be
marketed legally in the state if it lacks an ASTM specification. O2Diesel
does -5-




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not have an ASTM specification. As a condition to permitting the sale of
O2Diesel in California, the ARB mandated, among other things that, in the case
of storage or use of O2Diesel, fuel storage tank vents, vehicle tank vents and
fill openings must be fitted with flame arrestors. In Canada, there are fewer limits or restrictions on the introduction of new
motor fuel products like O2Diesel, despite the fact that the key federal
regulatory agencies  Environment Canada and Natural Resources Canada  tend
to follow the general policies set by the United States. One important
quasi-governmental organization that serves a regulatory control function is
the Canadian General Standards Board (CGSB), which works in a manner similar
to ASTM. Fuels sold in Canada on a widespread basis will ultimately be
subject to an industry and government consensus-based product specification.
The Company is actively working with CGSB and other agencies to meet those
requirements. Across Canada and among the provinces, various tax and other
incentives are in place to encourage the expanded production and use of
biomass-based transportation fuels. O2Diesel may be sold in Canada without obtaining any further approvals as long
as sales are limited to centrally fueled fleets. Various governmental approvals are required to sell O2Diesel in Brazil. These
approvals are administered by two Brazilian agencies  ANP and IBAMA. ANP is
the National Fuel Regulation Agency and IBAMA is the National Environment
Protection Agency. Approvals are needed from both agencies before O2Diesel
may be sold in Brazil. The Company has been advised that obtaining the
approvals is neither costly nor time consuming. The Company plans to submit
applications to each agency in April 2004 and we believe we may obtain approval
in approximately two months. Prior to receiving these approvals, we may only
sell our additive product to the sugar millers in Brazil. Effect of existing or probable governmental regulations: Regulations may affect new motor fuel products by raising barriers to entry
(thus keeping out untested products that lack proof of claims for performance)
or by providing incentives for products that help achieve public policy goals. O2Diesel began an intensive testing program in 1999 which will continue through
2004. For the most part, this testing is designed to provide proof to
federal, state and local regulatory bodies that O2Diesel has a positive impact
in reducing emissions that contribute to ground-level ozone in urban areas, and
that it will reduce toxic particulate matter emissions. These same agencies
may provide incentives for the use of such products in cases where the benefits
of using the products can be verified (see California ARB discussion, above). Regulations for motor fuels may have the effect of limiting competition from
products that cannot prove their claims to regulators, while giving others that
can an advantage in the marketplace. Moreover, the availability of federal,
state and local incentives to encourage the use of verified products helps make
O2Diesel a cost-effective fuel for fleets seeking to comply with tougher new
air quality regulations. As an example of some of these incentives, the U.S.
government permits a reduction in excise tax for diesel fuel blended with
ethanol, provided that ethanol makes up at least 10% of the blended fuel.
Texas allows a motor fuel tax reduction for the use of ethanol. If used in the
mandated proportions, O2Diesel may qualify for these tax reductions. The Company is not aware of any incentives for the use of its
additive or fuel in Brazil. Estimate of the amount of time spent during each of the last two fiscal years
on research and development activities: O2Diesel has an agreement with Cognis for the joint development of co-solvency
additive products as well as the joint ownership of patents covering such
products. Under the terms of this agreement, O2Diesel is not required to incur
any research and development expenditures, but we are required to share equally
in all of the legal costs to prepare, file and maintain all patent applications
and issued patents. Costs and effects of complying with environmental laws: O2Diesel is faced with very few costs for it to comply with environmental laws
and regulations. However, we have incurred substantial costs in carrying out
tests to demonstrate that the use of our product will enable -6-




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customers to comply with environmental laws and regulations. In the case of
O2Diesel, many of the tests required by the U.S. government have been funded
by governmental appropriations. In 2003 alone, O2Diesel spent about $160,000
to complete Tier 1 tests, of which approximately 80% was funded by government
appropriations. For a more detailed description of government appropriations,
see note 3 to the Financial Statements on page F-9. An additional $170,000
was incurred by the Company to obtain our California ARB verification, but none
of this cost was funded by government appropriations or grants. In 2004, the
Companys testing budget may reach $2.0 million to obtain both ARB and EPA
verification for the broadest possible array of engine families and uses,
combined in some cases with state-of-the-art exhaust after treatment
technologies. The Company believes that approximately 80% of the costs to
conduct these tests may be funded by appropriations from U.S. government agencies such as the
Department of Energy and the Department of Defense. O2Diesel has participated in tests in Canada with various government and
quasi-government agencies to verify the emissions of our product in bus fleets
as well as for use with diesel exhaust after treatment technologies. The Company anticipates having to incur about $120,000 for various tests in
Brazil during 2004 to insure that the use of O2Diesel conforms to the
countrys environmental laws and regulations. Employees: O2Diesel has 15 employees, all of whom are employed on a full-time basis. As
of the date of this report, the Company had 12 full-time employees in the U.S.
and 3 full-time employees in Brazil. (c) Reports to Security Holders: We are currently subject to the reporting requirements of the Securities
Exchange Act, and we file periodic reports including annual Form 10-KSB and
quarterly Form 10-QSB, and other information with the Securities and Exchange
Commission (the SEC). In addition, we will upon request, furnish
shareholders with annual reports containing audited consolidated financial
statements certified by our independent accountants and interim reports
containing unaudited consolidated financial information.
We will provide without charge to each person who receives a copy
of this Form 10-KSB, upon written or oral request, a copy of any information
that is incorporated by reference in this Form 10-KSB (not including exhibits
to the information that is incorporated by reference unless the exhibits are
themselves specifically incorporated by reference). Such request should be
directed to O2Diesel Corporation, Attention: Investor Relations, 100 Commerce
Drive, Suite 301, Newark, DE 19713, telephone 302-266-6000. Our web site is
www.o2diesel.com. For further information with respect to us, reference is made to all other
reports and information that we have filed with the SEC, which may be inspected
and copied at the public reference facilities of the SEC in Washington D.C.
Copies of such material can be obtained from the Public Reference Section of
the SEC, 450 Fifth Street, NW, Washington, D.C. 20549, telephone
1-800-SEC-0330, at prescribed rates and are available on the World Wide Web at
http://www.sec.gov. The SEC maintains information on this web site regarding
reports, proxy and information statements and other information pertaining to
issuers that file electronically with the SEC. Visitors to the site may access
such information by searching the EDGAR database on the SECs web site. 
 Item 2. Description of Property O2Diesel owns no real property. We rent 4,950 square feet of office space
located at 100 Commerce Drive Suite 301, Newark, Delaware, 19713 under a
five-year lease entered into in December 2003. This space serves as the corporate
headquarters of the group. The aggregate cost of this office space over the lease term is $392,875, plus
common area charges that will be billed annually to the Company. In the first quarter of 2004, we rented office space of about 650 square feet
in Sao Paulo, Brazil under a lease with a term of 18 months. In addition, the
Company has rented an office in Rio de Janeiro located in the offices of the
Brazilian company that owns 25% of O2Diesels Brazilian subsidiary. The Company owns office equipment that cost approximately $115,000 and test
equipment costing about $53,000, for a total of $168,000. Test equipment
acquired in 2003, which cost about $51,000, was used in conjunction with
carrying out a series of tests funded by U.S. government appropriations.
However, under the terms of the contract, the cost of capital equipment must be
borne by the Company. During 2003, the -7-




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Company acquired $91,600 of office furniture and equipment, of which about
$65,000 was acquired in December 2003 when we moved to our new rented office facility in
Newark, Delaware. The office furniture and fixtures acquired
in 2003 consisted of computers and other related equipment and normal office
furniture. 
 Item 3. Legal Proceedings O2Diesel is not a party to any legal proceedings as of the date of this report. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to the stockholders during the fourth quarter of the
year ended December 31, 2003. 
 PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters Market Information: Effective May 16, 2001, the Companys shares of common stock were accepted for
quotation on the National Association of Securities Dealers Over-the-Counter
Bulletin Board (OTC-BB) quotation service. The Companys common stock now is
identified by the symbol OTOD.OB The quotations shown below reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions. Per share common stock bid prices by quarter for the fiscal years ended
December
31, 2003 and December 31, 2002: Quarter Ended
    
    High (1)
    
    Low (1)December 31, 2003
    
    $
    3.71
    
    
    $
    3.35September 30, 2003(2)
    
    
    3.52
    
    
    
    1.20June 30, 2003
    
    
    1.20
    
    
    
    1.01March 31, 2003
    
    
    1.20
    
    
    
    1.15December 31, 2002
    
    
    1.95
    
    
    
    1.15September 30, 2002
    
    
    1.25
    
    
    
    1.15June 30, 2002
    
    
    1.95
    
    
    
    1.50March 31, 2002
    
    
    1.95
    
    
    
    1.85
  (1)
    
    Source of Information: Reuters(2)
    
    First quarter ended after July 15, 2003 Transaction with AAE Technologies
International Plc. Holders Of Common Equity: As of March 26, 2004, there were 28,969,772 shares of our common stock outstanding,
held by 203 stockholders of record. Dividends; To date, we have not paid any dividends on our common stock and we do not expect
to declare or pay any dividends on our common stock in the foreseeable future.
Payment of dividends will depend upon our future earnings, if any, our
financial condition, and other factors as deemed relevant by the Board of
Directors. -8-




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Recent Sales of Unregistered Securities: As part of the Offer, the Company undertook to raise an additional $3.5 million
through a follow-on private placement of our common stock (the Follow-On
Private Placement). As of March 26, 2004, 1,085,784 shares have been
subscribed to under the Follow-On Private Placement and the Company has
collected proceeds totaling $1,364,175. The common stock offered in the
Follow-On Private Placement was not publicly offered and instead was sold to
private investors. There was no underwriter involved in the Follow-On Private
Placement. The sales of common stock under the Follow-On Private Placement
that were completed in non-U.S. transactions were exempt from registration
pursuant to Regulation S promulgated under the Securities Act of 1933. The
sales of common stock under the Follow-On Private Placement to accredited U.S.
investors were exempt pursuant to Regulation D promulgated under the Securities
Act of 1933. As
    disclosed in our current report on Form 8-K filed with the SEC on March 12,
    2004 and incorporated herein by reference, the Company filed a Certificate
    of Designation with the Secretary of State of the State of Washington defining
    the rights of holders of O2Diesel Series A 0% Convertible Preferred Stock,
    par value $.0001 (Series A Preferred Stock). Pursuant to a Convertible
    Preferred Stock Purchase Agreement between the Company and the
purchaser named
    therein (the Series A Purchaser) dated as of March 3, 2004,
    the Company issued to the Series A Purchaser, 800,000 shares of Series A Preferred
    Stock. The offering resulted in gross proceeds to the Company, prior to the
    deduction of fees and commissions, of approximately $3,200,000. The sale of
    the Series A Preferred Stock was exempt from registration pursuant to Regulation S
    promulgated under the Securities Act of 1933. The
    Series A Preferred Stock is convertible into the Companys common stock
    at a variable conversion ratio which is the lesser of (a) $4.00 as adjusted
    as provided in the Series A Certificate of Designation (the Series A
    Fixed Conversion Price) or (b) eighty percent (80%) of the lowest
    closing bid price for the Common Stock in the ten business days preceding
    the date of conversion, but, in no case, less than 50% of the Series A Fixed
    Conversion Price. In no event will the Series A Purchaser receive more than
    approximately 4,395,604 nor less than 2,000,000 shares of the Companys
    common stock upon conversion of the Series A Preferred Stock. The Series A
    Preferred Stock is subject to a two-year restriction on transfer. The Series
    A Preferred Stock Certificate of Designation and the Convertible Preferred
    Stock Purchase Agreement with the Series A Purchaser are filed as exhibits to this report and incorporated
    herein by reference. On March 12, 2004, the Company
    filed a Certificate of Designation with the Secretary of State of the State
    of Washington defining the rights of holders of O2Diesel Series B 0%
    Convertible Preferred Stock, par value $.0001 (Series B Preferred Stock).
    Pursuant to a Convertible Preferred Stock Purchase Agreement between the Company
    and the purchaser named therein (the Series B Purchaser) dated
    as of March 29, 2004, the Company issued to the Series B Purchaser, 750,000
    shares of Series B Preferred Stock. The offering resulted in gross proceeds
    to the Company, prior to the deduction of fees and commissions, of approximately
    $3,000,000. The sale of the Series B Preferred Stock was exempt from
    registration pursuant to Regulation S promulgated under the Securities
    Act of 1933. The Series B Preferred Stock is
    convertible into the Companys common stock at a variable conversion
    ratio which is the lesser of (a) $3.65 as adjusted as provided in the Series
    B Certificate of Designation (the Series B Fixed Conversion Price)
    or (b) eighty percent (80%) of the lowest closing bid price for the Common
    Stock in the ten business days preceding the date of conversion, but, in no
    case, less than 50% of the Series B Fixed Conversion Price. In no event will
    the Series B Purchaser receive more than approximately 4,109,589 nor less
    than 2,054,795 shares of the Companys common stock upon conversion of
    the Series B Preferred Stock. The Series B Preferred Stock is subject
    to a two-year restriction on transfer. The Series B Preferred Stock Certificate
    of Designation and the Convertible Preferred Stock Purchase Agreement with
    the Series B Purchaser are filed as exhibits to this report and incorporated
    herein by reference. 
 Item 6. Plan Of Operation Business Plan: The
    Company is classified as a development stage company as shown on our audited
    consolidated financial statements for the year ended December 31, 2003.
    In 2004, the Company expects to begin the sale of O2D05 additive and O2Diesel
    in sufficient volumes to cause the Companys status as a development
    stage company. During 2004, we intend to devote our efforts to generating
    sales to our targeted customers in the U.S., Canada and Brazil, as well as
    improving our logistics network for the delivery of our products. In addition,
    we will continue a series of product tests and demonstrations that relate
    directly to our sales efforts and to the needs of our targeted customers. United States and Canada: Initially, our focus for the U.S. and Canada is to target key geographical
areas and specific diesel markets based upon:  
    
    Current and projected size of diesel fuel consumption;
    
    High-population centers under strict air quality regulations;
    
    Large concentrations of urban-based, centrally fueled fleets of trucks and buses;
    
    Off-road construction equipment;
    
    Diesel equipment used by Port facilities and in large-scale mining operations; and
    
    Marketing opportunities centered on public policy and positive environmental image. In the U.S., O2Diesels initial sales and marketing efforts will be focused on
the states of Texas and California, as well as the northeastern states of New
York, New Jersey and Connecticut. Taken together, these three -9-




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areas account for about one-third of all diesel fuel used in the U.S. In
Canada, we intend to concentrate our efforts on the countrys large population
centers in the Eastern and Western provinces. Our sales force will identify
potential customers that fit the profile for use of O2Diesel products. In
addition, our marketing partner, Octel-Starreon will assist us in our sales
efforts, and will also provide laboratory and other technical assistance,
including a quality control function. In selling into the U.S. and Canadian markets, the Company faces several
challenges, almost all centered around the logistics of delivering O2Diesel to
potential customers. O2Diesel has devised a parallel strategy to meet these
challenges. Under
    the first element of our strategy, we intend to sign distribution agreements
    with major jobbers, who in turn have centrally fueled fleets as their customers.
    We have signed distribution agreements with two jobbers in California. O2Diesel
    plans to sell additive to the jobbers and assist them in purchasing ethanol
    by either locating ethanol suppliers or purchasing and reselling ethanol to
    them. O2Diesel plans to have the jobbers blend the additive and ethanol with
    diesel and then sell O2Diesel to their customers. O2Diesels sales
    force and technical staff will work jointly with a jobber and the jobbers
    customers to assist in the transition from the use of regular diesel fuel
    to O2Diesel. A key part of working with each customer will be to provide
    safety and training materials covering the use of the fuel. In addition, O2Diesels
    technical staff plans to work closely with each customer in the process of
    purchasing and installing flame arrestors in all customer vehicles. In some
    cases, O2Diesel will be responsible for sourcing and installing the flame
    arrestors and in other cases the Company will have an oversight role. As
    part of the second leg of O2Diesels strategy, O2Diesels sales
    force, working with Octel, plans to market and sell O2Diesel directly
    to companies, government municipalities and others that operate large centrally
    fueled fleets. These may include large truck and bus fleets, construction
    and mining companies as well as port facilities, railroads, agricultural users,
    and the military. In these cases, O2Diesel will likely be responsible for
    all logistics required to deliver O2Diesel to the customer. To achieve
    this end, O2Diesel intends to work with fuel distributors that have the ability
    to blend diesel fuel, ethanol and additive for delivery to a customers
    central fueling location. O2Diesel plans to purchase the ethanol and supply
    additive and, in some cases, we may even purchase diesel fuel. In the process
    of transitioning a customers fleet to O2Diesel, the Company needs
    to put in place the logistical support to insure that fuel is delivered on
    a timely basis. In this regard, O2Diesel is seeking to create a network of
    transportation providers. With large fleet type customers, O2Diesels
    technical staff will work closely with the customer in all facets for preparing
    the vehicles or other equipment to use O2Diesel. This will include a
    review of the customers fueling facilities for cleanliness and compatibility
    to O2Diesel, arranging tank cleaning and filtering systems as necessary
    as well as either purchasing and installing flame arrestors or assisting the
    customer to do so. In Brazil, O2Diesel plans to target customers similar to those in the U.S.
However, in Brazil, we plan to establish our own sales force without seeking a
formal alliance with a local company active in the fuels or additive
industries. The Company has joined with a large, well established commodity
firm that trades in sugar and alcohol. This company owns 25% of O2Diesels
Brazilian subsidiary. O2Diesel has targeted some of Brazils largest sugar
growers and millers as potential customers for O2Diesel, and we hope that our
equity partner will play a significant role in selling to this sector. The fuel distribution system is more concentrated in Brazil than it is in the
U.S. As a consequence, O2Diesel must join with one or more large fuel
distributors who can deliver and distribute O2Diesel products in Brazil.
Failure to attract one or more distribution partners would likely set back the
Companys timetable for achieving market penetration in Brazil. Cash Requirements: Based
    on current projected levels of operations and expenditures, the Company may
    need to raise additional funds over the next twelve months. Subsequent to
    December 31, 2003, the Company has completed two financings in which
    the Company issued newly-created preferred stock in exchange for approximately
    $5.8 million, net of expenses. To date, the Company has not had any bank trade
    facilities, except an overdraft line in the U.K. used to meet operating needs.
    This overdraft facility was repaid and cancelled during 2003. However if the
    Company achieves significant sales, we plan to apply for trading lines with
    banks in the U.S. and Brazil as a means to finance our working capital needs.
    The Company has favorable trade terms with our supplier of additive. Under
    these terms, the Company expects to be able to purchase and sell our additive
    product and -10-




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match the receipt of sales proceeds with payment for our additive inventory. There are two significant risks that may affect the Companys ability to
adequately meet its cash needs and cash projections. First, there is what is
described as the flame arrestor matter. As part of the process by which
O2Diesel  was approved for sale in California, the California ARB set a number
of conditions that must be adhered to on an ongoing basis. One of the
conditions is that all storage tanks in which O2Diesel  is stored and all
vehicles that use the fuel must be fitted with devices known as flame
arrestors. Flame arrestors are safety devices which are intended to prevent a
fire in the case that a spark or other type of ignition might inadvertently
enter the fill inlet of a fuel tank. The Company has not obtained sufficient
experience with purchasing and fitting flame arrestors to vehicles and storage
tanks in the U.S. to be able to accurately project the cost and time of
completing this task. Moreover, there is insufficient history for the Company
to be able to predict with certainty the manpower required to accomplish this
work. The second concern relates to the logistics issues for large fleets that are
direct customers of the Company in the U.S., Canada and Brazil. To date, the
Company has not completed the required logistics arrangements to finalize the
necessary infrastructure to insure that we can purchase and blend ethanol with
our additive and then arrange for the timely delivery of O2Diesel to potential
customers. Given
    our projected level of expenses, the cash on hand, the continuation of favorable
    trade terms from our major supplier and the $5.8 million raised in March
    2004, the Company believes we will have sufficient cash to fund our operations
    for the remainder of 2004. However, additional funding may be needed if the
    Company is unable to successfully manage the flame arrestor issue and to establish
    adequate financial and logistics arrangements to insure the timely delivery
    of O2Diesel. If one or both of these issues are not resolved in a satisfactory
    and timely manner, there can be no assurance that the Company will have sufficient
    operating capital to carry out our business plan. Moreover, there can be no
    assurance that the Company will be successful in our efforts to raise additional
    funds. Nor can there be any assurance that the Company will generate sales
    and collect cash to offset our operating expenses. As of the date of this
    report, the Company has generated only $12,204 in sales and has only minimal
    orders for either O2D05 or O2Diesel. Lastly, there can be no assurance
    that actual events will not differ from those anticipated, or that general
    economic conditions may vary significantly in ways that could negatively impact
    the operations and cash position of the Company. Research & Development: O2Diesel has an agreement with Cognis for the joint development of co-solvency
additive products as well as the joint ownership of patents covering such
products. Under this agreement, O2Diesel has worldwide rights to market and
sell the additive products and Cognis has the worldwide rights to manufacture
such products. Under the terms of this agreement, O2Diesel is not required to
incur any research and development expenditures, but we are required to share
equally in all of the legal costs to file and maintain all patent applications
and issued patents. O2Diesel
    is responsible for the costs of testing O2Diesel products. To date, these
    tests have generally been specific to the jurisdictions in which the Company
    intends to do business. In the ensuing twelve months, the Company expects
    to pursue an ambitious program of testing O2Diesel products both in the laboratory
    and in field trials. In 2004 the Company intends to carryout the necessary
    testing to obtain both ARB and EPA verifications for the broadest possible
    array of engine families and uses. Completion of these tests should further
    validate the benefits of using O2Diesel, and should assist in the marketing
    of the product. The costs to complete these tests could reach as much as $2.0 million.
    Based on government funding that has been received and additional government
    funding that the Company believes may be appropriated for these specific purposes,
    the Company estimates that 80% or more of the costs for such laboratory tests
    and field trials may be funded by U.S. government agencies such as the Department
    of Energy and the Department of Defense. For a more detailed explanation,
    see Note 3 to the Financial Statements on page F-9. In
    Brazil, we expect to spend about $120,000 in 2004 on testing protocols to
    insure that our additive and fuel complies with the federal governments fuel and
    environmental laws and regulations. Employees: At present, O2Diesel has 15 full-time employees of which 12 are in the U.S. and
3 are in Brazil. The Company -11-




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has no part-time employees. For the remainder of the year, the Company plans
to add 10 full-time employees in the U.S. and 5 in Brazil which would bring our
total employee count to 30 by the year-end. In the U.S., the Company plans to
hire 2 persons in management positions for business planning and logistics,
respectively, 1 in sales, 3 as technical representatives, 1 for government
grants, 1 for logistics and 2 in accounting. Of the 5 new staff planned for
Brazil, the Company anticipates that 1 will work in logistics, 2 in sales, 1 in
technical services and 1 in office administration. 
 Item 7.
    Consolidated Financial Statements The Companys consolidated financial
    statements are filed with and begin on page F-1 of this report. 
 Item 8. Changes in Accountants As
    a result of the July 15, 2003 transaction in which the Company acquired
    AAE Technologies International Plc, and the subsequent relocation of O2Diesels
    management from Canada to the United States, it became necessary to replace
    the principal accountants of both O2Diesel Corporation and AAE Technologies
    International Plc. The former principal accountants for both companies were
    foreign accounting firms. O2Diesels former principal accountants, Manning
    Elliott are based in Canada. Manning Elliott informed the Company that, because
    of existing SEC guidelines that are unique to Canadian firms, Manning Elliott
    could not render an opinion on the Companys consolidated financial statements
    unless the management and control of the registrant remained in Canada. AAE
    Technologies International Plcs former principal accountants, Cremin
    McCarthy & Co. are based in Dublin, Ireland and are not qualified to
    render opinions on financial statements prepared under U.S. GAAP. Both Manning
    Elliott and Cremin McCarthy resigned as the principal accountants of O2Diesel
    Corporation and AAE Technologies International Plc, respectively. Both firms
    provided a letter to the Company in which each firm affirmatively stated that
    their reports on each companys respective financial statements for the
    past two fiscal years did not contain an adverse opinion or a disclaimer of
    opinion and were not qualified or modified as to uncertainty, audit scope,
    or accounting principles. In connection with the audits of each company by
    their former principal accountants, each accounting firm also affirmatively
    declared that for the relevant periods, there were no disagreements for any
    matters of accounting principles or practices, financial statement disclosure,
    or auditing scope and procedures which, if not resolved to the satisfaction
    of either firm would have caused that firm to make reference to the matter
    in their report. The resignation of each firm of principal accountants was reported by the
Company on a Form 8K filed on February 4, 2004, and is incorporated herein by
reference. On
    January 28, 2004, the Companys Board of Directors approved the engagement
    of Ernst & Young LLP to audit and report on the 2003 consolidated financial
    statements of the Company as well as to review the Companys financial
    information before we file our Form 10-KSB for 2003 and Forms 10-QSB for 2004. Item 8A. Controls and Procedures O2Diesel, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Companys
disclosure controls and procedures as of December 31, 2003. Based on that
evaluation, the Company determined that our disclosure controls and procedures
were effective as of December 31, 2003. There were no material changes in the
Companys internal control over financial reporting during the fourth quarter
of 2003. 
 PART III 
 Item 9.
    Directors and Executive Officers, Promoters and Control Persons The
    information for Item 9 will be included in the Companys Annual
    Proxy Statement to be filed in accordance with General Instruction E (3) to
    Form 10-KSB and is incorporated herein by reference. 
 Item 10. Executive Compensation The information for Item 10 will be included in the Companys Annual Proxy
Statement to be filed in accordance with General Instruction E (3) to Form
10-KSB and is incorporated herein by reference. -12-




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Item 11. Security Ownership of Certain Beneficial Owners and Management The information for Item 11 will be included in the Companys Annual Proxy
Statement to be filed in accordance with General Instruction E (3) to Form
10-KSB and is incorporated herein by reference. 
 Item 12. Certain Relationships and Related Transactions The information for Item 12 will be included in the Companys Annual Proxy
Statement to be filed in accordance with General Instruction E (3) to Form
10-KSB and is incorporated herein by reference. 
 Item 13. Exhibits and reports on Form 8-K (a) Exhibits Exhibits included or incorporated by reference in this document are set forth
in the Exhibit Index below. 
 EXHIBIT INDEX 3.1(1)
    
    Articles of Incorporation3.2(3)
    
    Articles of Amendment to change the Companys name to O2Diesel
Corporation (previously filed as Exhibit 1)3.3(1)
    
    Bylaws4.1(1)
    
    Specimen Stock Certificate4.2(1)
    
    Stock Subscription Agreement4.3(2)
    
    $100,000 Promissory Note10.1(1)
    
    License Agreement10.2(1)
    
    Assignment of License10.3(4)
    
    Support Agreement (previously filed as Exhibit 1)10.4(4)
    
    Indemnity Escrow Agreement (previously filed as Exhibit 2)10.5(4)
    
    Option and Escrow Agreement (previously filed as Exhibit 3)10.6(4)
    
    Contribution and Cancellation Agreement (previously filed as Exhibit 4)10.7(4)
    
    Waiver Agreement (previously filed as Exhibit 5)10.8(4)
    
    Loan Agreement (previously filed as Exhibit 6)10.9(4)
    
    Form of Convertible Note (previously filed as Exhibit 7)10.10(4)
    
        Form of Employment Agreement between O2Diesel
          and Alan Rae (previously filed as Exhibit 8)10.11(4)
    
    Form of Employment Agreement between O2Diesel and David Koontz
(previously filed as Exhibit 9)10.12(4)(5)
    
    Cooperation agreement between Cognis and AAE (previously filed as
Exhibit 10)10.13(6)
    
    Form of Agreement to Amendment Loan Agreement and Convertible Debenture10.14(7)
    
    Letter dated September 23, 2003 from the California Air Resources
Board (previously filed as Exhibit 10.13)10.15(7)
    
        Memorandum of Understanding between BASF Aktiengesellschaft
          and O2Diesel Corporation dated August 18, 2003 (previously filed as Exhibit 10.14)
 -13-




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Exhibit Number
        
        Description16.1(8)
        
        Letter from Manning Elliot to the Securities
          and Exchange Commission dated January 23, 200416.2(8)
        
        Letter from Cremin McCarthy & Company
          to the Securities and Exchange Commission dated February 2, 200431.1
        
        Rule 13a-14(a) Certification by Chief Executive Officer (filed herewith)31.2
        
        Rule 13a-14(a) Certification by Chief Financial Officer (filed herewith)32.1
        
        Rule 13a-14(b) Certifications by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 (filed herewith)99.1(9)
        
        Certificate of Designation of the Rights
          and Preferences of Series A 0% Convertible Preferred Stock of O2Diesel
          Corporation filed with the Secretary of State of the State of Washington
          on March 2, 200499.2(9)
        
        Convertible Preferred Stock Purchase Agreement
          by and among O2Diesel Corporation and the Purchaser named therein, dated
          as of March 3, 200499.3
        
        Certificate of Designation of the Rights
          and Preferences of Series B 0% Convertible Preferred Stock of O2Diesel
          Corporation filed with the Secretary of State of the State of Washington
          on March 12, 2004 (filed herewith)99.4
        
        Convertible Preferred Stock Purchase Agreement
          by and among O2Diesel Corporation and the Purchaser named therein, dated
          as March 29, 2004 (filed herewith)
 (1) Previously filed as an exhibit to the Companys registration statement on
Form SB-2 on June 30, 2000, as amended September 19, 2000, November 3, 2000 and
December 22, 2000 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Companys annual report on Form
10-KSB on March 29, 2002 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Companys current report on Form 8-K
on June 9, 2003 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Companys current report on Form 8-K
on July 30, 2003 and incorporated herein by reference.
(5) O2Diesel applied for, and was granted on February 25, 2004, confidential treatment with respect
to certain portions of this Agreement, which have been omitted, pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(6) Previously filed as an exhibit to the Companys quarterly report on Form
10-QSB for the quarter ended June 30, 2003 on August 14, 2003 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Companys quarterly report on Form
10-QSB for the quarter ended September 30, 2003 on November 19, 2003 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Companys current report on Form 8-K
on February 6, 2004 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Companys current report on Form 8-K
on March 12, 2004 and incorporated herein by reference. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the last quarter of the fiscal
year covered by this report. 
 Item 14.
    Principal Accountant Fees and Services The information for Item 14 will be included in the Companys Annual Proxy
Statement to be filed in accordance with General Instruction E (3) to Form
10-KSB and is incorporated herein by reference. -14-




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. O2DIESEL CORPORATIONBy:
    
    /s/ Alan R. RaeAlan R. RaeChief Executive Officer and DirectorMarch 30, 2004
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated. TITLE
    
    DATE/s/ Alan R. Rae
Alan R. Rae
    
    Director and Chief Executive Officer
(Principal Executive Officer)
    
        March 30, 2004/s/ David L. Koontz
David L. Koontz
    
    Chief Financial Officer,
Treasurer & Secretary
(Principal Financial and
Accounting Officer)
    
        March 30, 2004/s/ Anthony Dean Smith
          Anthony Dean-Smith
    
    Director
    
        March 30, 2004/s/ Karim Jobanputra
Karim Jobanputra
    
    Director
    
        March 30, 2004/s/ Hendrick Rethwilm
Hendrik Rethwilm
    
    Director
    
        March 30, 2004
 -15-




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##### Table of Contents



02DIESEL CORPORATION
(A Development Stage Company) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGEReport of Independent Auditors
    
    F-1Consolidated Balance Sheet as of December 31, 2003
    
    F-2Consolidated Statements of Operations for the years ended
December 31, 2003 and 2002 and for the period from October 14, 2000
(inception) through December 31, 2003
    
    F-3Consolidated Statements of Changes in Stockholders (Deficit) Equity for
the period from October 14, 2000 (inception) through December 31, 2003
    
    F-4Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002 and for the period from October 14, 2000
(inception) through December 31, 2003
    
    F-5Notes to Consolidated Financial Statements
    
    F-6




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##### Table of Contents



Report of Independent Auditors To The Board of Directors and
Shareholders O2Diesel Corporation We have audited the accompanying consolidated balance sheet of O2Diesel
Corporation (a development stage company) as of December 31, 2003, and the
related consolidated statements of operations, changes in shareholders
(deficit) equity, and cash flows for each of the two years in the period ended
December 31, 2003, and for the period October 14, 2000 (inception) through
December 31, 2003. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of O2Diesel
Corporation at December 31, 2003, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2003, and for the period October 14, 2000 (inception) through
December 31, 2003, in conformity with accounting principles generally accepted
in the United States. /s/ Ernst & Young LLP Philadelphia, Pennsylvania
March 30, 2004 F - 1




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##### Table of Contents



O2Diesel Corporation
(A Development Stage Company)
Consolidated Balance Sheet
December 31, 2003 ASSETSCURRENT ASSETSCash
    
    $
    1,084,876Restricted cash
    
    
    750,000Accounts receivable
    
    
    12,204Due from related parties
    
    
    65,309Other receivables
    
    
    276,659Inventory
    
    
    57,988Prepaid expenses and deposits
    
    
    81,380Total current assets
    
    
    2,328,416Furniture
and EquipmentOffice furniture and equipment
    
    
    115,948Fuel and test equipment
    
    
    52,731168,679Less accumulated depreciation
    
    
    (29,296
    )139,383TOTAL ASSETS
    
    $
    2,467,799LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    529,923Accrued expenses
    
    
    884,078Due to related party
    
    
    29,642Deferred grants
    
    
    65,872Other current liabilities
    
    
    54,339Total current liabilities
    
    
    1,563,854STOCKHOLDERS EQUITYPreferred stock: par value $0.0001; 20,000,000 preferred
shares authorized and none issuedCommon stock: par value of $0.0001; 100,000,000
shares authorized; 28,080,372 issued and outstanding
    
    
    2,808Common stock
subscribed  754,900 shares
    
    
    1,132,350Additional paid-in capital
    
    
    11,745,765Subscriptions receivable
    
    
    (180,000
    )Accumulated other comprehensive income
    
    
    101,128Deficit accumulated during the development stage
    
    
    (11,898,106
    )Total stockholders equity
    
    
    903,945TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    2,467,799
 See notes to consolidated financial statements F - 2




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##### Table of Contents



O2Diesel Corporation
(A Development Stage Company)
Consolidated Statements of Operations October 14, 2000(inception)Year Ended December 31,
        
        through2003
        
        2002
        
        December 31, 2003Revenue
        
        $
        12,204
        
        
        $
        
        
        
        $
        12,204Expenses:Cost of goods sold
        
        
        11,271
        
        
        
        
        
        
        
        11,271Selling and marketing
        
        
        980,780
        
        
        
        228,115
        
        
        
        2,749,542Product testing and
            government grants, net
        
        
        106,478
        
        
        
        380,965
        
        
        
        629,236General and administrative
        
        
        3,187,345
        
        
        
        1,406,392
        
        
        
        8,919,161Total operating expenses
        
        
        4,285,874
        
        
        
        2,015,472
        
        
        
        12,309,210Operating loss
        
        
        (4,273,670
        )
        
        
        (2,015,472
        )
        
        
        (12,297,006
        )Other income (expense):Interest expense
        
        
        (41,813
        )
        
        
        (47,172
        )
        
        
        (90,523
        )Interest income
        
        
        3,817
        
        
        
        9,365
        
        
        
        13,182Foreign currency
            gain (loss), net
        
        
        15,692
        
        
        
        97,228
        
        
        
        64,618Other income, net
        
        
        17,469
        
        
        
        296,814
        
        
        
        265,981Total other income
            (expense)
        
        
        (4,835
        )
        
        
        356,235
        
        
        
        253,258Loss before provision
            for income taxes
        
        
        (4,278,505
        )
        
        
        (1,659,237
        )
        
        
        (12,043,748
        )Provision (benefit)
            for income taxes
        
        
        (48,209
        )
        
        
        53,566
        
        
        
        (145,642
        )Net loss
        
        $
        (4,230,296
        )
        
        $
        (1,712,803
        )
        
        $
        (11,898,106
        )Net loss per share
            (basic and diluted)
        
        $
        (0.20
        )
        
        $
        (0.12
        )
        
        $
        (0.76
        )Weighted average
            shares of common stock outstanding
        
        
        52,614,550
        
        
        
        67,541,451
        
        
        
        57,802,044Recapitalization
            resulting from the AAE Technologies International Plc acquisition
        
        
        (31,655,936
        )
        
        
        (52,781,519
        )
        
        
        (42,143,061
        )Weighted average
            shares of common stock outstanding - giving effect to the recapitalization
        
        
        20,958,614
        
        
        
        14,759,932
        
        
        
        15,658,983
 See notes to consolidated financial statements F - 3




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##### Table of Contents





O2Diesel Corporation
(A Development Stage Company)
Statement of Changes in Stockholders Equity (Deficit)
October 14, 2000 (Inception)through December 31, 2003 DeficitAccumulatedAccumulated
    
    During
    
    TotalCommon Stock
    
    CommonStock
    
    AdditionalPaid - In
    
    Subscription
    
    OtherComprehensive
    
    theDevelopment
    
    Stockholders'EquityShares
    
    Amount
    
    Subscribed
    
    Capital
    
    Receivable
    
    Income (Loss)
    
    Stage
    
    (Deficit)Balance at October 14,
2000 (Inception)
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Common stock issued in
exchange for interest
in wholly owned
subsidiaries
    
    
    43,008,772
    
    
    
    430,088
    
    
    
    
    
    
    
    3,603,415
    
    
    
    
    
    
    
    
    
    
    
    (4,138,684
    )
    
    
    (105,181
    )Common stock issued at
various dates in 2001
    
    
    24,181,038
    
    
    
    241,810
    
    
    
    
    
    
    
    1,268,031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,509,841Comprehensive income:Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,476
    )
    
    
    
    
    
    
    (4,476
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,406,709
    )
    
    
    (1,406,709
    )Balance at December 31,
2001
    
    
    67,189,810
    
    
    
    671,898
    
    
    
    
    
    
    
    4,871,446
    
    
    
    
    
    
    
    (4,476
    )
    
    
    (5,545,393
    )
    
    
    (6,525
    )Common stock issued at
$0.225 per share issued
on various dates in 2002
    
    
    703,282
    
    
    
    7,033
    
    
    
    
    
    
    
    515,657
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522,690Comprehensive income:Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74,085
    )
    
    
    
    
    
    
    (74,085
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,712,803
    )
    
    
    (1,712,803
    )Balance at December 31,
2002
    
    
    67,893,092
    
    
    
    678,931
    
    
    
    
    
    
    
    5,387,103
    
    
    
    
    
    
    
    (78,561
    )
    
    
    (7,258,196
    )
    
    
    (1,270,723
    )Common stock issued at various dates in 2003
    
    
    555,556
    
    
    
    5,556
    
    
    
    
    
    
    
    119,444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Common Stock issued for
consulting services
    
    
    200,000
    
    
    
    2,000
    
    
    
    
    
    
    
    43,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000Common Stock issued for
remaining interest in
subsidiaries on July 15, 2003
    
    
    4,356,371
    
    
    
    43,562
    
    
    
    
    
    
    
        46,323
    
    
    
    
    
    
    
    
    
    
    
        (409,614
    )
    
    
    (319,729
    )Common stock issued upon
exercise of stock
options on various
dates in 2003
    
    
    8,670,881
    
    
    
    86,709
    
    
    
    
    
    
    
    1,131,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,218,304Recapitalization resulting
from the AAE
acquisition on July 15,
2003
    
    
    (56,928,861
    )
    
    
    (814,283
    )
    
    
    
    
    
    
    814,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
at $1.50 per share on
various dates during
2003
    
    
    3,333,333
    
    
    
    333
    
    
    
    
    
    
    
    4,999,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000,000Expenses related to 2003
issuance of common
stock and
recapitalization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (795,650
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (795,650
    )Subscriptions for 754,900
shares of common stock
at $1.50 per share on
various dates during 2003
    
    
    
    
    
    
    
    
    
    
    1,132,350
    
    
    
    
    
    
    
    (180,000
    )
    
    
    
    
    
    
    
    
    
    
    952,350Comprehensive income:Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,689
    
    
    
    
    
    
    
    179,689Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,230,296
    )
    
    
    (4,230,296
    )Balance - December 31, 2003
    
    
    28,080,372
    
    
    $
    2,808
    
    
    $
    1,132,350
    
    
    $
        11,745,765
    
    
    $
    (180,000
    )
    
    $
    101,128
    
    
    $
        (11,898,106
    )
    
    $
    903,945
 See notes to consolidated financial statements F - 4




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##### Table of Contents



O2Diesel Corporation
(A Development Stage Company)
Consolidated Statements of Cash Flows Year Ended December 31,
        
        October 14, 2000
          (inception)
          through2003
        
        2002
        
        December 31, 2003Cash flows from
            operating activitesNet loss
        
        $
        (4,230,296
        )
        
        $
        (1,712,803
        )
        
        $
        (11,898,106
        )Adjustments to reconcile
            loss to net cash used in operating activites:Depreciation
        
        
        17,936
        
        
        
        31,699
        
        
        
        85,023Amortization
        
        
        
        
        
        
        
        
        
        
        7,786Write off of patent
        
        
        
        
        
        
        337,329
        
        
        
        337,329Common stock issued
            for consulting services
        
        
        45,000
        
        
        
        
        
        
        
        45,000Write off of equipment
        
        
        1,538
        
        
        
        
        
        
        
        1,538Changes in operating
            assets and liabilites:Accounts receivable
        
        
        (12,204
        )
        
        
        
        
        
        
        (12,204
        )Due from related
            parties
        
        
        (35,667
        )
        
        
        549,775
        
        
        
        (35,667
        )Other receivables
        
        
        (220,885
        )
        
        
        (30,429
        )
        
        
        (276,659
        )Inventory, prepaid
            expenses and other current assets
        
        
        (2,200
        )
        
        
        (133,283
        )
        
        
        (139,368
        )Accounts payable
        
        
        (5,507
        )
        
        
        265,676
        
        
        
        529,923Accrued expenses
        
        
        626,905
        
        
        
        161,082
        
        
        
        884,078Deferred grants
        
        
        65,872
        
        
        
        
        
        
        
        65,872Other current liabilities
        
        
        54,339
        
        
        
        (1,114,646
        )
        
        
        54,339Cash flows used
            in operating activities
        
        
        (3,695,169
        )
        
        
        (1,645,600
        )
        
        
        (10,351,116
        )Cash flows from
            investing activitiesRestricted cash
        
        
        (750,000
        )
        
        
        
        
        
        
        (750,000
        )Purchase of furniture
            and equipment
        
        
        (142,590
        )
        
        
        (23,858
        )
        
        
        (225,944
        )Purchase of patent
        
        
        
        
        
        
        
        
        
        
        (345,115
        )Cash flows used
            in investing activities
        
        
        (892,590
        )
        
        
        (23,858
        )
        
        
        (1,321,059
        )Cash flows from
            financing activitiesNet proceeds from
            issuance of common stock
        
        
        3,847,775
        
        
        
        522,690
        
        
        
        10,323,423(Repayments) borrowings
             of bank debt.
        
        
        1,526,032
        
        
        
        806,468
        
        
        
        2,332,500Cash flows provided
            by financing activities
        
        
        5,373,807
        
        
        
        1,329,158
        
        
        
        12,655,923Effect of exchange
            rates on cash
        
        
        179,689
        
        
        
        (74,085
        )
        
        
        101,128Increase (decrease) in
            cash
        
        
        965,737
        
        
        
        (414,385
        )
        
        
        1,084,876Cash at beginning
            of period
        
        
        119,139
        
        
        
        533,524
        
        
        
        Cash at end of
            period
        
        $
        1,084,876
        
        
        $
        119,139
        
        
        $
        1,084,876Cash at end of
            periodSupplemental Disclosures:Cash paid for interest
        
        $
        42,000
        
        
        $
        47,000
        
        
        $
        89,000Cash paid for income
            taxes
        
        $
        
        
        
        $
        
        
        
        $
        Conversion of bridge
            loan into common stock
        
        $
        2,332,500
        
        
        $
        
        
        
        $
        2,332,500Common stock subscribed
        
        $
        180,000
        
        
        $
        
        
        
        $
        180,000Common stock issued
            in exchange for interest in subsidiaries
        
        $
        319,729
        
        
        $
        
        
        
        $
        424,910
 F - 5




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##### Table of Contents



O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 1. The Company and Basis of Presentation O2
    Diesel Corporation (O2Diesel or the Company) is in
    the development stage and has developed a proprietary additive product designed
    to improve the performance of distillate liquid transportation fuels by facilitating
    the addition of ethanol as an oxygenate to these fuels. The additive stabilizes
    and enhances the blending of fuel grade ethanol with diesel fuel. Blending
    02D05 with ethanol and various grades of diesel fuel in turn creates a proprietary
    clean burning fuel called O2DieselTM. To date, the Companys
    operations have been primarily focused on raising capital, performing product
    tests and demonstrations, and bringing its product to market. O2Diesel Corporations predecessor, Dynamic Ventures, Inc., was
incorporated in the State of Washington on April 24, 2000. Dynamic
Ventures, Inc. changed its name to O2Diesel Corporation effective June
10, 2003, in contemplation of the reverse acquisition of AAE Technologies
International Plc (AAE). On July 15, 2003, O2Diesel Corporation acquired
all of the issued and outstanding share capital of AAE in exchange for
17,847,039 shares of its common stock. As a result of this transaction,
the former shareholders of AAE acquired control of the combined companies.
The acquisition of AAE has been accounted for as a capital transaction
followed by a recapitalization as AAE was considered to be the accounting
acquirer. Accordingly, the historical consolidated financial statements of AAE are
considered to be those of O2 Diesel Corporation for all periods presented. In conjunction with the reverse acquisition, the Company completed a
private placement of its common stock whereby it issued 3,333,333 shares
of common stock at $1.50 per share. Of the $5.0 million raised,
approximately $800,000 was used to pay the costs of the reverse acquisition and
private placement, $1.0 million was used to repay a bridge loan that was
made in contemplation of the transaction, and the balance of $3.2 million
is being used to fund the ongoing developmental activities of the Company. 2. Summary of Significant Accounting Policies Principles of Consolidation The
    consolidated financial statements include the accounts of the Company and
    all affiliated subsidiaries. All significant intercompany balances and transactions
    have been eliminated in consolidation. Restricted Cash Restricted
    cash consists of cash held by the Company that is to be released based
    on the timing set forth in documents to the July 15, 2003 transaction,
    which provided for the release of the restricted funds in equal amounts on
    two dates  October 15, 2003 and January 15, 2004. Such funds
    were released on these dates. Concentration of Credit Risk and Allowance for Doubtful Accounts Due to the limited volume of sales, concentrations of credit risk with
respect to accounts receivable are limited. No allowance for doubtful
accounts receivable was deemed necessary at December 31, 2003. F - 6




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##### Table of Contents



O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 2. Summary of Significant Accounting Policies (continued) Inventories Inventories, consisting of fuel held at a third party location, are stated
at the lower of cost as determined using the first in, first out (FIFO)
method or market value. Furniture
and Equipment Depreciation Furniture
and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets
using the straight-line method. The estimated useful lives of
furniture and equipment are as follows: Office furniture and equipment
    
    3 to 5 yearsFuel and test equipment
    
    5 years
 Long-Lived Assets Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long Lived Assets was issued in August
2001 and adopted by the Company on January 1, 2002. In accordance with
SFAS No. 144, the carrying values of intangible assets and other long-lived
assets are reviewed on a regular basis for the existence of facts or
circumstances that may suggest impairment. The Company recognizes an
impairment when the sum of the expected undiscounted future cash flows is
less than the carrying amount of the asset. Impairment losses, if any, are
measured as the excess of the carrying amount of the asset over its
estimated fair value. Financial Instruments The carrying value of cash, restricted cash, accounts receivable, due
to/from related parties, and accounts payable approximate fair value due
to the relatively short maturity of these instruments. Revenue Recognition Revenue from the sales of product by the Company is recognized and
recorded upon the passage of title of the product to the customer. Sales
of the Companys product will also be made by its exclusive sales agent
for the United States and Canada. On these sales, the Company will be
paid a share of the gross profit realized from each sale to the end user.
The Company will record revenue earned in these cases upon notification of
a completed sale to the end user. F - 7




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##### Table of Contents



O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 2. Summary of Significant Accounting Policies (continued) Shipping and Handling Costs The Company classifies costs associated with shipping and handling
activities within cost of goods sold in the consolidated statements of
operations. Shipping and handling costs were $1,941 for the year ended
December 31, 2003 and for the period October 14, 2000 (inception) through
December 31, 2003. Advertising Expenses Advertising costs are expensed as incurred. Advertising expense was
$500,000 for the year ended December 31, 2003 and for the period October 14,
2000 (inception) to December 31, 2003, respectively. There were no
advertising expenditures prior to 2003. Research and Development CostsResearch and development costs
are expensed as incurred. Product Test and Demonstration Appropriations The Company receives appropriations from governmental agencies to fund
its product testing and demonstration programs. The Company evaluates the
conditions of the appropriation and either increases revenue, decreases
expenses or reduces the cost of furniture and equipment depending upon the attributes
of the underlying grant. Appropriations are not recognized until there is
reasonable assurance that the Company will comply with the conditions of
the grant and that the grant will be received. Net Loss Per Common Share (basic and diluted) Basic net loss per common share is computed by dividing the net loss
available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net loss per share gives
effect to all dilutive potential common shares outstanding during the
period using the if-converted method. Diluted net loss per share excludes
all potential dilutive common shares if their effect is anti dilutive.
The weighted average number of shares used to compute basic and diluted
loss per share is the same since the effect of the dilutive securities is
anti-dilutive. Stock Based Compensation The Company accounts for stock option grants in accordance with APB Opinion 25, Accounting for Stock Issued to Employees (APB 25)
and related interpretations. Under APB 25, because the exercise price of the stock options equaled the fair value of the underlying common stock on the date of grant,
no compensation cost was recognized. In accordance with SFAS 123, Accounting for Stock-Based Compensation, the Company does not recognize compensation cost based on the fair
value of the options granted at grant date. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date, net loss and net loss per share
would not have been materially different. Income taxes Income
    taxes are accounted for using the liability method whereby deferred tax assets
    or liabilities are computed based upon the difference between the financial
    statement and income tax basis of assets and liabilities using the enacted
    marginal tax rate applicable when the related asset or liability is expected
    to be realized or settled. Deferred income tax expenses or benefits are based
    on the changes in the asset or liability from period to period. If available
    evidence suggests that it is more likely than not that some portion or all
    of the deferred tax assets will not be realized, a valuation allowance is
    required to reduce the deferred tax assets to the amount that is more likely
    than not to be realized. Future changes in such valuation allowance would
    be included in the provision for deferred income taxes in the period of change. F - 8




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O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 2. Summary of Significant Accounting Policies (Continued) Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates. Foreign Currency Translation The
    Company has foreign subsidiaries whose local currency has been determined
    to be the functional currency. For these foreign subsidiaries, the assets
    and liabilities have been translated using the current exchange rates, and
    the income and expenses have been translated using historical exchange rates.
    The adjustments resulting from translation have been recorded separately in
    stockholders (deficit) equity as other comprehensive income
    (loss) and are not included in determining consolidated net income (loss).
    As of December 31, 2003, other comprehensive income included $101,128
    of cumulative income from foreign currency translation. Segment Reporting The Company is a development stage company and has not made sales of its
products in commercial volumes. Management believes that the Company
currently operates and manages the business as one business segment. 3. Government Appropriations Appropriation from the Department of Energy: In
    2002, Company received an appropriation of $1,107,734 from the U.S. Department
    of Energy (DOE) to test the Companys fuel additive as well as its
    blended fuel, O2Diesel. This appropriation is managed for the DOE by
    the National Renewable Energy Laboratory (NREL) under a contract
    which, as amended, continues until November 30, 2004. Under the terms
    of the contract, the Company is reimbursed by NREL for 80% of the costs incurred
    to complete the Statement of Work as set forth in the contract. The Company
    charges all expenses as incurred to operations and accrues all amounts receivable
    under the contract as a reduction to contract expenses. As of December 31,
    2003, the Company incurred costs of $646,856 towards completion of the contract,
    leaving a balance of $460,878 in costs to complete the contract. From the inception
    of the contract in December 2002 through December 31, 2003, the Company
    billed NREL $517,485 of which $184,850 is included in other receivables as of December 31,
    2003. Appropriation from the Department of Defense: In 2003, the Company received an appropriation of $1,000,000 from the
Department of Defense to test O2Diesel fuel in non-strategic military
vehicles operated by the U.S. Air Force at Nellis Air Force Base in Las
Vegas, Nevada . Under the terms of this Appropriation, a third party is
to be paid $200,000 to administer this program on behalf of the Department
of Defense. The remaining $800,000 is to be used to fund purchases of
O2Diesel fuel, certain capital equipment and to reimburse the Company for
its labor, overhead and out-of-pocket costs required to complete this
project. Under this program, the Company is required to meet certain
milestones as a condition to receiving reimbursements for its costs.
Thus, upon achieving a milestone, the Company accrues the amount due and
submits an invoice for reimbursement. All amounts are expensed as incurred, and all amounts receivable F - 9




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O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 3. Government Appropriations (continued) for
    work done are treated as a reduction to expense over the period earned. The
    period of performance for this program runs from October 7, 2003 to December 31,
    2004. As of December 31, 2003, the Company incurred costs of $29,976
    leaving a balance of $770,024 in costs to complete the program. At December 31,
    2003, the Company had achieved one milestone and billed $80,000 related to
    its appropriation which is included in other receivables. 4. Impairment of Intellectual Property Rights Prior
    to the fourth quarter of 2002, the Company was pursuing the marketability
    of a technology it had acquired for $424,659. In December 2002, the Company
    decided that the related product was no longer commercially viable and would no longer be pursued. As a result, it was determined that the intangible asset
    was not recoverable as there was no alternative market for the technology.
    Accordingly, the net book value of $345,115 was charged to general and administrative
    expenses during the quarter ended December 31, 2002. 5. Other Receivables Other receivables consisted of the following at December 31, 2003: NREL Appropriation
    
    $
    184,850Reimbursement due from Cognis
    
    
        11,809CTC Appropriation
    
    
    80,000$
        276,659
 6.
    Accrued Expenses Accrued
    expenses consisted of the following at December 31, 2003: Legal and professional fees
    
    $
        728,984Other
    
    
    105,094Marketing
    
    
    50,000$
        884,078
 7. Deferred Financing and Business Acquisition Costs During
    2003, Management began the public listing process on the Alternative Investment
    Market (AIM) in London, England. All legal accounting and other related
    costs incurred in connection with the AIM listing were capitalized as deferred
    financing costs. In December 2003, management determined that the Company
    would terminate its plan to seek an AIM listing. Accordingly, deferred financing
    costs of $517,000, were charged to expense for the year ended December 31,
    2003. F - 10




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O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 8. Income Taxes No
    provision for Federal and state income taxes has been recorded during the
    periods presented due to the Companys significant operating losses in
    each year. The income tax provision (benefit) reflected in the accompanying
    consolidated statement of operations is the current (benefit) expense
    recognized in Ireland for the periods presented. Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Companys deferred tax assets as of December
31, 2003 are as follows: Net operating loss carryforwards
    
    $
        1,455,000Accrued professional fees
    
    
    210,000Advertising costs
    
    
        127,000Accrued expenses and deferred revenue
    
    
    79,000Total deferred tax assets
    
    
    1,871,000Valuation allowance
    
    
    (1,871,000
    )Net deferred tax assets
    
    $
    
 Management
    has determined that a valuation allowance equal to 100% of the existing deferred
    tax assets is appropriate given the uncertainty regarding the ultimate realization
    of these assets. At December 31, 2003, the Company had Federal and state
    net operating loss carryforwards of approximately $3.6 million for income
    tax purposes. If not used, these carryforwards begin to expire in 2021 for
    Federal and state tax purposes. Federal tax rules impose limitations on the
    use of net operating losses following certain changes in ownership. If such
    a change occurs, the limitation would reduce the amount of these benefits
    that would be available to offset future taxable income each year, starting
    with the year of ownership change. As of December 31, 2003, the Company
    had an Irish net operating loss carryforward of approximately $60,000, which
    can be carried forward indefinitely. F - 11




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O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 9. Stockholders Equity Recapitalization On July 15, 2003, O2Diesel Corporation and AAE Technologies International
    Plc (AAE) entered into a merger transaction whereby O2Diesel acquired all
    of the issued and outstanding share capital of AAE in exchange for the issuance
    of 17,847,039 shares of common stock of O2Diesel. Although O2Diesel was the
    legal acquirer, AAE was deemed to be the accounting acquirer. The transaction was accounted for as an AAE capital transaction, accompanied
    by a recapitalization. As a result of the transaction, the historical financial statements AAE
are deemed to be those of the Company for financial reporting purposes.
The equity accounts of AAE have been adjusted for the recapitalization to
reflect the equity structure of O2Diesel, the legal acquirer.
Specifically:  
    
    The historical stockholders equity of AAE prior to the
transaction has been effected for the equivalent number of shares of
O2Diesel common stock received in the transaction, with an offset to
paid-in capital;
    
    The accumulated deficit of AAE has been carried forward after
the transaction; and
    
    The loss per share for all periods prior to the transaction has
been restated to reflect the number of equivalent common shares
received by AAE in the transaction. The pro-forma results of the combined companies have not been reflected
herein because O2Diesel was a non-operating public shell prior to the
merger and thus would not have had a material impact on the consolidated
results of operations of the Company. There were no stock options or warrants outstanding at the time of the
transactions for either O2Diesel or AAE. Subsequent Issuances of Common Stock In
    connection with the merger between O2Diesel and AAE in July 2003, the Company
    completed a private placement of 3,333,333 shares of common stock at $1.50
    per share. The private placement was partially effectuated through the issuance
    of a $4 million convertible note that was convertible into the Companys
    common stock at $1.50 per share. In October 2003, the Company repaid
    $1,677,500 of the note and the $2,322,500 balance was converted into 1,548,333
    shares of common stock. The remaining 1,785,000 shares of common stock issuable
    under the private placement were issued to other parties in exchange for cash
    proceeds of $2,677,500. The expenses associated with the merger and subsequent
    issuances of shares were $795,650 and they have been reflected as a reduction
    of paid-in capital. During
    the later half of 2003, the Company received subscriptions for the issuance
    of 754,900 additional shares of common stock in conjunction with a follow-on
    private placement. The Company received $952,350 in gross proceeds related
    to the subscriptions for 634,900 shares and has recorded a subscription receivable
    of $180,000 related to the subscriptions for the remaining 120,000 shares.
    The shares are reflected as common stock subscribed in the accompanying financial
    statements as of December 31, 2003 because the shares had not been issued
    as of the balance sheet date. Subsequent to December 31, 2003, the Company
    received additional subscriptions for the issuance 330,884 additional shares
    of common stock at $1.50 a share and the private placement was closed. F - 12




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O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 9. Stockholders Equity (continued) Warrants A wholly-owned subsidiary of the Company entered into a supply and
distribution agreement (the Agreement) with a distributor dated July 10,
2001 that granted the distributor the right to purchase up to 10% of the
outstanding common stock of the subsidiary for $1.00 should certain sales
targets be achieved. The warrant expires on July 10, 2006. To date, none
of the sales targets have been achieved under the Agreement. 10. Related Party Transactions A
    company controlled by the Chairman of the Board provides office space, accounting
    and other services to the Company at a cost of approximately $2,300 per month.
    For the years ending December 31, 2003 and 2002 and for the period from
    October 14, 2000 (inception) through December 31, 2003 the Company
    paid $29,042, $27,330, and $101,966, respectively to the company controlled
    by the Chairman. Included in receivables due from related parties at December 31, 2003 is
$49,709 due from Directors for the individual tax liability in Ireland
attributable to certain consultancy fees paid during 2003 and $15,600
related to travel advances made to certain employees. Included
    in due to related party at December 31, 2003 is $29,640 payable to
    a stockholder for a non-interest bearing advance that had been made to the
    Company. The balance was paid in full subsequent to year end. 11. Commitments Operating leases The Company leases certain office equipment under agreements that are
accounted for as operating leases. As at December 31, 2003, future
minimum lease payments under non-cancelable operating leases expiring in
2008, were as follows: 2004
    
    $
    77,0402005
    
    
    79,2852006
    
    
    81,5302007
    
    
    83,7752008
    
    
    78,680Total
    
    $
    400,310
 Rent expense under the leases was $4,262 for the year ended December 31,
2003 and for the period October 14, 2000 (inception) through December 31,
2003. The leases did not exist prior to 2003. F - 13




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O2Diesel Corporation
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2003 11. Commitments (continued) Options The
    Company has commitments to grant to certain of its Officers and Directors
    options to purchase 4.4 million shares of the Companys Common Stock at
    $1.50 per share. The options will vest over three years and will expire 10 years
    from the effective date. These options will not be issued until the Companys
    proposed stock incentive plan has been approved by the stockholders. The Company
    will record a compensation charge for the difference between the fair value
    of the common stock and the exercise of the option on the date of issuance
    if the fair value of the common stock exceeds the exercise price of the option
    on that date. 12. Subsequent Events In March 2004, the Company approved the designation of two new series of
preferred shares. The new preferred shares, which consists of one million
four hundred thousand (1,400,000) shares of Preferred Stock, is Series A
and B 0% Convertible Preferred Stock (the Series A Preferred Stock and
Series B Preferred Stock) each with a stated value of ten dollars
($10.00) per share. Subsequent to approving the new Series A and Series B
Preferred Stock, the Company immediately completed a transaction with a
publicly traded investment trust on the London Stock Exchange in which it
received approximately $3.1 million in exchange for 800,000 shares of its
Series A Preferred Stock. Further the Company has signed an agreement to
issue an additional 750,000 shares of Series B Preferred Stock
to this investment trust for $2.7
million effective March 29, 2004. During
2003, the Company began the process to establish a company to carry on
business in Brazil. A Brazilian Holding Company was reserved for O2Diesel
and its Articles of Incorporation were registered in Brazil on December 9,
2003. In the first quarter of 2004, the name of the Company was changed
to O2Diesel Quimicos Ltda (Quimicos). and steps were taken to qualify
Quimicos to do business in Brazil. Brazilian legal counsel has advised
that all registration requirements, which are necessary to legally conduct
business in Brazil, should be completed by the end of March 2004. To
date, no capital has been paid in for the quotas (shares) of Quimicos.
O2Diesel will purchase 75% of Quimicos shares for
approximately $12,500. A local Brazilian company will purchase 24.9% of
the companys shares for approximately $4,166 and the manager of Quimicos
will purchase I share. The stated capital of Quimicos is R$50,000, which
is equivalent to approximately $16,667. In 2004, Quimicos was permitted
to open a bank account and to enter into an intercompany loan agreement
with O2Diesel Corporation. The Loan agreement was approved by the
Brazilian monetary authorities on February 20, 2004. Following the
approval of the loan agreement, O2Diesel transferred $120,000 to Quimicos
to allow it to pay legal fees, start up costs and to continue the process
of qualification to carry on business in Brazil. F - 14




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Exhibit Number
    
    Description3.1(1)
    
    Articles of Incorporation3.2(3)
    
    Articles of Amendment to change the Companys name to O2Diesel
Corporation (previously filed as Exhibit 1)3.3(1)
    
    Bylaws4.1(1)
    
    Specimen Stock Certificate4.2(1)
    
    Stock Subscription Agreement4.3(2)
    
    $100,000 Promissory Note10.1(1)
    
    License Agreement10.2(1)
    
    Assignment of License10.3(4)
    
    Support Agreement (previously filed as Exhibit 1)10.4(4)
    
    Indemnity Escrow Agreement (previously filed as Exhibit 2)10.5(4)
    
    Option and Escrow Agreement (previously filed as Exhibit 3)10.6(4)
    
    Contribution and Cancellation Agreement (previously filed as Exhibit 4)10.7(4)
    
    Waiver Agreement (previously filed as Exhibit 5)10.8(4)
    
    Loan Agreement (previously filed as Exhibit 6)10.9(4)
    
    Form of Convertible Note (previously filed as Exhibit 7)10.10(4)
    
        Form of Employment Agreement between O2Diesel
          and Alan Rae (previously filed as Exhibit 8)10.11(4)
    
    Form of Employment Agreement between O2Diesel and David Koontz
(previously filed as Exhibit 9)10.12(4)(5)
    
    Cooperation agreement between Cognis and AAE (previously filed as
Exhibit 10)10.13(6)
    
    Form of Agreement to Amendment Loan Agreement and Convertible Debenture10.14(7)
    
    Letter dated September 23, 2003 from the California Air Resources
Board (previously filed as Exhibit 10.13)10.15(7)
    

      Memorandum of Understanding between BASF Aktiengesellschaft
        and O2Diesel Corporation dated August 18, 2003 (previously filed
        as Exhibit 10.14)16.1(8)
        
        Letter from Manning Elliot to the Securities
          and Exchange Commission dated January 23, 200416.2(8)
        
        Letter from Cremin McCarthy & Company
          to the Securities and Exchange Commission dated February 2, 200431.1
        
        Rule 13a-14(a) Certification by Chief Executive Officer (filed herewith)31.2
        
        Rule 13a-14(a) Certification by Chief Financial Officer (filed herewith)32.1
        
        Rule 13a-14(b) Certifications by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 (filed herewith)99.1(9)
        
        Certificate of Designation of the Rights
          and Preferences of Series A 0% Convertible Preferred Stock of O2Diesel
          Corporation filed with the Secretary of State of the State of Washington
          on March 2, 200499.2(9)
        
        Convertible Preferred Stock Purchase Agreement
          by and among O2Diesel Corporation and the Purchaser named therein, dated
          as of March 3, 200499.3
        
        Certificate of Designation of the Rights
          and Preferences of Series B 0% Convertible Preferred Stock of O2Diesel
          Corporation filed with the Secretary of State of the State of Washington
          on March 12, 2004 (filed herewith)99.4
        
        Convertible Preferred Stock Purchase Agreement
          by and among O2Diesel Corporation and the Purchaser named therein, dated
          as March 29, 2004 (filed herewith)


(1) Previously filed as an exhibit to the Companys registration statement on
Form SB-2 on June 30, 2000, as amended September 19, 2000, November 3, 2000 and
December 22, 2000 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Companys annual report on Form
10-KSB on March 29, 2002 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Companys current report on Form 8-K
on June 9, 2003 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Companys current report on Form 8-K
on July 30, 2003 and incorporated herein by reference.
(5) O2Diesel applied for, and was granted on February 25, 2004, confidential treatment with respect
to certain portions of this Agreement, which have been omitted, pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(6) Previously filed as an exhibit to the Companys quarterly report on Form
10-QSB for the quarter ended June 30, 2003 on August 14, 2003 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Companys quarterly report on Form
10-QSB for the quarter ended September 30, 2003 on November 19, 2003 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Companys current report on Form 8-K
on February 6, 2004 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Companys current report on Form 8-K
on March 12, 2004 and incorporated herein by reference.