Dec. 18, 2007 AET Annual Meeting Report

The 2007 AET annual meeting was held at 11:00 am on December 18, 2007 at Carroll Shelby Enterprises which houses OX2 engine development facilities. Attending the meeting were John Luft, Chief Operating Officer, Alexandria Phillips, Treasurer and Director, Mike Edwards, Chief Engineer, and 5 AENG shareholders. While, Carroll Shelby, President and Director, was not in attendance, he did, unexpectedly, arrive and make a brief appearance on the floor on his way to his office. 33,885,000 AENG shares outstanding exist out of an authorized limit of 50,000,000 shares. Only 12,772,013 shares were present, representing 37% of shares and insufficient for a quorum requiring 51% shares for a vote. Apparently, Steve Manthey again declined to vote his shares. As a consequence, no vote was held and the Board of Directors continues to consist of Carroll Shelby, President, Alexandria Phillips, Treasurer, and Noel Holmes.

The issue that at least some AENG shareholders whose shares are held by brokers in "street" name are not receiving proxy statements was raised. John Luft stated that the same mailing procedures were followed as were used for the 2006 meeting, and brokers are supposed to mail the proxy statements to their clients. However, Mr. Luft said that any shareholder not receiving a proxy statement may call the AET offices and have the proxy statement "overnighted" directly to them. It was also agreed that shareholders may call the Carroll Shelby Enerprises receptionist or John Luft at 310 538-2914 to leave a name and address to directly receive all future proxy statements and notices. Efforts are also being made to find a way to directly mail all future proxy statements.

Staff changes have taken place at AET as OX2 development winds down and marketing efforts begin to ramp up. At this stage engineering is primarily needed to facilitate endurance testing of the OX2. Mike Edwards now remains the only full-time engineer and is the project manager. Engineers Ian Mann and Scott Graves are no longer with AET. After enduring many months of long hours and long commutes from Oxnard, they have taken jobs closer to home, not because they did not enjoy working on the OX2. Steve Wells continues to remain as a technician supporting dyno testing and engine setup and assembly. A full time machinist is now on staff along with another mechanic. Additional engineering, such as electrical engineering, is contracted out as needed.

Financially, about $1.7 million remains of the Petersen Trust subscription, plus some additional capital. It is estimated that there is sufficient funding to cover AET's operating costs for the next 2 years before new funding must be acquired. If AET had not delisted its stock in 2005, SEC and Sarbanes-Oxley auditing requirements would have AET cost about $2 million per year or $4 million to date, i.e. AET would be broke.

Steve Manthey continues to independently work with the Desigh Level 2 OX2 engine in Australia with his own funds and is pursuing contracts and interest from Lincoln Electric and the Australian government. AET owns the patents and will step in to support and complete any contract deals Manthey can arrange.

During the meeting, Mike Edwards gave a full rundown on the progress and status of OX2 and generator development. A thick color handout given to attending shareholders provided detailed charts, chronologies, diagrams, graphs, and photos of the engineering work, marketing direction, and progress at AET.

Design and development of the Level 3 OX2 engine is specifically targeted to provide power to drive a compact 30 KW generator designed and built by Danotek Motion Technologies for AET. AET has 2 of the 3 Danotek generators contracted for. To test the Danotek generator, a 4 cylinder propane GM Vortec 3000 Industiral Engine was acquired. In addition to marketing the OX2 engine and the OX2/Danotek genset, AET also has plans to offer a GM/Danotek genset, and the Danotek generator alone as products. A fully functional prototype propane GM/Danotek generator has been assembled and was running and demonstrated at the annual meeting. The power electronics are enclosed in a side add-on box and will be integrated into the generator housing in any future production design reducing the overall package size. The GM/Danotek genset uses a belt drive, while the OX2/Danotek genset is direct drive.

AET's generator packages offer a significant reduction in size and weight compared to existing conventional diesel generators offering similar power output. Typical generators range from 53.8 cu ft to 79.6 cu ft (68.5 cu ft avg) and 1300 to over 2000 lbs in weight. AET's GM/Danotek generator is 34.6 cu ft and about 1000 lbs and the OX2/Danotek generator will be about 28.9 cu ft. Pricewise, average cost of a conventional generator is about $350 per KW. The current goal for the OX2 system is around $500 per KW. The smaller size and lighter weight are AET's primary selling point. The market desires and will willingly pay more for a smaller size generator. This is analogous to the consumer preference for more expensive, small footprint, lightweight flat-screen TVs and computer monitors over the less expensive, bulky, heavy CRT TVs and monitors.

The Level 3 engine was first dyno tested in August 2005. Since then numerous modifications have been made to correct problems and improve performance. Port seal leakage was a major initial problem. However, that problem has now long been completely fixed. Cylinder wall wear was a problem caused by excessive friction from pistons mounted on fixed posts. The cylinder wear problem was solved when the design was changed to floating pistons with longer skirts mounted on connecting rods instead of fixed posts. By June 2006, the Level 3 OX2 produced 202 ft-lbs torque at 1000 rpm, enough power to drive the 30 KW Danotek generator. In February 2007, the OX2 was modified to run with turbocharging. In March 2007, the turbocharged OX2 produced 303 ft-lbs, 44 hp at 800 rpm. Turbocharging provides positive pressure and improves port sealing by keeping the port seals pushed against the plate. A normal aspirated OX2 could provide sufficient power for a 30 KW generator. With some performance improvement, a turbocharged OX2 in the same package could power a 60 KW generator which would require around 325 ft-lbs at 1200 rpm.

Three Level 3 OX2 engines have been built to date, with the third engine currently being readied for endurance testing. A continuing problem is excessively high oil temperatures being reached during dyno testing, impeding oil flow. A dry sump oil pump system will be used to try to correct the problem. This problem must be corrected before endurance testing can begin. A new advanced dynamometer has been purchased to facilitate endurance testing. The older dyno system has limitations on the amount of data and number of sensor inputs it can handle and must be manually sequenced through its testing steps. The new dyno is fully computer controlled, can handle an unlimited number of sensor inputs, collect thousands of data points per second, and allows test sequences to be computer programmed and controlled.

AET is shooting for completion of successful endurance testing during the first quarter of 2008. A total of 10-12 OX2 engines is hoped to be built during 2008. Carroll Shelby's close relationship with Ford gives AET an "in" with Ford and other potential partners in commercialization. AET will also be applying for a U.S. government development grant in 2008. An application for the grant was hastily prepared in 2007, but a technicality caused the application to be rejected. However, the government agency was very interested in AET and the OX2 and strongly encouraged AET to reapply.

John Luft again discussed revamping the AET website which has not come to pass after previous promises. However, this time, an updated website will be part of new marketing efforts, and I think we will see a new look to AET's website in 2008.

After the formal part of the meeting was completed, demonstrations of the turbo OX2 running on the dyno and the GM/Danotek generator running were given. The new dyno and the newest OX2 under construction were shown. A mockup of the OX2/Danotek generator was present. For comparison, a huge trailer mounted MQ Power 45 KVA (36 KW) diesel generator was on the floor.

AET has come a long way from its early days. This is now a fully professional and competently run operation. AET has specific targets and goals which it is meeting on a tightly controlled and limited budget. Engineering has done its work. Now it is time for AET to show equal competence in marketing and placing its products. 2008 looks to be a major turning point and promising year for AET.