Diesel engines occupy a crucial position in automobile industry due to their high thermal efficiency and high power to weight ratio. However, they lag behind in controlling air polluting components coming out of the engine exhaust. Therefore, diesel consumption should be analyzed for future energy consumption and this can be primarily controlled by the petroleum fuel substitution techniques for existing diesel engines, which include biodiesel, alcohol-diesel emulsions and diesel water emulsions. Among them the diesel water emulsion is found to be most suitable fuel due to reduction in particulate matter and NOx emission, besides that it also improves the brake thermal efficiency. But the major problem associated with emulsions is the ignition delay, since this is responsible for the power and torque loss. A reduction in NOx emission was observed due to reduction in combustion chamber temperature as the water concentration increases. However the side effect of emulsified diesel is a reduction in power which can be compensated by oxygen enrichment. The present study investigates the effects of oxygen concentration on the performance characteristics of a diesel engine when the intake air is enriched to 27% of oxygen and fueled by 10% of water diesel emulsion. It was found that the brake thermal efficiency was enhanced, combustion characteristics improved and there is also a reduction in HC emissions.