UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                   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 June 30, 2004

                                       OR


     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934.


     For the transition period from___________ to__________

                         Commission file number 0-25177

                       ADVANCED ENGINE TECHNOLOGIES, INC.

                 (Name of Small Business Issuer in Its Charter)



                Colorado                                  84-1358194
      (State or Other Jurisdiction                     (I.R.S. Employer
    of Incorporation or Organization                  Identification No.)

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

                                 (310) 914-9599
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                    Title of                   Name of Each Exchange
                  Each Class                    on Which Registered

                     None                              None

         Securities registered under Section 12(g) of the Exchange Act:
                    Common Stock, $0.001 par value per share

                                (Title of Class)

     Check whether the issuer: (1) filed all reports required to be filed by
     Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
     such shorter period that the registrant was required to file such reports),
     and (2) has been subject to such filing requirements for past 90 days.
     Yes  X   No


<PAGE>
     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.

     State issuer's revenues for its most recent fiscal year.   $-0-
                                                             ----------

     State the aggregate market value of the voting and non-voting common equity
     held by non-affiliates computed by reference to the price at which the
     common equity was sold, or the average bid and asked price of such common
     equity, as of a specified date within the past 60 days. (See definition of
     affiliate in Rule 12b-2 of the Exchange Act.) $9,468,200 as of August 31,
     2004 .

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

                           DURING THE PAST FIVE YEARS

     Check whether the issuer has filed all documents and reports required to be
     filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
     of securities under a plan confirmed by a court.
     Yes     No

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

     State the number of shares outstanding of each of the issuer's classes of
     common equity, as of the latest practicable date 33,815,000 shares of
     Common Stock as of August 31, 2004 .

     Transitional Small Business Disclosure Format (check one):

     Yes     No  X

                       DOCUMENTS INCORPORATED BY REFERENCE

     If the following documents are incorporated by reference, briefly describe
     them and identify the part of the Form 10-KSB ( e.g. , Part I, Part II,
     etc.) into which the document is incorporated: (1) any annual report to
     security holders; (2) any proxy or information statement; and (3) any
     prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of
     1933 ("Securities Act"). The listed documents should be clearly described
     for identification purposes ( e.g. , annual report to security holders for
     fiscal year ended December 24, 1990).

                                       2
<PAGE>
                                     PART I


Item 1.  Description of Business.


Forward-Looking Statements

This document contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this report to conform such statements to actual results or to
changes in our expectations.

Readers are also urged to carefully review and consider the various disclosures
made by us which attempt to advise interested parties of the factors that affect
our business, including without limitation the disclosures made under the
caption "Management's Discussion and Analysis of Financial Condition or Plan of
Operation" and under the caption "Risk Factors" included herein.

General

Advanced Engine Technologies, Inc. ("we", "us" or the "Company"), a Colorado
Corporation, on September 23, 1996 was formed to develop and commercialize the
OX2 internal combustion engine, a uniquely designed engine. Our focus is on the
development and commercial introduction of the OX2 engine and the subsequent
licensing of the OX2 engine technology to approved manufacturers.

We have been granted U.S. and Australian patents for an Axial Piston Rotary
Engine. In addition, we have patent registrations in countries throughout the
world which have either been granted or are pending.

Our Product

AT THE PRESENT TIME ONLY THREE (3) PROTOTYPES OF THE OX2 INTERNAL COMBUSTION
ENGINE ("OX2 ENGINE PROTOTYPES"), PLUS ADDITIONAL PARTS THAT CAN BE USED FOR
ENGINE DEVELOPMENT OR FOR THE BUILDING OF ADDITIONAL PROTOTYPES, HAVE BEEN
BUILT. THE DEVELOPMENT AND TESTING OF THE OX2 ENGINE IS ONGOING. NO OX2 ENGINES
HAVE BEEN MANUFACTURED FOR PRODUCTION USE, AND NO ASSURANCE CAN BE GIVEN THAT
THE OX2 ENGINE WILL BE SUCCESSFULLY DEVELOPED OR MANUFACTURED FOR COMMERCIAL
APPLICATION.

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

The major parts of the engine prototype are: (1) housing, (2) cylinder block,
(3) top piston plate, (4) lower piston plate, (5) cam track and (6) drive shaft.
The moving parts are: (1) cylinder block, (2) top piston plate and (3) lower
piston plate.

In August 13, 2004 we entered into an agreement to co-develop a generator unit
to be used in conjunction with the OX2 engine. The development of this generator
is expected to be completed by June 2005 at an anticipated expense of $325,000.
As of June 30, 2004, we paid $97,500 as a deposit related to this agreement.

We expect that the OX2 engine, once completed, will have several advantages over
a four stroke conventional engine. Some of these advantages are expected to
include:

                                       3
<PAGE>
o    The OX2 engine will have only six major components, which we believe will
     result in lower set-up, production and manufacturing costs than a typical
     conventional engine and a simplicity of design that will promote a high
     level of quality assurance.

o    We believe the OX2 engine will have greater effective engine capacity than
     a typical conventional engine.

o    The OX2 engine will not use a conventional crankshaft, which we believe
     will result in a leverage advantage over a typical conventional engine.

o    The design of the OX2 engine should enable the timing to be adjusted, which
     we believe will produce a more effective burn of the combustible fuel being
     used.

o    The piston speed of the OX2 engine should remain constant throughout the
     entire power stroke, which we believe will allow exhaust gases to be more
     efficiently expelled than a typical conventional engine.

In the short term, our plans are to develop the OX2 engine for commercial
stationary generator applications, and in the longer term, we plan to develop
the OX2 engine for commercial, marine, aircraft and/or automotive applications.

Research and Development Activities

On October 15, 2001, we entered into an agreement with OX2 Engine Development
PTY, LTD, an Australian company ("OX2 LTD") and the inventor of the OX2 engine,
to provide research and development products and services related to the OX2
engine. Research and development activities include continued maintenance of the
first and second performing test engines as well as design and development of
three additional OX2 Engine Prototypes. The agreement also calls for the design
and manufacturing of new and advanced components for the OX2 Engine Prototype.
We are also conducting research and development activities in Gardena,
California.

We have spent $508,422 for the fiscal year ended June 30, 2004 and $513,756 for
the fiscal year ended June 30, 2003, on research and development.

Sources of Income

We expect to generate income in two ways: (1) we expect to receive a licensing
fee from approved manufacturers in return for the right to produce and sell the
OX2 engine; license fees will be determined by territory size and market
potential; and (2) we expect to receive a royalty payment for each engine
produced and sold; we expect that royalty payments will be determined by engine
capacity and application.

Patents

We have been granted a U.S. patent for an Axial Piston Rotary Engine (U.S.
Patent No. 5,813,372). We have also been granted a patent for an Axial Piston
Rotary Engine in Australia (No. PCT/AU95/00815). In addition, we have patent
applications for an Axial Piston Rotary Engine pending in countries throughout
the world which have either been granted, or are pending.

Employees

We have two employees, our president and our chief operating officer. We are
currently evaluating the need to hire additional employees to assist in the
daily operations and market placement of our product. We also engage consultants
who receive fees for their consulting services, including two full time
engineers hired through a company owned by Carroll Shelby. See Item 12 "Certain
Relationships and Related Transactions."

Other Agreements

In June 1999, we agreed to grant 1,000,000 shares of our common stock, $0.001
par value per share ("Common Stock") to the University of California Riverside
Foundation. The stock was issued in five annual installments of 200,000 shares
of Common Stock each. Installments were granted in July 1999, July 2000,
September 2001, September 2002 and August 2003 for a total of 1,000,000 shares.
The shares were donated to provide an endowment for research funds for the
College of Engineering-Center for Environmental Research and Technology. This
donation is independent of our relationship with the University of California
Riverside for testing of the OX2 engine and related services.

                                       4
<PAGE>
Risk Factors

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

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

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

o Our cash or cash equivalents reserves may not be adequate to cover our costs
of operations. To date, we have covered our operating losses by privately
placing securities. We expect to fund our general operations and marketing
activities for 2005 with our current cash and cash equivalents reserves, which
were obtained from the sale of securities and were $401,358 as of June 30, 2004.
We also have a $5,700,500 stock subscription receivable from the R.E.&M.
Petersen Living Trust DTD 1/17/83 (the "Petersen Trust"), which may be drawn
upon at the discretion of our Board of Directors. The Petersen Trust has
executed a promissory note and security agreement for the sole purpose of paying
down the stock subscription receivable balance. However, our cost estimates do
not include provisions for any contingencies, unexpected expenses or increases
in costs that may arise. If our cash and cash equivalent reserves are exhausted,
we plan to request payments on the subscription receivable as funds are required
for operations.

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

o Our business depends on the protection of our intellectual property and may
suffer if we are unable to protect adequately our intellectual property.
Currently, we have been granted one U.S. Patent and one Australian Patent for an
Axial Piston Rotary Engine. We have registered these patents in many countries
and have patent registrations pending in many other countries throughout the
world. We believe that our ability to establish and maintain our position in the
market depends on these patents. We cannot provide any assurance that our
patents will not be invalidated, circumvented or challenged, that the rights
granted under the patents will give us competitive advantages or that our patent
registration applications will be granted. In the future, we may also have to
enforce our patents and other intellectual property rights through litigation.
Any such enforcement could also result in substantial costs and could materially
affect our financial condition and our business.

o If we are found to infringe on the intellectual property rights of others, we
may not be able to continue the development and production of the OX2 engine, or
we may have to enter into costly license or settlement agreements to be able to
continue development and/or production. Third parties may allege infringement by
us with respect to past, current or future intellectual property rights. Any
claim of infringement, regardless of merit, could be costly and time-consuming
and could require us to develop non-infringing technology or enter into royalty,
licensing or settlement agreements. These agreements could be on terms
unfavorable or unacceptable to us and could significantly harm the development
of our products and, ultimately, our business.

                                       5
<PAGE>
o Our business is dependent on our relationships with other parties. Research
and development and testing of our engine is presently being carried out
internally and in conjunction with Steven Charles Manthey, the inventor of the
OX2 engine, and his companies. In addition, we have agreements with Carroll
Shelby and his companies to assist in the further development, testing and
promotion of our engine. Completion of such research, development and testing is
essential to the success of our business. Until such research, development, and
testing have been completed, we will not have a finished product to introduce to
the market. Thus, if we are unable to maintain our relationships with Steven
Charles Manthey and/or Carroll Shelby and their companies, our business may be
adversely affected.

o We have a history of losses. We have a history of operating losses and an
accumulated deficit, as of June 30, 2004, of $13,603,646. Our ability to
generate revenues and profits is subject to the risks and uncertainties
encountered by development stage companies.

o Our future revenues and profitability are unpredictable . We currently have no
signed contracts that will produce revenue, and we do not have an estimate as to
when we will be entering into such contracts. Furthermore, we cannot provide any
assurance that management will be successful in negotiating such contracts.

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

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

o Our principal shareholders can exercise significant control over us and could
limit the ability of our other shareholders to influence the outcome of
transactions requiring a shareholder vote . As of June 30, 2004 approximately
90% of our outstanding Common Stock was owned by our executive officers,
directors and principal shareholders. These shareholders will have the ability
to exercise influence over all matters requiring approval by our shareholders,
including the election of directors and approval of significant corporate
transactions.

Item 2. Description of Property

We lease office space for our headquarters in Los Angeles, California and work
space for engine development in Gardena, California.

Item 3. Legal Proceedings


None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

                                       6
<PAGE>
                                     Part II


Item 5. Market for Common Equity and Related Stockholder Matters

Since the first quarter of 1998, our Common Stock has traded in the
over-the-counter market and has been quoted on the Bulletin Board of the NASDAQ
under the symbol: AENG.

Set forth below is the range of high and low bid information by quarter for the
last two fiscal years.

                                                      High   Low

              July-September 2002                     .38    .25
              October-December 2002                   .35    .09
              January-March 2003                      .35    .13
              April-June 2003                         .28    .13
              July-September 2003                     .37    .13
              October-December 2003                   .72    .25
              January-March 2004                      .57    .25
              April-June 2004                         .42    .29

The above quotations were obtained from Yahoo.com. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. As of August 31, 2004, we had 441
shareholders of record.

We have not paid any dividends since inception. We do not anticipate paying any
dividends in the future even if we were to have earnings.

See Item 11 for a discussion of Securities Authorized for Issuance Under Equity
Compensation Plans.

Sales of Unregistered Securities

In August 2003, we granted our directors the number of shares of Common Stock
set forth below opposite their respective names, in consideration of such
person's service as a director of the Company. Such shares were granted in
reliance on the exemption provided by Rule 505 of Regulation D promulgated under
the Securities Act of 1933, as amended. Each of Mr. Holmes, Mr. Manthey, Ms.
Phillips and Mr. Shelby is an accredited investor.

                                                       Number of Shares of
             Name of Director                              Common Stock
         Noel Holmes                                          20,000
         Steven Charles Manthey                               10,000
         Alexandria Phillips                                  20,000
         Carroll Shelby                                       30,000
         Richard Ronzi                                        10,000
                                                              ------
         Total                                                90,000
                                                              ======

Item 6.   Management's Discussion and Analysis or Plan of Operation

We plan to continue the research and development of our OX2 engine prototype
during the 2005 fiscal year. On October 15, 2001 we entered into an agreement
with OX2 LTD and Steven Charles Manthey, the inventor of the OX2 engine, to
provide research and development products and services related to the OX2
engine. OX2 LTD is wholly-owned by Mr. Manthey. The agreement was amended in
January 2002 and April 2002. Research and development activities under the
agreement include continued maintenance of the first and second OX2 Engine
Prototypes as well as design and development of three additional OX2 Engine
Prototypes. In consideration for the services provided by Mr. Manthey and OX2
under the agreement, we will repurchase from Mr. Manthey, or his affiliates,
240,000 shares of Common Stock, at $2 per share. We have allocated the $2.00 per
share repurchase price as follows: $.50 per share for the redemption of shares
of Common

                                       7
<PAGE>
Stock and $1.50 per share as research and development expense. The $.50 common
share redemption price is based on the fair market value of the Common Stock as
of the agreement date. In addition, Mr. Manthey provides consulting services
under the agreement for the sum of eighty thousand dollars ($80,000) per annum.
As of June 30, 2004, we have repurchased 180,000 shares of common stock for
$360,000 under this agreement. No stock was repurchased under this agreement for
the fiscal year ended June 30, 2004. For the fiscal year ended June 30, 2004 and
2003, respectively, we paid $73,326 and $80,000 in connection with consulting
service under this agreement.

We have an agreement with the University of California, Riverside ("UCR"), which
provides that it will continue to provide engine testing and related services to
the Company, with particular emphasis on testing related to emissions. These
services are being provided under the guidance of Dr. Joseph Norbeck (of the
CE-CERT program at UCR) and Dr. Roberta Nichols, one of our consultants. We are
also conducting research, development and testing activities in Gardena,
California.

We have spent $508,422 for the fiscal year ended June 30, 2004 and $513,756 for
the fiscal year ended June 30, 2003, on research and development for the OX2
engine.

Assuming the successful completion of the necessary research and development
work, and assuming the tests of our OX2 Prototypes (existing and future) are
successful, we will attempt to introduce the OX2 engine into the market. Such
marketing activities may include demonstrations to manufacturers of products
using internal combustion engines and the addition of joint venture and/or
strategic partners to assist in marketing, development and commercial
application of the OX2 engine.

In the shorter term, our plans are to develop the OX2 engine for commercial
stationary generator applications, and in the longer term, we plan to develop an
engine for commercial, marine, automobile and/or aircraft applications.

We expect that our cash flow requirements to fund general operations in the
fiscal year ending June 30, 2005 will total approximately $1,500,000, including
outside consulting fees and expenditures for equipment. We expect to fund these
costs with our cash or cash equivalent reserves, which were $401,358 as of June
30, 2004. The Company also has a $5,700,500 stock subscription receivable from
the Petersen Trust, which may be drawn upon at the discretion of the Board of
Directors. The Petersen Trust has executed a promissory note and security
agreement for the sole purpose of paying down the stock subscription receivable
balance. The Board of Directors, at its discretion, may draw down upon the
secured promissory note at any time to further the research, development and/or
commercial application of the Company's engine(s). Our cost estimates do not
include provisions for any contingencies or unexpected expenses that may arise
or any unanticipated increases in costs.

Our net loss since inception (September 23, 1996) is $13,603,646. Our net loss
for the fiscal year ended June 30, 2004 is $2,143,644.

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

Critical Accounting Policies

We believe that our accounting policy for long-lived assets, including patents,
is a critical accounting policy that significantly impacts our financial
statements. Our accounting policy of long-lived assets, including patents, is as
follows:

We assess the fair value and recoverability of our long-lived assets, including
patents, whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from estimated future cash flows expected to
result from its use and eventual disposition. In doing so, we make assumptions
and estimates regarding future cash flows and other factors to make our
determination. The fair value of our long-lived assets and patents is dependent
upon the forecasted performance of our business, changes in the automotive
industries, and the overall economic environment. When we determine that the
carrying value of our long-lived assets and goodwill may not be recoverable, we
measure any impairment based upon the excess of the carrying value that exceeds
the estimated fair value of the assets. As a result of these reviews, we have
not yet recognized any impairment losses as of June 30, 2004.

                                       8
<PAGE>
Item 7.           Financial Statements.









                                       9

<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                                    CONTENTS

                                  June 30, 2004


                                                                Page

Report of Independent Registered Public Accounting Firm          11
-------------------------------------------------------
Financial Statements
--------------------
Balance Sheet                                                    12
-------------
Statements of Operations                                         13
------------------------
Statements of Shareholders' Equity                            14-16
----------------------------------

Statements of Cash Flows                                      17-18
------------------------

Notes to Financial Statements                                 19-27
-----------------------------






                                       10
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Advanced Engine Technologies, Inc.

We have audited the accompanying balance sheet of Advanced Engine Technologies,
Inc. (the "Company") (a development stage company) as of June 30, 2004, and the
related statements of operations, shareholders' equity, and cash flows for each
of the two years in the period ended June 30, 2004. 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 have
not audited the statement of operations, shareholders' equity and cash flows for
the period from September 23, 1996 (inception) to June 30, 2000.

We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (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 provided a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Engine Technologies,
Inc. as of June 30, 2004, and the results of its operations and its cash flows
for each of the two years in the period ended June 30, 2004, in conformity with
U.S. generally accepted accounting principles.


SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

August 25, 2004



                                       11
<PAGE>

                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                                  BALANCE SHEET

                                  June 30, 2004

<TABLE>
<CAPTION>
                                     ASSETS
<S>                                                                           <C>
Current assets:
Cash and cash equivalents                                                     $    401,358
Deposit                                                                             97,500
Prepaid expenses and other                                                          70,053
                                                                              ------------
Total current assets                                                               568,911
                                                                              ------------
Due from related parties                                                            21,000
Property and equipment , net of accumulated depreciation of $150,834               147,895
Patents, net of accumulated amortization of $886,834                               922,462
                                                                              ------------
Total assets                                                                  $  1,660,268
                                                                              ============
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses                                         $     60,799
                                                                              ------------
Total current liabilities                                                           60,799
                                                                              ------------
Shareholders' equity
Common stock, $0.001 par value
     50,000,000 shares authorized, 33,790,000 shares issued and outstanding         33,790
Additional paid-in capital                                                      20,869,825
Subscription receivable                                                         (5,700,500)
Deficit accumulated during the development stage                               (13,603,646)
                                                                              ------------
Total shareholders' equity                                                       1,599,469
                                                                              ------------
Total liabilities and shareholders' equity                                    $  1,660,268
                                                                              ============
</TABLE>


    The accompanying notes are an integral part of this financial statement.


                                       12
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF OPERATIONS

                 For the Years Ended June 30, 2004 and 2003 and

       for the Period from September 23, 1996 (Inception) to June 30, 2004

<TABLE>
<CAPTION>
                                                                        For the
                                                                      Period from
                                                                   September 23, 1996
                                            For the Year Ended        (Inception) to
                                                 June 30,             June 30, 2004
                                           2004             2003
                                           ----             ----
<S>                                   <C>             <C>             <C>
Expenses:
     Operating                        $    783,732    $    885,649    $  5,239,185
     Research and development              508,422         513,756       3,859,034
     Stock grant expense                   852,000         930,000       4,650,000
     Write-off of patent                      --              --            23,332
                                      ------------    ------------    ------------
Total expenses                           2,144,154       2,329,405      13,771,551
                                      ------------    ------------    ------------
Loss from operations                    (2,144,154)     (2,329,405)    (13,771,551)
                                      ------------    ------------    ------------
Other income (expense):
     Interest income                         1,443           1,384         168,838
     Loss on sale of fixed asset              (933)           --              (933)
                                      ------------    ------------    ------------
                                               510            --           167,905
                                      ------------    ------------    ------------

Net loss                              $ (2,143,644)   $ (2,328,021)   $(13,603,646)
                                      ============    ============    ============
Basic and diluted loss per share      $       (.06)   $       (.07)
                                      ============    ============
Weighted-average shares outstanding     33,776,339      33,633,014
                                      ============    ============
</TABLE>


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

                                       13
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                       STATEMENTS OF SHAREHOLDERS' EQUITY

       For the Period from September 23, 1996 (Inception) to June 30, 2004


<TABLE>
<CAPTION>
                            Common Stock          Additional  Committed Subscription Shares     Deferred      Deficit
                                                                Common               receivable    Costs     Accumulated
                                                    Paid-In                         under stock               During the
                                                                                    repurchase  Under Grant  Development
                               Shares     Amount   Capital      Stock    Receivable agreement  Agreement      Stage        Total

<S>                          <C>         <C>      <C>         <C>          <C>        <C>     <C>           <C>          <C>
Balance, September 23, 1996        --    $  --         --     $     --     $  --      --      $   --        $    --      $     --
  (Inception)

Common stock issued for      20,000,000   20,000    (18,000)        --        --      --          --             --           2,000
  license rights
Common stock issued for cash    499,200      499    498,701         --        --      --          --             --         499,200
Common stock issued for         600,000      600      5,400         --        --      --          --             --           6,000
  services
                                                                    --        --      --          --         (164,233)     (164,233)
                             ----------  -------   --------   ----------   -----   -----      ----------    ---------    ----------

Balance, June 30, 1997       21,099,200  $21,099  $ 486,101         --        --      --          --        $(164,233)   $  342,967
                             ==========  =======  =========   ==========   =====   =====       =========    =========    ==========
Common stock issued for cash    500,800      501    500,299         --        --      --          --             --         500,800
Net loss                           --       --         --           --        --      --          --         (309,635)     (309,635)
                             ----------  -------   --------   ----------   -----   -----      ----------    ---------    ----------
Balance, June 30, 1998       21,600,000  $21,600   $986,400         --        --      --          --        $(473,868)   $  534,132
                             ==========  =======  =========   ==========   =====   =====       =========    =========    ==========
Common stock committed under       --       --         --      4,650,000      --      --      (4,650,000)          --            --
  grant agreement
Common stock issued for         325,000      325    568,425         --        --      --          --             --         568,750
  assets and services
Common stock issued for cash    400,000      400  1,999,600         --        --      --          --             --       2,000,000
</TABLE>


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

                                       14
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                       STATEMENTS OF SHAREHOLDERS' EQUITY

       For the Period from September 23, 1996 (Inception) to June 30, 2004


<TABLE>
<CAPTION>
                  Common Stock        Additional     Committed     Subscription       Shares   Deferred        Deficit       Total
                                       Paid-in         Common       Receivable      receivable   Costs      Accumulated
                                       Capital         Stock                       under stock   Under       During the
                                                                                    repurchase   Grant      Development
                                                                                    agreement   Agreement      Stage
                  Shares     Amount

<S>           <C>           <C>         <C>          <C>           <C>             <C>         <C>          <C>          <C>
Research and        --           --             --           --         --             --           78,000          --       78,000
development
expense
recognized
under grant
agreement
Net loss            --           --             --           --          --            --             --       (980,381)   (980,381)
              ----------    -------     ----------   ----------    --------        ------      -----------  -----------  ----------
Balance,      22,325,000    $22,325     $3,554,425   $4,650,000          --            --      $(4,572,000) $(1,454,249) $2,200,501
June 30,      ==========    =======     ==========   ==========    ========        ======      ===========  ===========  ==========
1999
Common stock     200,000        200        929,800     (930,000)         --            --             --            --           --
issued under
grant
agreement
Common stock     400,000        400      1,999,600           --          --            --             --            --    2,000,000
issued for
cash
Common stock      25,000         25         87,475           --          --            --             --            --       87,500
issued for
services
Research and        --           --             --           --          --            --          930,000          --      930,000
development
expense
recognized
under grant
agreement
Net loss            --           --             --           --          --            --             --     (2,800,657) (2,800,657)
              ----------    -------     ----------   ----------    --------        ------      -----------  -----------  ----------
Balance,      22,950,000    $22,950 $    6,571,300   $3,720,000    $     --        $   --      $(3,642,000) $(4,254,906) $2,417,344
June 30,      ==========    =======     ==========   ==========    ========        ======      ===========  ===========  ==========
2000
Common stock     200,000        200        929,800     (930,000)         --            --             --             --          --
issued under
grant
agreement
Common stock  10,000,000     10,000      9,990,000           --    (10,000,000)        --             --             --          --
subscribed
Common stock      80,000         80         49,920           --           --           --             --             --      50,000
issued for
services
Stock               --           --          9,500           --           --           --             --             --       9,500
options
issued for
services
Research and        --           --             --           --           --           --          930,000           --     930,000
development
expense
recognized
under grant
agreement
Net loss            --           --             --           --           --           --             --     (1,976,852) (1,976,852)
              ----------    -------     ----------   ----------    --------        ------      -----------  -----------  ----------
</TABLE>

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

                                       15
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                       STATEMENTS OF SHAREHOLDERS' EQUITY

       For the Period from September 23, 1996 (Inception) to June 30, 2004
<TABLE>
<CAPTION>
            Common Stock          Additional     Committed    Subscription    Shares        Deferred         Deficit        Total
                                   Paid-In        Common       Receivable    receivable    Costs Under     Accumulated
                                   Capital        Stock                     under stock       Grant         During the
                                                                             repurchase     Agreement      Development
                                                                             agreement                        Stage
            Shares        Amount
<S>         <C>          <C>       <C>           <C>          <C>              <C>       <C>             <C>            <C>
Balance,    33,230,000   $33,230   $17,550,520   $2,790,000   $(10,000,000)        --    $(2,712,000)    $( 6,231,758)  $ 1,429,992
June 30     ==========   =======   ===========   ==========   ============     ======    ===========     ============   ===========
2001
Stock              --        --        542,495         --            --            --           --             --           542,495
options
issued for
services
Shares             --        --            --           --            --       (85,000)         --             --           (85,000)
receivable
under stock
repurchase
agreement
Common             --        --            --           --       1,500,000          --          --             --         1,500,000
stock
subscribed
Common         200,000       200       929,800     (930,000)         --             --          --             --              --
stock
issued
under grant
agreement
Research           --        --            --           --           --             --       930,000           --           930,000
and
development
expense
recognized
under grant
agreement
Net loss           --        --            --           --           --             --          --         (2,900,223)   (2,900,223)
            ----------   --------  -----------   ----------   ------------     --------  -----------     ------------    ----------
Balance,    33,430,000   $ 33,430  $19,022,815   $1,860,000   $ (8,500,000)    $(85,000) $(1,782,000)    $ (9,131,981)   $1,417,264
June 30     ==========   ========  ===========   ==========   ============     ========  ===========     ============    ==========
2002

Common          50,000   $     50       51,320       18,603          --             --          --             --            69,973
Stock for
Services
Shares             --         --           --           --           --          (5,000)        --             --            (5,000)
receivable
under stock
repurchase
agreement
Common             --         --           --           --       1,035,000          --          --             --         1,035,000
stock
subscribed
Common         200,000        200      929,800     (930,000)         --             --          --             --               --
stock
issued
under grant
agreement
Research           --         --           --           --           --             --       930,000           --           930,000
and
development
expense
recognized
under grant
agreement
Net loss           --         --           --           --           --             --          --         (2,328,021)   (2,328,021)
            ----------   --------  -----------   ----------   ------------     --------  -----------     ------------    ----------
Balance,    33,680,000   $ 33,680  $20,003,935   $  948,603   $ (7,465,000)    $(90,000) $  (852,000)    $(11,460,002)   $1,119,216
June 30     ==========   ========  ===========   ==========   ============     ========  ===========     ============    ==========
2003
Common          90,000   $     90       25,910      (18,603)         --              --         --             --             7,397
Stock for
Services
Shares        (180,000)      (180)     (89,820)         --           --          90,000         --             --              --
receivable
under stock
repurchase
agreement
Common             --          --          --           --       1,764,500           --         --             --         1,764,500
stock
subscribed
Common         200,000        200      929,800     (930,000)         --              --         --             --              --
stock
issued
under grant
agreement

Research           --          --          --           --           --              --      852,000           --           852,000
and
development
expense
recognized
under grant
agreement
Net loss           --          --          --          --            --              --         --         (2,143,644)   (2,143,644)
            ----------   --------  -----------   ----------   ------------     --------  -----------     ------------    ----------
Balance,    33,790,000   $ 33,790  $20,869,825   $     --     $ (5,700,500)    $     --  $      --       $(13,603,646)   $1,599,469
June 30     ==========   ========  ===========   ==========   ============     ========  ===========     ============    ==========
2004
</TABLE>


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

                                       16
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS

                 For the Years Ended June 30, 2004 and 2003 and

       for the Period from September 23, 1996 (Inception) to June 30, 2004

<TABLE>
<CAPTION>
                                                                                              For the Period
                                                                                                   from
                                                                   For the Year Ended        September 23, 1996
                                                                        June 30,               (Inception) to
                                                                                              June 30, 2004
                                                                   2004            2003
<S>                                                           <C>             <C>             <C>
Cash flows from operating activities:
Net loss                                                      $ (2,143,644)   $ (2,328,021)   $(13,603,646)
Adjustments to reconcile net loss to net cash used in
   operating activities
  Stock grant expense                                              852,000         930,000       4,650,000
  Depreciation and amortization                                    239,325         210,164       1,066,753
  Common stock issued and committed for assets and services          7,397          69,973         791,620
  Net loss on sale of fixed asset                                      933            --               933
  Stock options issued for services                                   --              --           551,995
Write-off of patents                                                  --              --            23,332
(Increase) decrease in
  Due from related parties                                            --              --           (21,000)
  Prepaid expenses                                                 (35,376)        (13,015)        (70,053)
  Deposit                                                          (97,500)           --           (97,500)
Increase (decrease) in
  Accounts payable and accrued expenses                            (50,674)         33,554          60,799
                                                              ------------    ------------    ------------
Net cash used in operating activities                           (1,227,539)     (1,097,345)     (6,646,767)
                                                              ------------    ------------    ------------
Cash flows from investing activities:
Acquisition of patents                                             (81,185)        (94,346)     (1,853,045)
Purchase of property and equipment                                (113,780)        (50,077)       (308,730)
Proceeds from sale of fixed assets                                     400            --               400
                                                              ------------    ------------    ------------
Net cash used in investing activities                             (194,565)       (144,423)     (2,161,375)
                                                              ------------    ------------    ------------
Cash flows from financing activities:
Proceeds from note payable                                            --              --           500,000
Proceeds from stock subscription receivable                      1,764,500       1,035,000       4,299,500
Repayment of note payable                                             --              --          (500,000)
Repurchase of common stock                                            --            (5,000)        (90,000)
Proceeds from issuance of common stock                                --              --         5,000,000
                                                              ------------    ------------    ------------
Net cash provided by financing activities                        1,764,500       1,030,000       9,209,500
                                                              ------------    ------------    ------------
</TABLE>


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

                                       17
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS

                 For the Years Ended June 30, 2004 and 2003 and

       for the Period from September 23, 1996 (Inception) to June 30, 2004


<TABLE>
<CAPTION>
                                                                                            For the Period
                                                                                                 from
                                                                                             September 23,
                                                                                                 1996
                                                               For the Year Ended           (Inception) to
                                                                    June 30,                   June 30,
                                                                                                 2004
                                                                2004                 2003

<S>                                                        <C>                  <C>              <C>
 Net increase (decrease) in cash and cash equivalents      $   342,396          $  (211,768)     $  401,358
 Cash and cash equivalents, beginning of period                 58,962              270,730             --
                                                            -----------          ----------       ----------
 Cash and cash equivalents, end of period                  $   401,358          $    58,962      $  401,358
                                                                ======               ======          ======
 Supplemental disclosures of cash flow information
 Interest paid                                             $       --           $       --       $      --
                                                                ======               ======          ======
 Income taxes paid                                         $       --           $       --       $      --
                                                                ======               ======          ======
</TABLE>

Supplemental Schedule of Non-Cash Investing and Financing Activities
--------------------------------------------------------------------

During the year ended June 30, 2004 and 2003, the Company:

Issued 200,000 and 200,000 shares, respectively, of common stock to the
University of California Riverside Foundation which had been included in
committed common stock under grant agreement as of June 30, 2003 and 2002,
respectively.

Retired 180,000 shares of common stock valued at $90,000 from shares received
under a stock redemption agreement.

Issued 90,000 shares of common stock to its Board of Directors.

During the period from September 23, 1996 (inception) through June 30, 2004 the
Company:

Issued 1,000,000 shares of common stock valued at $4,650,000 to the University
of California Riverside Foundation in connection with a stock grant agreement.
Of the $4,650,000 $852,000 and $930,000 has been expensed on the statement of
operations for the years ended June 30, 2004 and 2003.

Issued 21,170,000 shares of common stock for services and assets valued at
$791,620.

Issued 2,800,000 stock options valued at $551,995 for services.

Retired 180,000 shares of common stock valued at $90,000 from shares received
under a stock redemption agreement.

Issued 61,534 shares of common stock valued at $18,604 that was committed as of
June 30, 2003.

Issued 90,000 shares of its common stock to its directors for services rendered
during the fiscal year ended June 30, 2003 as of June 30, 2004.


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

                                       18
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004

NOTE 1--ORGANIZATION AND LINE OF BUSINESS

Advanced Engine Technologies, Inc. (the "Company") was incorporated in Colorado
and commenced operations on September 23, 1996. The Company was formed to
develop and commercialize the OX2 internal combustion engine, a uniquely
designed engine. On October 18, 1996, the Company entered into an exclusive
sublicense agreement with OX2 Engine (Distribution) Limited, a company
incorporated under the laws of the Republic of Vanuatu ("OX2 LTD"), pursuant to
which the Company acquired the rights to manufacture, distribute and market the
OX2 engine in the North America Free Trade Agreement countries (presently the
United States, Canada and Mexico). Pursuant to the terms of said sublicense
agreement, the Company issued 20,000,000 shares of its common stock to OX2 LTD
and agreed to pay a 15% royalty on the gross proceeds generated from actual
sales of the OX2 engine. In addition, the sublicense agreement provided that the
Company would issue an additional 19,000,000 shares of common stock to OX2 LTD
upon completion of certain emission testing. In December 1998, the parties
agreed to rescind the obligation of the Company to issue these additional
19,000,000 shares of common stock to OX2 LTD.

In May 1999, pursuant to a four-party agreement among the Company, OX2 LTD, OX2
Intellectual Property Inc. and Advanced Engine Technology PTY Ltd., the Company
acquired the worldwide patent rights for the OX2 engine for $1,500,000. This
agreement superseded and terminated the October 1996 sublicense agreement. The
Company has assumed responsibility for worldwide patent maintenance and for
future research and development on the OX2 engine.

On October 15, 2001, the Company entered into an agreement with OX2 LTD and the
inventor of the OX2 engine to provide research and development products and
services related to the OX2 engine ("R&D Agreement"). OX2 LTD is wholly-owned by
the inventor of the OX2 engine. Research and development activities will include
continued maintenance of the first and second performing test engines as well as
design and development of three additional OX2 test engines. The agreement also
calls for the design and manufacturing of new and advanced components for the
test engines. In addition, the Company has contracted with the inventor of the
OX2 engine to provide consulting services for the sum of eighty thousand dollars
($80,000) per annum. For the years ended June 30, 2004 and 2003, the Company
paid $73,326 and $80,000, respectively in connection with consulting and product
development services under this agreement. (See Note 5 for additional
information regarding the R&D Agreement.)

As of June 30, 2004, the Company's operations consisted of engineering, testing,
marketing and development of the OX2 combustion engine for commercial
applications and raising any necessary capital investments. Management does not
expect to generate significant sales revenue during the year ending June 30,
2005. Accordingly, planned principal operations have not commenced.

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

The Company is a development stage company as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises." All losses accumulated since inception have been considered
as part of the Company's development stage activities.

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

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

Cash and Cash Equivalents
-------------------------

For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with original maturity of three months or less to
be cash equivalents.

Property and Equipment
----------------------

Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over an estimated useful life of three to ten years.

                                       19
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Patent Rights
-------------

Patent rights are amortized on a straight-line basis over the remaining
estimated useful life of five to ten years. The Company continually reviews its
patent rights to assess recoverability from estimated future net cash flows. To
date, these reviews have not resulted in a reduction of these assets.

Amortization expense of the patents aggregated to $202,818 and $183,041 for the
years ended June 30, 2004 and 2003, respectively. The weighted-average
amortization period was 9.21 and 9.44 years for the years ended June 30, 2004
and 2003, respectively. In addition, as of June 30, 2004, the estimated
amortization expense for the next five years was as follows:

                       Year Ended June 30,
                       2005                   $     210,507
                       2006                   $     204,772
                       2007                   $     192,869
                       2008                   $     179,637
                       2009                   $     134,679


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

The Company reviews long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, the Company would recognize an impairment loss based on the estimated
fair value of the asset.

Concentration of Credit Risk
----------------------------

At June 30, 2004, a subscription receivable in the amount of $5,700,500 is due
from a related party. See Note 5.

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

SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," an amendment of SFAS No. 123, provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent disclosures in financial statements about the effects of stock-based
compensation.

SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the elect to continue using the current
implicit value accounting method specified in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account
for stock-based compensation.

The Company has elected to use the intrinsic value based method and has
disclosed the pro forma effect of using the fair value based method to account
for its stock-based compensation.

Research and Development Costs
------------------------------

Research and development costs are expensed as incurred.

Advertising Costs
-----------------

The Company expenses advertising costs as incurred. Advertising costs amounted
to $26,171 and $35,885 for the years ended June 30, 2004 and 2003, respectively.

                                       20
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

Estimates
---------

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

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

In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies,
and simplifies existing accounting pronouncements. This statement rescinds SFAS
No. 4, which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. As a result, the criteria in Accounting Principles Board No.
30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS
No. 4 and is no longer necessary as SFAS No. 4 has been rescinded. SFAS No. 44
has been rescinded as it is no longer necessary. SFAS No. 145 amends SFAS No. 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as sale-lease
transactions. This statement also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances, they may change accounting practice. Management does not expect
adoption of SFAS No. 145 to have a material impact, if any, on the Company's
financial position or results of operations.

In June 2003, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2003 with earlier application encouraged. Management does not expect adoption of
SFAS No. 146 to have a material impact, if any, on the Company's financial
position or results of operations.

In October 2003, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. Management does

                                       21
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

not expect adoption of SFAS No. 147 to have a material impact, if any, on the
Company's financial position or results of operations.

In December 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123. SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. This statement is effective for
financial statements for fiscal years ending after December 15, 2003. SFAS No.
148 will not have any impact on the Company's financial statements as management
does not have any intention to change to the fair value method.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments and
hedging activities entered into or modified after June 30, 2003, except for
certain forward purchase and sale securities. For these forward purchase and
sale securities, SFAS No. 149 is effective for both new and existing securities
after June 30, 2003. Management does not expect adoption of SFAS No. 149 to have
a material impact on the Company's statements of earnings, financial position,
or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments entered
into or modified after May 31, 2003 and otherwise will be effective at the
beginning of the first interim period beginning after June 15, 2003. Upon
adoption of SFAS No. 150, the Company will reclassify its, if any redeemable
preferred stock as a liability. As of December 31, 2003, the Company did not
have any preferred stock outstanding.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This pronouncement is effective for
financial statements issued after December 15, 2002. The Company has no
contractual guarantees; therefore this interpretation is not expected to have a
material impact on the Company's financial statements.

In December 2003, the Financial Accounting Standards Board (the "FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements." This pronouncement requires the consolidation of variable interest
entities, as defined, and is effective immediately for variable interest
entities created after January 31, 2003, and for variable interest entities in
which an enterprise obtains an interest after that date. The Company does not
have any variable interest entities, and therefore, this interpretation is not
expected to have a material impact on the Company's financial statements.

NOTE 3--CASH AND CASH EQUIVALENTS

The Company maintains its cash balances at a bank located in Southern
California. The balances at the bank are insured by the Federal Deposit
Insurance Corporation up to $100,000. At times, cash balances are in excess of
the insured limit. As of June 30, 2004 the Company exceeded the FDIC limit by
$304,193.

                                       22
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004


NOTE 4--PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2004 consisted of the following:


Furniture                                                   $     7,523
Software                                                         25,568
Computer equipment                                               51,477
Manufacturing equipment and tooling                             214,161
                                                             ----------
                                                                298,729
Less accumulated depreciation                                  (150,834)
                                                             ----------
Total                                                       $   147,895
                                                             ==========

Depreciation expense was $36,507 and $27,122 for the years ended June 30, 2004
and 2003, respectively.

NOTE 5--SHAREHOLDERS' EQUITY

Common Stock
------------

As described in Note 1, in October 1996, the Company issued 20,000,000 shares of
its common stock to OX2 LTD for the rights to manufacture, distribute, and
market the OX2 engine.

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

On August 6, 1998, the Company entered into a joint venture agreement with
Carroll Shelby under which the Company was to issue 300,000 shares of restricted
common stock in exchange for services related to possible future applications of
the engine in a street vehicle that utilizes the OX2 combustion engine. These
shares were issued in November 1998. They were valued at $525,000 and expensed
as research and development costs. Subsequent to this transaction, Carroll
Shelby was appointed to the Board of Directors. This agreement expired on
December 31, 2001.

In November 1998, the Company issued 25,000 shares of restricted stock to
purchase patents, copyrights, designs, and prototypes to be used with the
Company's technology. This transaction was valued at $43,750 and was recorded as
an intangible asset. The asset was written off during the year ended June 30,
2001.

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

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

During the year ended June 30, 2001, in a private placement, the Company entered
into a subscription agreement with the R.E. & M. Petersen Trust DTD 1/17/83 (the
"Petersen Trust") to issue 10,000,000 of the Company's common stock in exchange
for $10,000,000. On September 6, 2000, the Company issued the stock under
subscription. In addition, the Company also issued 2,000,000 stock options to
the Petersen Trust for its investment in Company, which became immediately
vested, and carry an exercise price of $0.625 per share.

                                       23
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004

NOTE 5--SHAREHOLDERS' EQUITY (continued)

In September 2001, in connection with this subscription agreement, the Company
received a $10,000,000 non-interest bearing promissory note from the Petersen
Trust that is payable upon demand and secured by all of the assets of the
Petersen Trust. The Board of Directors intends to request payment on the
subscription receivable and promissory note as funds are required for
operations. During the year ended June 30, 2004, the Company requested and
received payments on the subscription receivable and promissory note of
$1,764,500, which left a balance on the subscription receivable and promissory
note at June 30, 2004 of $5,700,500.

In April 2001, the Company issued 80,000 shares of common stock valued at
$50,000 for services provided by directors.

In connection with the R & D Agreement described in Note 1, the Company has the
option to repurchase from the Steven Charles Manthey, the inventor, or his
affiliates, 240,000 shares of common stock of the Company at $2.00 per share.
The Company has allocated its $2.00 per share repurchase price as follows: $.50
per share for redemption of common shares and $1.50 per share as research and
development expense. The $.50 common share redemption price is based on the fair
market value of the common shares as of the date of the R&D Agreement. As of
June 30, 2003, the Company had repurchased 180,000 shares of common stock under
the R&D Agreement. Stock certificates representing the repurchased shares are in
the possession of the Company and in the process of being transferred. No shares
were repurchased under this agreement in fiscal 2004. Of the $360,000 paid by
the Company for these shares, $15,000 was charged to research and development
and $5,000 was charged to equity for the years ended June 30, 2003.

In August 2002, the company issued 50,000 shares to its directors for services
rendered. As result of this transaction and accrual for shares to be issued for
services rendered, the Company recorded compensation expense of $69,973 for the
year ended June 30, 2003.

In August 2003, the Company issued 90,000 shares to its Board of Directors for
services rendered. As a result of this transaction for shares issued for
services rendered the Company recorded compensation expense of $7,397 for the
year ended June 30, 2004.

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

In June 1999, the Company agreed to issue 1,000,000 shares of restricted common
stock to the University of California Riverside Foundation in five annual
installments of 200,000 shares each. The donated stock is to provide an
endowment for research funds for the College of Engineering Center for
collaborative research on the development of advanced engine technologies. For
financial statement presentation purposes, the stock under the grant agreement
is treated as committed stock until its issuance. The five installments were
issued in July 1999, July 2000, September 2001, September 2002 and August 2003,
respectively.

Expense on the grant is recognized ratably over a five-year period based upon an
estimated fair value at the date of the grant of $4.65 per share. This estimate
of its fair value is based upon the quoted price of the stock on the grant date
of $7.75 per share, less a 40% discount because the stock was restricted, the
Company's stock had a very low trading volume at the time of the grant
agreement, and the Company was still in a development stage. During the period
from September 23, 1996 (inception) to June 30, 2004, the Company recognized
total expense on the stock grant of $4,650,000, including $852,000 and $930,000,
respectively for the years ended June 30, 2004 and 2003.

Stock Options
-------------

The Company maintains the 2000 Stock Incentive Plan (the "Plan") under which a
maximum of 10,000,000 shares of common stock may be issued to employees,
directors, and consultants. The options vest over a period that is determined by
the Board of Directors. The options expire no later than 10 years after the date
of grant.

The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB No. 25 and related interpretations in accounting for its plans and
does not recognize compensation expense for its stock-based compensation plans
other than for restricted stock and options issued to outside third parties.

During the year ended June 30, 2002, the Company recognized $542,495 in
operating and research development expense for 2,775,000 stock options that were
issued for consulting services that were primarily performed by officers and
directors of the Company. The consulting services performed by the officers and
directors were for activities and services in addition to their normal
responsibilities as officers and directors.

                                       24
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004


NOTE 5--SHAREHOLDERS' EQUITY (continued)

The following summarizes all of the Company's stock option transactions:


                                        Stock             Weighted-
                                       Options             Average
                                     Outstanding          Exercise
                                                           Price

Outstanding , June 30, 2000                --              $ --
Granted                               3,700,000            $0.625
                                      ---------            ------
Outstanding, June 30, 2001            3,700,000            $0.625
Granted                               3,975,000             0.308
Cancelled                                  --                --
Exercised                                  --                --
                                      ---------            ------
Outstanding, June 30, 2002            7,675,000            $0.461


Outstanding, June 30, 2002            7,675,000            $0.461
Granted                                    --                --
Cancelled                                  --                --
Exercised                                  --                --
                                      ---------            ------
Outstanding, June 30, 2003            7,675,000            $0.461
Granted                                    --                --
Cancelled                                  --                --
Exercised                                  --                --
                                      ---------            ------
Outstanding, June 30, 2004            7,675,000            $0.461
Exercisable, June 30, 2004            7,675,000            $0.461

Stock Options
-------------

Information relating to these options is as follows:

<TABLE>
<CAPTION>
                                                   Weighted-Average      Weighted-Average Exercise    Weighted-Average Exercise
                  Stock Options  Stock Options  Remaining Contractual        Price of Options             Price of Options
 Exercise Price    Outstanding    Exercisable            Life                   Outstanding                  Exercisable
----------------------------------------------------------------------------------------------------------------------------------

<C>                 <C>            <C>                <C>                         <C>                          <C>
$0.625              3,700,000      3,700,000          6.84 years                  $0.625                       $0.625
$0.308              3,975,000      3,975,000          7.92 years                  $0.308                       $0.308
</TABLE>

For purposes of computing the pro forma disclosures required by SFAS No. 123,
the fair value of each option granted to employees and directors is estimated
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for the year ended June 30, 2002:

                  Dividend yield                                  0%
                  Expected volatility                           100%
                  Risk free interest rate                      3.80%
                  Expected life                             3 years

                                       25
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.

                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004

NOTE 5--SHAREHOLDERS' EQUITY (Continued)

The weighted-average fair value of options granted during the year ended June
30, 2002 for which the exercise price equals the market price on the grant date
was $0.30 and the weighted-average exercise price was $0.308. No options were
issued for the fiscal years ended June 30, 2004 and 2003.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

The Company has no pro forma expense for the years ended June 30, 2004 and 2003
as options issued in the prior years vested immediately. Therefore, the proforma
expense related to those options was recognized in the year they were granted.

NOTE 6--INCOME TAXES

At June 30, 2004, the Company had deferred tax assets amounting to approximately
$3,497,000. The deferred tax assets consist primarily of the tax benefit of net
operating loss carryforwards and are fully offset by a valuation allowance of
the same amount.

The net change in the valuation allowance for deferred tax assets was an
increase of approximately $575,000 and $1,293,000 years ended June 30, 2004 and
2003, respectively. The net change is due primarily to the increase in net
operating loss carryforwards.

At June 30, 2004, the Company had net operating loss carryforwards of
approximately $8,447,000 available to offset future federal taxable income and
approximately $2,347,000 available to offset future state taxable income.
Further, the Company has available approximately $91,000 in federal tax credits
and approximately $83,000 in state tax credits to offset future taxes. Both the
net operating loss carryforwards and tax credits begin to expire in 2017.

NOTE 7--RELATED PARTY TRANSACTIONS

The Company has paid research and development costs and rent to a company owned
by its current President in the amount of $1,258,328 from September 23, 1996
(inception) to June 30, 2004, including $392,855 and $376,284 for the years
ended June 30, 2004 and 2003, respectively.

The Company has paid for services to a company that is a stockholder in the
amount of $71,956 for the period from September 23, 1996 (inception) to June 30,
2004.

At June 30, 2004, the Company had an outstanding receivable from the legal
corporation owned by its Secretary of $21,000 for reimbursement of remodeling
costs on office space that the Company and its Secretary share.

The Company shares office space with a legal corporation that is legal counsel
to the Company and of which its Secretary is a principal. For the period from
September 23, 1996 (inception) to June 30, 2004, the Company incurred legal
fees, rent, and other reimbursement costs of $616,597, including $73,067 and
$97,292 for the years ended June 30, 2004 and 2003, respectively.

For the year ended June 30, 2004 and 2003, the Company paid a director $73,326
and $80,000, respectively, in connection with consulting services (see Note 1).
In addition the Company paid $360,000 to a company wholly-owned by such director
for the repurchase of 180,000 shares of common stock from the director in
connection with the R&D agreement. (see Note 1). Of the $360,000 paid, $15,000
has been charged to research and development expense for the year ended June 30,
2003.

The Company paid consulting fees to its former President and director and a
current stockholder in the amount of $293,503 from September 23, 1996
(inception) to June 30, 2001. No consulting fees were paid for the years ended
June 30, 2004, 2003 and 2002.

The Company paid administrative fees and reimbursed expenses to a company that
is owned a stockholder in the amount of $117,693 from September 23, 1996
(inception) to June 30, 2001. No administrative fees and reimbursed expenses
were paid to this company for the years end June 30, 2004, 2003 and 2002.

                                       26
<PAGE>
                       ADVANCED ENGINE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 2004

NOTE 7--RELATED PARTY TRANSACTIONS (Continued)


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

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

See Note 1 for related party transactions in connection with a sublicense
agreement and a patent and license agreement.

During the year ended June 30, 2002, the Company recognized $537,608 in
operating and research and development expense for 2,775,000 stock options that
were issued to various officers and directors for their services to the Company
that were for activities and services in addition to their normal
responsibilities as officers and directors.

During the year ended June 30, 2003 the Company recognized $69,923 in operating
and research and development expense for 50,000 shares issued and approximately
60,000 shares committed to its directors for their services to the Company that
were for activities and services in addition to their normal responsibilities as
officers and directors. No such shares were committed during 2004.

NOTE 8--SUBSEQUENT EVENT

On August 13, 2004 the Company entered into an agreement to co-develop a
generator unit to be used in conjunction with the OX2 engine. The development of
this generator is expected to be completed by June 2005 at an anticipated
expense of $325,000. As of June 30, 2004, the Company paid $97,500 as a deposit
related to this agreeement.

                                       27
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.


None

Item 8A.      Controls and Procedures


Management, including the Company's principal executive officer and principal
financial officer, has evaluated, as of the end of the period covered by this
report, the effectiveness of the design and operation of the Company's
disclosure controls and procedures with respect to the information generated for
use in this report. Based upon, and as of the date of that evaluation, the
principal executive officer and principal financial officer concluded that the
disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports filed or
submitted under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.

In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based upon the above evaluation, management believes that its
controls do provide such reasonable assurances.

There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

Item 8B.      Other Information

None.

                                       28
<PAGE>
                                    Part III


Item 9.  Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.


Our current directors and executive officers, their ages and positions held in
the Company as of September 1, 2004 are as follows:





      Name                          Age           Current Position

M. Neil Cummings                     54               Secretary
Noel Holmes                          56               Director
John Luft                            48        Chief Operating Officer
Alexandria Phillips                  57          Director, Treasurer
Carroll Shelby                       81          Director, President
Steven Charles Manthey               44               Director


Our directors will serve in such capacity until the next annual meeting of our
shareholders and until their successors have been elected and qualified. Our
officers serve at the discretion of our directors.

Carroll Shelby - President, Director

Carroll Shelby has over 50 years of successful experience in the engine
industries. He has been inducted into a number of automotive-related Halls of
Fame. Mr. Shelby has been our president since May 2000 and one of our directors
since 1998.

Mr. Shelby is a founder and director of:

Shelby American, Inc.

Carroll Shelby International Inc.

Carroll Shelby Licensing, Inc.

Shelby Technologies

Carroll Shelby Enterprises

Carroll Shelby Children's Foundation

International Chili Society

Shelby Automobiles, Inc.

M. Neil Cummings - Secretary

M. Neil Cummings has been a practicing lawyer in the State of California since
1977 and was a partner for many years in the Los Angeles law firm of Walker,
Wright, Tyler & Ward. In July 1995, Mr. Cummings founded, and is currently the
owner and president of, M. Neil Cummings and Associates, a professional law
corporation that focuses on the area of business law, with an emphasis on
licensing and intellectual property in the context of existing and emerging
modes of ground transportation. Mr. Cummings has been our secretary since 1999.

John Luft - Chief Operating Officer

John Luft was the director of resorts/attractions marketing for the Walt Disney
Corporation at the Walt Disney World (WDW) Resort in Orlando, Florida from 1992
to 1994. From 1985 to 1992, Mr. Luft was the corporate director of U.S.
marketing for Hilton Hotels Corporation and from 1994 to 1999 he served as

                                       29
<PAGE>
Hilton's director of global and strategic partnership & product development. He
also served as the senior vice president of global marketing and sales and
business development at SkyNet Holdings, Inc. from 1999 to 2000. Mr. Luft earned
a BA degree from the University of Southern California in Marketing and Speech
Communications. Mr. Luft has been our chief operating officer since September
2001. Mr. Luft is also president, chief financial officer and director of
Carroll Shelby International, Inc. and president of Carroll Shelby Licensing,
Inc.

Alexandria Phillips - Director/Treasurer

Alexandria Phillips brings to the Company her years of wide ranging experience
and expertise as a tax advisor and financial consultant to Robert E. Petersen
and entities controlled by Mr. Petersen. Ms. Phillips resides in Southern
California and has been our treasurer since 2000 and one of our directors since
1999.

Noel Holmes - Director

Noel Holmes was born and resides in Australia, but spends a good deal of time in
Southern California, while maintaining a diverse international business and
accounting practice. Mr. Holmes commenced his career as a chartered accountant
in 1968, gained Australian public practicing certificate in 1973 and practiced
as a senior partner in a firm of Chartered Accountants since 1974. Mr. Holmes is
a director of private investment and property companies in the United States,
Australia, Singapore, the United Kingdom, Malaysia, Hong Kong, China, the
Netherlands and New Zealand. Mr. Holmes has been one of our directors since
1999.

Steven Charles Manthey - Director

Steven Charles Manthey is an inventor and conducts research and development in
connection with engines and related devices. Mr. Manthey has been one of our
directors since 2001.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that
our officers and directors, and persons who beneficially own more than ten
percent of our Common Stock, file reports of ownership and changes in ownership
with the commission. These reporting persons are also required to furnish us
with copies of all Section 16(a) forms they file. To our knowledge, the
following persons have failed to file, on a timely basis, the identified Section
16(a) reports during the most recent fiscal year:

<TABLE>
<CAPTION>
                                                                 Number of
                                                             Transactions that
                                                             Were Not Reported       Known Failures to File a
Name and Principal Position      Number of Late Reports      On a timely basis           Required Report
---------------------------      ----------------------      -----------------       ------------------------

<S>                                       <C>                        <C>                       <C>
Carroll Shelby,                           0                          1                         1
President and Director
Alexandria Phillips,                      0                          0                         0
Treasurer and Director
Noel Holmes,                              0                          1                         1
Director
Steven Charles Manthey,                   0                          1                         1
Director
Richard Ronzi,                            0                          1                         1
Director
</TABLE>

Audit Committee Financial Expert

This Board has determined that no member of the Board has the qualifications
required to be considered an "audit committee financial expert" as defined by
the rules and regulations of the Securities and Exchange Commission. Currently,
the Company is not required to have an audit committee financial expert.

Code of Ethics

The Company has adopted a code of ethics that applies to its principal executive
officer and principal financial officer. This code of ethics is filed as an
exhibit to this annual report on Form 10-KSB.

                                       30
<PAGE>
Item 10.      Executive Compensation.


The following table sets forth information regarding the annual and long-term
compensation paid to our executive officers during the last fiscal year.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                        Annual Compensation                          Long-Term Compensation

                                                                              Awards                        Payouts

                                                           Other                    Securities                      All
                                                           Annual  Restricted       Underlying                     Other
                                                          Compen-     Stock          Options/      LTIP           Compen-
Name And Principal                 Salary      Bonus      sation     Award(s)           SARs        Payouts        sation
Position                    Year      $           $          $        $                            ($)            ($)


<S>                         <C>      <C>          <C>       <C>       <C>           <C>              <C>       <C>
Carroll Shelby,             2004     60,000       --         --        --              --            --
President, Director
                            2003     60,000       --         --        --              --            --         $8,250(1)

                            2002     60,000       --         --        --           1,000,000        --         $3,300(2)


John Luft,                  2004     62,500       --         --        --              --            --            --
Chief Operating Officer
                            2003     62,500       --         --        --              --            --            --

                            2002     51,562       --         --        --             200,000        --            --
</TABLE>


(1)   Represents the market value of 30,000 shares of Common Stock granted to
      Mr. Shelby during the last fiscal year, based on an average between the
      closing bid and ask prices of $0.275 per share on August 27, 2003, the
      date of grant. These shares were granted under the Company's 2000 Stock
      Incentive Plan, as amended.

(2)   Represents the market value of 10,000 shares of Common Stock granted to
      Mr. Shelby during the fiscal year ended June 30, 2002, based on an average
      between the closing bid and ask prices of $0.33 per share on August 16,
      2002, the date of grant. These shares were granted under the Company's
      2000 Stock Incentive Plan, as amended.


Compensation of Directors

In August 2003, we granted our directors a total of 90,000 shares of Common
Stock in consideration for their services as directors of the Company as
follows:

                                               Number of Shares of
   Name of Director                               Common Stock
Noel Holmes                                          20,000
Steven Charles Manthey                               10,000
Alexandria Phillips                                  20,000
Carroll Shelby                                       30,000
Richard Ronzi                                        10,000
                                                     ------
Total                                                90,000
                                                     ======


Option Grants in the Last Fiscal Year

None.

                                       31
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values

<TABLE>
<CAPTION>
                                                   Number of Securities
                                                       Underlying
                                                   Unexercised Options     Value of Unexercised
                                      Value            at FY-End          In-The-Money Options
                     Shares Acquired                   Exercisable/       at FY-End Exercisable/
     Name              on Exercise    Realized        Unexercisable           Unexercisable
---------------      ---------------  --------     --------------------   ----------------------

<S>                        <C>           <C>        <C>                           <C>
John Luft                  --            --           300,000/0 $                 0/$0
Carroll Shelby             --            --         2,000,000/0 $                 0/$0
</TABLE>


Item 11.      Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth, as of August 31, 2004, the number of shares of
Common Stock beneficially owned by (i) each person who was known by us to own
beneficially more than five percent (5%) of our Common Stock; (ii) our
directors; (iii) our executive officers; and (iv) our directors and officers as
a group. As of August 31, 2004, there were 33,815,000 shares of Common Stock
issued and outstanding.

<TABLE>
<CAPTION>
                                                                        Amount and Nature of       Percent of
                  Name & Address Of Beneficial Owner                    Beneficial Ownership        Class (1)
------------------------------------------------------------------      --------------------       -----------

<S>                                                                         <C>                       <C>
Robert E./Margaret M. Petersen                                              22,987,153(2)             67.98%
6420 Wilshire Blvd./20th Floor
Los Angeles, California 90048
Estate of Paul Ebbage                                                        4,981,619(3)             14.73%
4 Spica Street
Coorparoo
Brisbane, QLD Australia, 4151
Steven Charles Manthey                                                       5,621,619(4)             16.62%
c/o Advanced Engine Technologies, Inc.
11150 W. Olympic Blvd. Suite 1050
Los Angeles, California 90064
Carroll Shelby                                                               2,420,000(5)              7.16%
c/o Advanced Engine Technologies, Inc.
11150 W. Olympic Blvd. Suite 1050
Los Angeles, California 90064
Alexandria Phillips                                                            501,000(6)              1.48%
c/o Advanced Engine Technologies, Inc.
11150 W. Olympic Blvd. Suite 1050
Los Angeles, California 90064
Noel Holmes                                                                    395,000(7)              1.17%
c/o Advanced Engine Technologies, Inc.
11150 W. Olympic Blvd. Suite 1050
Los Angeles, California 90064
M. Neil Cummings 332,389(8) * c/o Advanced Engine Technologies, Inc.
11150 W. Olympic Blvd. Suite 1050
Los Angeles, California 90064
John Luft                                                                      300,000(9)             *
c/o Advanced Engine Technologies, Inc.
11150 W. Olympic Blvd. Suite 1050
Los Angeles, California 90064
Directors and Executive Officers as a Group                                  9,769,021                28.89%
</TABLE>

*  Less than 1%.

                                       32
<PAGE>
1)  Applicable percentage of ownership is based on 33,815,000 shares of our
    common stock outstanding as of August 31, 2004. Shares of our common stock
    that a person has the right to acquire within 60 days of August 31, 2004 are
    deemed outstanding for purposes of computing the percentage ownership of the
    person holding such rights, but are not deemed outstanding for purposes of
    computing the percentage ownership of any other person, except with respect
    to the percentage ownership of all directors and executive officers as a
    group.


2)  Includes 13,195,534 shares that are directly owned by the Petersen Trust.
    Robert E. and Margaret M. Petersen (the "Petersens") are the trustees of the
    Petersen Trust. Also includes 4,000,000 shares of our common stock issuable
    upon the exercise of outstanding options granted to Mr. Petersen which were
    subsequently transferred to the Petersen Trust. The Company has been
    informed that the remaining 5,791,619 shares are beneficially owned by
    Steven Charles Manthey, one of our directors, but are subject to a voting
    agreement dated as of September 27, 2001 between Mr. Manthey and the
    Petersens, individually and as trustees of the Petersen Trust, pursuant to
    which Mr. Manthey has agreed to vote such shares at all shareholder meetings
    in the same manner that shares beneficially owned by the Petersens and the
    Petersen Trust are voted at such shareholder meetings, other than in
    circumstances where any proposal, resolution or issue at any such
    shareholder meeting relates to Mr. Manthey personally or during any period
    that Mr. Manthey ceases to be a director of the Company. The voting
    agreement is for a term of 20 years, or for so long as the Company continues
    to do business as a corporate entity, whichever is longer. The Company has
    been informed that the Petersens and the Petersen Trust have no economic
    interest in or investment control with respect to the shares beneficially
    owned by Mr. Manthey.

3)  Includes 3,981,619 shares that are held of record by Macro Management Group,
    Inc. and 1,000,000 shares that are held of record by Resolution Services
    Ltd., all of which the Company understands are beneficially owned by the
    Estate of Paul Ebbage.

4)  Includes 3,950,000 shares that are held of record by Trinity Enterprises
    S.A. and 1,781,619 shares that are held of record by Goldwater Estates Inc.,
    all of which the Company has been informed are beneficially owned by Steven
    Charles Manthey. Also includes 50,000 shares of our common stock issuable
    upon the exercise of outstanding options granted to Mr. Manthey under the
    Company's 2000 Stock Incentive Plan, as amended.

5)  Includes 2,000,000 shares of our Common Stock issuable upon the exercise of
    outstanding options granted to Mr. Shelby under the Company's 2000 Stock
    Incentive Plan, as amended.

6)  Includes 375,000 shares of our common stock issuable upon the exercise of
    outstanding options granted to Ms. Phillips under the Company's 2000 Stock
    Incentive Plan, as amended.

7)  Includes 375,000 shares of our common stock issuable upon the exercise of
    outstanding options granted to Mr. Holmes under the Company's 2000 Stock
    Incentive Plan, as amended.

8)  Includes 275,000 shares of our common stock issuable upon the exercise of
    outstanding options granted to Mr. Cummings under the Company's 2000 Stock
    Incentive Plan, as amended.

9)  Includes 300,000 shares of our common stock issuable upon the exercise of
    outstanding options granted to Mr. Luft under the Company's 2000 Stock
    Incentive Plan, as amended.

                                       33
<PAGE>
Equity Compensation Plan Information

The following table gives information about the shares of Common Stock issuable
upon the exercise of options under the Company's 2000 Stock Incentive Plan, as
amended, as of June 30, 2002. The Company currently has no other equity
compensation plans.

                      EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                                                                                                     Number of securities
                                                                                                      remaining available
                                                Number of securities to                               for future issuance
                                                be issued upon exercise      Weighted-average            under equity
                                                of outstanding options,     exercise price of         compensation plans
                                                  warrants and rights      outstanding options,      (excluding securities
                                                                           warrants and rights     reflected in column (a))
                  Plan category                           (a)                      (b)                        (c)
---------------------------------------------- -------------------------  --------------------      ------------------------

<S>                                                 <C>                         <C>                     <C>
Equity compensation plans approved by security
     holders                                                0                    N/A                          N/A
Equity compensation plans not approved by
     security holders                               7,675,000 $                 0.46                    2,195,000
Total                                               7,675,000 $                 0.46                    2,195,000
</TABLE>


See also Note 5 to the Financial Statements.

Item  12.      Certain Relationships and Related Transactions.

We have paid research and development costs and rent to a company owned by
Carroll Shelby, our president, a director and a shareholder, in the amount of
$392,855 for the fiscal year ended June 30, 2004 and in the amount of $376,284
for the fiscal year ended June 30, 2003.

On July 15, 1998, we entered into a joint venture agreement with Mr. Shelby to
develop the OX2 engine for use in a standard application for motor vehicles and
to promote the OX2 engine to the automotive industry. Mr. Shelby received
300,000 shares of Common Stock for the initial joint venture agreement. The
agreement expired on December 31, 2001.

We have paid legal fees and have reimbursed expenses, including rent, to a
company that is owned by M. Neil Cummings, our secretary and a shareholder, in
the amount of $73,067 for the fiscal year ended June 30, 2004, and in the amount
of $97,292 for the fiscal year ended June 30, 2003. As of June 30, 2004, we have
an outstanding receivable of $21,000, from a company owned by Mr. Cummings to
reimburse Mr. Cummings' company for the build-out of office space.

On May 23, 2000 we entered into an agreement with Steven Charles Manthey, a
director, to provide research and development products and services related to
the OX2 engine. On October 15, 2001, we entered into a new agreement with Mr.
Manthey and OX2 Engine Development PTY Limited, a company wholly-owned by Mr.
Manthey, to provide research and development products and services related to
the OX2 engine, which superceded the May 2000 agreement with Mr. Manthey. The
agreement was amended in January 2002 and April 2002. Pursuant to the agreement,
we paid consulting fees to Mr. Manthey in the amount of $80,000 for the fiscal
year ended June 30, 2003 and $73,326 for the fiscal year ended June 30, 2004. In
addition, in the fiscal year ended June 30, 2003 we repurchased 10,000 shares of
our Common Stock from OX2 Engine (Development) PTY Limited, for $20,000. In the
fiscal year ended June 30, 2002 we repurchased 170,000 shares of our Common
Stock from OX2 Engine (Development) PTY Limited, for $340,000.

In May 2002 we granted immediately vested options to purchase Common Stock, at
an exercise price of $0.3076 per share, to certain of our officers, directors
and to Robert E. Petersen in connection with consulting services provided to the
Company:

                                       34
<PAGE>
                                                            Number of Shares of
       Name                     Current Position                Common Stock
----------------------      -------------------------      ---------------------

M. Neil Cummings                    Secretary                       175,000
Noel Holmes                         Director                        175,000
John Luft                    Chief Operating Officer                200,000
Steven Charles Manthey              Director                         50,000
Robert E. Petersen(1)                   --                         2,000,000
Alexandria Phillips            Director, Treasurer                  175,000
Richard C. Ronzi                        --                           175,000
Carroll Shelby                 Director, President                1,000,000

(1)  These stock options were subsequently transferred to the R.E. & M. Petersen
     Living Trust DTD 1/17/83.

                                       35
<PAGE>
Item 13.      Exhibits, List and Reports on Form 8-K

Exhibits


Number  Description

  3.1   Certificate of Incorporation of the Registrant (incorporated by
        reference to Exhibit 3.1 to the Registrant's Registration Statement on
        Form 10-SB12G, filed on December 17, 1998).
  3.2   Form of Amended and Restated By-Laws of the Registrant (this is a
        compilation of the Registrant's By-Laws reflecting amendments made on
        December 7, 1999 and November 16, 2000) (incorporated by reference to
        Exhibit 3.2 to the Registrant's Report on Form 10-KSB for the fiscal
        year ended June 30, 2001).
 10.1   Cancellation of the issuance of 19,000,000 shares of the Registrant's
        Common Stock (incorporated by reference to Exhibit 10.2 to the
        Registrant's Report on Form 10-KSB for the fiscal year ended June 30,
        1999).
 10.2   Deed of Agreement Concerning the Patents, Licensing and Research and
        Development in Relation to the OX2 Engine, by and among the Registrant,
        Advanced Engine Technology Pty. Ltd. AN 063 092 759, OX2 Intellectual
        Property Inc., and OX2 Engine (Distribution) Limited, dated as of May
        12, 1999 (incorporated by reference to Exhibit 10.2 to the Registrant's
        Report on Form 10-KSB for the fiscal year ended June 30, 1999).
 10.3   Joint Venture Agreement by and between the Registrant and Carroll
        Shelby, dated as of July 15, 1998 (incorporated by reference to Exhibit
        10.1 to the Registrant's Registration Statement on Form 10-SB12G, filed
        on December 17, 1998).
 10.4   Agreement by and between the Registrant and Steven Charles Manthey,
        dated as of May 23, 2000 (incorporated by reference to Exhibit 10.4 to
        the Registrant's Report on Form 10-KSB for the fiscal year ended June
        30, 2000).
 10.5   Release Agreement by and among the Registrant, Advanced Engine
        Technology Pty. Ltd. and Steven Charles Manthey, dated as of May 23,
        2000 (incorporated by reference to Exhibit 10.5 to the Registrant's
        Report on Form 10-KSB for the fiscal year ended June 30, 2000).
 10.6   Agreement for Performance of Technology Development Services by
        Independent Contractors by and among the Registrant, Steven Charles
        Manthey and OX2 Engine Development PTY Limited, dated as of October 15,
        2001 (incorporated by reference to Exhibit 10.6 to the Registrant's
        Report on Form 10-KSB for the fiscal year ended June 30, 2002).
 10.7   First Amendment to Agreement for Performance of Technology Development
        Services by Independent Contractors by and among the Registrant, Steven
        Charles Manthey and OX2 Engine Development PTY Limited, dated as of
        January 24, 2002 (incorporated by reference to Exhibit 10.7 to the
        Registrant's Report on Form 10-KSB for the fiscal year ended June 30,
        2002).
 10.8   Second Amendment to Agreement for Performance of Technology Development
        Services by Independent Contractors by and among the Registrant, Steven
        Charles Manthey and OX2 Engine Development PTY Limited, dated as of
        April 2002 (incorporated by reference to Exhibit 10.8 to the
        Registrant's Report on Form 10-KSB for the fiscal year ended June 30,
        2002).
 10.9   Share Subscription Agreement by and between the Registrant and the R.E.
        & M. Petersen Living Trust DTD 1/17/83 (incorporated by reference to
        Exhibit 10.6 to the Registrant's Report on Form 10-QSB filed on November
        14, 2000).
 10.10  Promissory Note of The Robert E. and Margaret M. Petersen Trust in favor
        of the Registrant, dated September 1, 2001 (incorporated by reference to
        Exhibit 10.10 to the Registrant's Report on Form 10-KSB for the fiscal
        year ended June 30, 2002).
 10.11  Security Agreement of The Robert E. and Margaret M. Petersen Trust in
        favor of the Registrant (incorporated by reference to Exhibit 10.11 to
        the Registrant's Report on Form 10-KSB for the fiscal year ended June
        30, 2002).
 10.12  Registrant's 2000 Stock Incentive Plan (incorporated by reference to
        Exhibit 4.1 to the Registrant's Report on Form 10-KSB for the fiscal
        year ended June 30, 2000).
 10.13  Form of Stock Option Agreement (incorporated by reference to Exhibit
        10.13 to the Registrant's Report on Form 10-KSB for the fiscal year
        ended June 30, 2002).
 10.14  First Amendment to the Registrant's 2000 Stock Incentive Plan
        (incorporated by reference to Exhibit 10.8 to the Registrant's Report on
        Form 10-KSB for the fiscal year ended June 30, 2001).
 10.15  Second Amendment to the Registrant's 2000 Stock Incentive Plan
        (incorporated by reference to Exhibit 10.9 to the Registrant's Report on
        Form 10-KSB for the fiscal year ended June 30, 2001).
 10.16  Memorandum of Understanding, Charitable Gift Agreement, by and among the
        Registrant, the UC Riverside Foundation and the Regents of the
        University of California, dated as of June 7, 1999 (incorporated by
        reference to Exhibit 10.10 to the Registrant's Report on Form 10-KSB for
        the fiscal year ended June 30, 2001).
 14.1   Code of Business Conduct and Ethics
 31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
        --President.
 31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
        --Treasurer
 32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
        Section 906 of the Sarbanes-Oxley Act of 2002--President.
 32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
        Section 906 of the Sarbanes-Oxley Act of 2002--Treasurer.

Reports on Form 8-K

None

                                       36
<PAGE>
              Principal Accountant fees and services
Item 14


The Company engaged Singer, Leewak, Greenbaum & Goldstein, LLP (SLGG) as its
Independent Public accountants to audit the June 30, 2004 fiscal year. The
estimated audit fee for the 2004 audit is $25,000. The following table sets
forth fees for services SLGG provided during fiscal year

                                                 2004        2003
           Audit Fees(1)                      $ 40,138    $ 33,259
           Audit-related fees(2)                     0           0
           Tax fees(3)                           4,747       4,400
           All other fees(4)                         0           0
                                              --------    --------
                       Total                  $ 44,885    $ 37,659
                                              ========    ========

(1) Represents fees for professional services paid to SLGG provided in
connection with the audit of Advanced Engine Technologies, Inc.'s (AET's) annual
financial statements for 2003 and review of AET's quarterly financial
statements, advice on accounting matters that arose during the audit and audit .


(2) During the fiscal 2003 year, AET did not incur any fees for assurance
services not related to financial statement audits.

(3) Represents fees for services and advice provided in connection with
preparation of AET's federal and state (California) tax returns.

(4) During 2003, the Company did not incur any other fees related to AET's
financial statements and other services provided.

       Generally, the Audit Committee approves in advance audit and non-audit
services to be provided by the Company's independent auditors. In other cases,
in accordance with Rule 2-01(c)(7) of Securities and Exchange Commission
Regulation S-X, the Audit Committee has delegated pre-approval authority to the
Chairman of the Audit Committee for matters which arise or otherwise require
approval between regularly scheduled meetings of the Audit Committee, provided
that the Chairman report such approvals to the Audit Committee at the next
regularly scheduled meeting of the Audit Committee.

                                       37
<PAGE>
                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


ADVANCED ENGINE TECHNOLOGIES, INC.

       (Registrant)
By:                                  /s/ CARROLL SHELBY
                                     ------------------
                                         Carroll Shelby,
                                           President
Date:                                  September 28, 2004


In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.


By:               /s/ CARROLL SHELBY
                  ------------------
          Carroll Shelby, President and Director
Date:              September 28, 2004

By:              /s/ ALEXANDRIA PHILLIPS
                 -----------------------
          Alexandria Phillips, Treasurer and Director
Date:                September 28, 2004

By:              /s/ NOEL HOLMES
                 ---------------
              Noel Holmes, Director
Date:             September 28, 2004


                                       38