**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM10-QSB**

**(Mark One)**

| x                                         |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|                                      |   | ** **                                                                                   |
| **For the  period ended: March 31, 2007** |
|                                      |   | ** **                                                                                   |
| o                                         |   | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**      |

 

**For the transition period from                     to                     **

**CommissionFile Number: 333-128758**

**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

(Exact name ofsmall business issuer as specified in its charter)

| **Nevada**                                |   | **20-1990623**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | Identification  No.) |
|                                      |   |                 |
| **7339  Paeso Del Volcan**                |   | ** **           |
| **Albuquerque,  New Mexico**              |   | **87121**            |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

**31-20-676-0304**

(Issuer’stelephone number)

Check whether the issuer(1) has 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 periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.     x  Yes     o  No

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).      o  Yes      x  No

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date:

| Class                                     | ** ** | **Outstanding at March 31, 2007** |
|-------------------------------------------|------------|-----------------------------------|
| Common Stock,  par value $.0001 per share |       | 214,825,989  shares               |

 

Transitional Small Business Disclosure Format (check one):  Yes     o  No     x

 

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**UTILICRAFTAEROSPACE INDUSTRIES, INC.**

**FORM10-QSB**

**CONTENTS**
|                                          | ** ** | **Page No.**   |
|------------------------------------------|------------|----------------|
| **PART I — FINANCIAL  INFORMATION** |       |           |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 1.        |   | Financial Statements |   | 3 |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 2.        |   | Management’s  Discussion and Analysis |   | 16 |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 3         |   | Controls and  Procedures |   | 21 |
|                                     |       |           |   |   |   |   |
| **PART  II — OTHER INFORMATION**    | ** ** | ** **     |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 1.        |   | Legal Proceedings |   | 21 |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 2.        |   | Unregistered Sales of  Equity Securities and Use of Proceeds |   | 21 |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 3.        |   | Defaults Upon  Senior Securities |   | 21 |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 4.        |   | Submission of  Matters to a Vote of Security Holders |   | 21 |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 5.        |   | Other Information |   | 21 |
|                                     |       |           |   |   |   |   |
|                                     |       | Item 6.        |   | Exhibits |   | 22 |
|                                     |       |           |   |   |   |   |
|                                     |       | Signatures     |   | 22 |
|                                     |       |           |   |   |
|                                     |       | Certifications |   | Attached |

 

2

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**PARTI. FINANCIAL INFORMATION**

**Item1. Financial Statement**

**UtilicraftAerospace Industries, Inc.(A Development Stage Company)(UNAUDITED)Balance SheetMarch 31, 2007**
| Assets                                                                                                     | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                                 | ** ** | ** ** | ** ** |
| Current assets:                                                                                            |       |       |       |
| Cash                                                                                                       |       | $          | 18,536     |   |
|                                                                                                       |       |       |       |
| Total current  assets                                                                                      |       | 18,536     |       |
|                                                                                                       |       |       |       |
| Computer equipment, net of depreciation of $8,181                                                          |       | 18,868     |       |
|                                                                                                       |       |       |       |
| Other assets:                                                                                              |       |       |       |
| Lease security  deposits and other assets                                                                  |       | 23,250     |       |
| Prototypes for  design aircraft                                                                            |       | 312,804    |       |
|                                                                                                       |       | 336,054    |       |
|                                                                                                       |       |       |       |
| Total assets                                                                                               |       | $          | 373,458    |   |
|                                                                                                       |       |       |       |
| Liabilities and  Stockholders’ Equity (Deficit)                                                       |       |       |       |
|                                                                                                       |       |       |       |
| Current liabilities:                                                                                       |       |       |       |
| Accounts payable  and accrued expenses                                                                     |       | $          | 575,397    |   |
| Payroll taxes  payable                                                                                     |       | 382,133    |       |
| Accrued  interest, related party                                                                           |       | 54,320     |       |
| Rent payable,  related party                                                                               |       | 114,000    |       |
| Accrued aircraft  rent, related party                                                                      |       | 52,500     |       |
| Deferred  compensation                                                                                     |       | 2,832,329  |       |
| Loans and  advances from related party                                                                     |       | 540,241    |       |
| Total current  liabilities                                                                                 |       | 4,550,920  |       |
|                                                                                                       |       |       |       |
| Long-term liabilities:                                                                                     |       |       |       |
| Deferred rent  obligation                                                                                  |       | 72,000     |       |
|                                                                                                       |       |       |       |
| Commitments and  contingencies (Note 6)                                                                    |       |       |       |
|                                                                                                       |       |       |       |
| Stockholders’ equity  (deficit):                                                                      |       |       |       |
| Preferred stock,  $.0001 par value, 25,000,000 shares authorized, no shares issued or  outstanding         |       | —     |       |
| Common stock,  $.0001 par value, 475,000,000 shares authorized, 214,825,989 shares issued  and outstanding |       | 21,482     |       |
| Additional paid-in  capital                                                                                |       | 4,737,335  |       |
| Deficit accumulated  during the development stage                                                          |       | (9,008,279 | )          |
| Total  stockholders’ equity (deficit)                                                                 |       | (4,249,462 | )          |
|                                                                                                       |       |       |       |
| Total liabilities and  stockholders’ equity (deficit)                                                 |       | $          | 373,458    |   |

The accompanyingnotes are an integral part of these unaudited financial statements.

3

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Util**icraft Aerospace Industries, Inc.**

**(ADevelopment Stage Company)**

**(UNAUDITED)**

**Statementsof Operations**
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** | **Period From  December 9,  2004  (Inception) to** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**               | ** ** | **March 31,**               | ** ** | **March 31,**                                                | ** ** |
| ** **                                                                         | ** ** | **2007**                         | ** ** | **2006**                         | ** ** | **2007**                                                          | ** ** |
| ** **                                                                         | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                                                        | ** ** |
| Revenues                                                                           |       | $                                | —     |                             | $          | —                                                            |       | $ | — |   |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Operating  expenses:                                                               |       |                             |       |                             |       |                                                              |       |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Related party reorganization costs (Notes 1 and 2)                                 |       | —                           |       | —                           |       | 3,519,073                                                         |       |
| Compensation and related costs                                                     |       | 268,600                          |       | 196,952                          |       | 3,629,129                                                         |       |
| General and administrative, exclusive of  compensation cost shown separately above |       | 108,934                          |       | 169,014                          |       | 1,344,062                                                         |       |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Engineering, research and development                                              |       | 17,224                           |       | 15,469                           |       | 456,977                                                           |       |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Interest expense                                                                   |       | 5,446                            |       | 8,078                            |       | 59,038                                                            |       |
| Total operating expenses                                                           |       | 400,204                          |       | 389,513                          |       | 9,008,279                                                         |       |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Loss before  provision for income taxes                                            |       | (400,204                         | )          | (389,513                         | )          | (9,008,279                                                        | )          |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Provision for  income taxes                                                        |       | —                           |       | —                           |       | —                                                            |       |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Net loss                                                                           |       | $                                | (400,204   | )                                | $          | (389,513                                                          | )          | $ | (9,008,279 | ) |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Basic net loss per  share based on weighted average common shares                  |       | $                                | (0.01      | )                                | $          | (0.01                                                             | )          |   |   |
|                                                                               |       |                             |       |                             |       |                                                              |       |
| Weighted average number  of common shares outstanding                              |       | 157,228,752                      |       | 142,342,517                      |       |                                                              |       |

 

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

4

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**Utilicraft Aerospace Industries, Inc.**

**(A Development Stage Company)**

**(UNAUDITED)**

**Statements of Cash Flows**
| ** **                                                                   | ** ** | **Three Months  Ended** | ** ** | **Three Months  Ended** | ** ** | **Period From  December 9, 2004  (Inception) to** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**           | ** ** | **March 31,**           | ** ** | **March 31,**                                                    | ** ** |
| ** **                                                                   | ** ** | **2007**                     | ** ** | **2006**                     | ** ** | **2007**                                                              | ** ** |
| ** **                                                                   | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                                                            | ** ** |
| Cash flows from  operating activities:                                       |       |                         |       |                         |       |                                                                  |       |
|                                                                         |       |                         |       |                         |       |                                                                  |       |
| Net loss                                                                     |       | $                            | (400,204   | )                            | $          | (389,513                                                              | )          | $ | (9,008,279 | ) |
|                                                                         |       |                         |       |                         |       |                                                                  |       |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                         |       |                         |       |                                                                  |       |
| Depreciation                                                                 |       | 1,353                        |       | —                       |       | 8,182                                                                 |       |
| Non-cash portion of related party reorganization  costs                      |       | —                       |       | —                       |       | 2,450,615                                                             |       |
| Common stock issued for services                                             |       | —                       |       | —                       |       | 1,400,000                                                             |       |
| Deferred compensation                                                        |       | 119,792                      |       | 93,620                       |       | 973,221                                                               |       |
| Expenses paid by related party                                               |       | —                       |       | —                       |       | 206,052                                                               |       |
| Compensation paid by AMUC                                                    |       | —                       |       | —                       |       | 46,923                                                                |       |
| Deferred rent                                                                |       | 6,000                        |       | —                       |       | 72,000                                                                |       |
| Changes in  operating assets and liabilities:                                |       |                         |       |                         |       |                                                                  |       |
| Prepaid expenses                                                             |       | —                       |       | —                       |       | —                                                                |       |
| Lease security deposits and other assets                                     |       | —                       |       | (7,201                       | )          | (23,250                                                               | )          |
| Deferred financing costs                                                     |       | —                       |       | —                       |       | —                                                                |       |
| Accounts payable and accrued expenses                                        |       | 63,113                       |       | 116,783                      |       | 498,246                                                               |       |
| Accounts payable, AMUC                                                       |       | —                       |       | —                       |       | —                                                                |       |
| Payroll taxes payable                                                        |       | 28,436                       |       | (38,404                      | )          | 385,743                                                               |       |
| Accrued interest, related party                                              |       | 5,446                        |       | 8,078                        |       | 54,320                                                                |       |
| Rent payable, related party                                                  |       | —                       |       | —                       |       | 114,000                                                               |       |
| Accrued aircraft rent, related party                                         |       | 7,500                        |       | 7.500                        |       | 52,500                                                                |       |
| Deferred compensation                                                        |       | —                       |       | —                       |       | (33,000                                                               | )          |
| Net cash used in  operating activities                                       |       | (168,564                     | )          | (209,137                     | )          | (2,802,727                                                            | )          |
|                                                                         |       |                         |       |                         |       |                                                                  |       |
| Cash flows from  investing activities:                                       |       |                         |       |                         |       |                                                                  |       |
| Purchase of prototypes for design aircraft                                   |       | —                       |       | —                       |       | (312,804                                                              | )          |
| Purchase  of computers                                                       |       | —                       |       | —                       |       | (27,050                                                               | )          |
| Net cash used in  investing activities                                       |       | —                       |       | —                       |       | (339,854                                                              | )          |
|                                                                         |       |                         |       |                         |       |                                                                  |       |
| Cash flows from  financing activities:                                       |       |                         |       |                         |       |                                                                  |       |
| Proceeds from issuance of common stock                                       |       | 160,000                      |       | 374,960                      |       | 3,626,439                                                             |       |
| Financing cost associated with common stock                                  |       | —                       |       | —                       |       | (271,000                                                              | )          |
| Advances from related party                                                  |       | —                       |       | 106,697                      |       | 122,378                                                               |       |
| Repayment of advances from related party                                     |       | (8,700                       | )          | (110,000                     | )          | (316,700                                                              | )          |
| Net cash  provided by financing activities                                   |       | 151,300                      |       | 371,657                      |       | 3,161,117                                                             |       |
|                                                                         |       |                         |       |                         |       |                                                                  |       |
| Net increase in  cash                                                        |       | (17,264                      | )          | 162,520                      |       | 18,536                                                                |       |
| Cash at  beginning of period                                                 |       | 35,800                       |       | 507                          |       | —                                                                |       |
| Cash at end of  period                                                       |       | $                            | 18,536     |                         | $          | 163,027                                                               |       | $ | 18,536 |   |
|                                                                         |       |                         |       |                         |       |                                                                  |       |
| Interest paid                                                                |       | $                            | —     |                         | $          | —                                                                |       | $ | 371 |   |

 

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

5

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**UtilicraftAerospace Industries, Inc.**

**(ADevelopment Stage Company)**

**(UNAUDITED)**

**Statementsof Cash Flows**

Supplemental Disclosures of Non-Cash

Investing and Financing Activities
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** | **Period From  December 9, 2004  (Inception) to** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**               | ** ** | **March 31,**               | ** ** | **March 31,**                                                    | ** ** |
| ** **                                                                   | ** ** | **2007**                         | ** ** | **2006**                         | ** ** | **2007**                                                              | ** ** |
| ** **                                                                   | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                                                            | ** ** |
| Assumption of  obligations for deferred compensation of former AMUC officers |       | $                                | —     |                             | $          | —                                                                |       | $ | 1,892,108 |   |
|                                                                         |       |                             |       |                             |       |                                                                  |       |
| Assumption of  loans and advances from related party                         |       | $                                | —     |                             | $          | —                                                                |       | $ | 531,889 |   |
|                                                                         |       |                             |       |                             |       |                                                                  |       |
| Assumption of accounts  payable of AMUC                                      |       | $                                | —     |                             | $          | —                                                                |       | $ | 1,145,609 |   |

 

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

6

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**UTILICRAFTAEROSPACE INDUSTRIES, INC.(A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)MARCH 31, 2007**

**1.             BASIS OF PRESENTATION AND GOINGCONCERN UNCERTAINTY:**

Theunaudited financial statements have been prepared by the Company, pursuant tothe rules and regulations of the Securities and Exchange Commission.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beenomitted pursuant to such SEC rules and regulations; nevertheless, the Companybelieves that the disclosures are adequate to make the information presentednot misleading.  These financialstatements and the notes hereto should be read in conjunction with the financialstatements and notes thereto included in the Company’s Form 10-KSB forthe year ended December 31, 2006, which was filed April 27, 2007.  In the opinion of the Company, alladjustments, including normal recurring adjustments necessary to present fairlythe financial position of Utilicraft Aerospace Industries, Inc. as of March 31,2007 and the results of its Operations and cash flows for the three months thenended, have been included.  The resultsof operations for the interim period are not necessarily indicative of theresults for the full year.

UtilicraftAerospace Industries, Inc., (the “Company”) was incorporated in the State ofNevada on December 9, 2004 and uses a December 31 year end.  It is a development stage, research anddevelopment company.  The Company wasformed to conceive and implement a solution to the problem of decliningcapacity in the short haul (or feeder) route segments of the air cargo hub andspoke system.  The research anddevelopment efforts are focused on the design of a system for moving freight,centered around a new aircraft specifically designed for feeder route segments,the FF-1080-300ER Freight Feeder aircraft. The Company is also engaged in the development of related systems for fuelmanagement and electronic freight tracking (Note 2).

The financialstatements of the Company have been prepared assuming that the Company willcontinue as a going concern.  However,since inception the Company has a loss from operations of approximately$9,000,000.  This is largely attributableto the reorganization costs associated with American Utilicraft Corporation (“AMUC”)(Note 3) and the costs of sustaining a corporate infrastructure and the relatedoverhead deemed necessary to support the Company’s operations while raisingcapital to develop a prototype of the aircraft described above.  Cash losses from operations since inceptionhave been approximately $2,800,000. Although the Company has a working capital deficiency of approximately$4,530,000 at March 31, 2007, approximately $3,480,000 of this deficiency isowed to the principal officers of the Company and will be paid when and iffunds are available.

In light of theCompany’s current financial position and the uncertainty of raising sufficientcapital to achieve its business plan, there is substantial doubt about theCompany’s ability to continue as a going concern.  In the opinion of management, approximately$15,000,000 will be required over the next twelve months to remove any threatto the continuation of its business during such time.  The Company has entered into a financingagreement as more fully discussed in Note 5, with PacifiCorp Funding PartnersTrust (“PacifiCorp”), to potentially provide between $40,000,000 and$80,000,000 in equity financing.  Despitethese activities, there can be no assurance that management’s efforts toadequately capitalize the Company will be successful.

 There have been no changes in accountingpolicies used by the Company during the quarter ended March 31, 2007.

**2.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

###### Managementestimates

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the dates ofthe financial statements and the reported amounts of operating expenses duringthe reporting periods.  Actual resultscould differ from these estimates.

Cash and cash flows

For purposes ofthe statements of cash flows, cash includes demand deposits and time depositswith maturities of less than three months. None of the Company’s cash is restricted.

The Companymaintains cash accounts, which could exceed federally insured limits. TheCompany has not experienced any losses from maintaining cash accounts in excessof federally insured limits. Management believes that the Company does not havesignificant credit risk related to its cash accounts.

7

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Fair value of financialinstruments 

In accordance with the reporting requirements of SFAS No. 107, *Disclosures About Fair Value of Financial Instruments*, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of the loans from related party approximate their carrying amounts due to the short maturity of these instruments. At March 31, 2007, the Company did not have any other financial instruments.

Stock Based Compensation

Effective September 30, 2005, the Company adoptedStatement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment, usingthe modified prospective method. This statement requires the Company torecognize compensation cost based on the grant date fair value of optionsgranted to employees and directors. 

Recent accounting pronouncements 

In July2006, the FASB issued FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting forincome taxes by prescribing a minimum probability threshold that a tax positionmust meet before a financial statement benefit is recognized. The minimumthreshold is defined in FIN 48 as a tax position that is more likely thannot to be sustained upon examination by the applicable taxing authority,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. The tax benefit to be recognized ismeasured as the largest amount of benefit that is greater than fifty percentlikely of being realized upon ultimate settlement. FIN 48 must be applied toall existing tax positions upon initial adoption. The cumulative effect ofapplying FIN 48 at adoption, if any, is to be reported as an adjustment toopening retained earnings for the year of adoption. FIN 48 is effective for theCompany’s year end 2007, although early adoption is permitted. The Company isassessing the potential effect of FIN 48 on its financial statements.

In 2006, theFinancial Accounting Standards Board issued the following:

·  SFAS No. 155:*Accounting for Certain Hybrid Financial Instruments*

·  *SFASNo. 156: Accounting for Servicing of Financial Assets*

·  *SFASNo. 157: Fair Value Measurements*

·  *SFAS No. 158: Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans*

Management hasreviewed these new standards and believes that they have no impact on thefinancial statements of the Company.

#### Income taxes

The Company employs theasset and liability method in accounting for income taxes pursuant to Statementof Financial Accounting Standards (SFAS) No. 109 “*Accounting for Income Taxes*.” Under thismethod, deferred tax assets and liabilities are determined based on temporarydifferences between the financial reporting and tax bases of assets andliabilities and net operating loss carryforwards, and are measured usingenacted tax rates and laws that are expected to be in effect when thedifferences are reversed.

8

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Net loss per share

Basic net loss per shareis computed based upon the weighted average number of common shares outstandingduring the periods, adjusted for contingently returnable shares (see Note 6)and is computed by dividing net loss by the adjusted weighted average number ofshares during the periods. Diluted net loss per share is based upon theweighted average number of common shares outstanding during the periods,adjusted for contingently returnable shares, plus the number of incrementalshares of common stock contingently issuable upon the exercise of theoutstanding warrants, (Notes 4 and 6). No effect has been given to the potential exercise of the warrants becausetheir effect would be anti-dilutive.

Basic net loss per sharehas been computed as follows:
|                                                                     | ** ** | **Three Months**        | ** ** | **Three Months**        | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                                                          | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** |
|                                                                |       |                         |       |                         |       |
| Net loss                                                            |       | $                            | (400,204   | )                            | $          | (389,513 | ) |
|                                                                |       |                         |       |                         |       |
| Weighted average  common shares outstanding                         |       | 215,349,545                  |       | 000000                       |       |
| Less - weighted  average contingently returnable shares             |       | (58,120,793                  | )          | (000000000                   | )          |
| Adjusted  weighted average for basic net loss per share computation |       | 157,228,752                  |       | 151,886,769                  |       |
| Basic net loss per  share                                           |       | $                            | (0.01      | )                            | $          | (0.01 | ) |

 

Engineering, research and development 

The Company expenses engineering, research anddevelopment costs as they are incurred. For the months ended March 31, 2007 and the years ended December 31,2006 and 2005, respectively, and for the period from December 9, 2004(inception) through December 31, 2006, such costs were $17,224, $174,445,$261,428 and $456,977, respectively. These amounts relate to research and development of the Company’s newaircraft design.  Costs directly relatedto building a prototype aircraft which will have an alternative future use arebeing capitalized.  Upon completion,these costs will be depreciated over the then estimated useful lives.

Patents

In December 2004, the Company obtained the assignmentof rights to three U.S. patents from its President pursuant to the terms of his“Employment Agreement.” One patent is for the design of the FF-1080 aircraft.Another is a method patent that incorporates the design in an integrated aircargo information system for an electronic freight tracking system. The thirdpatent is for a system that computes the most economical route segment based onthe change in aircraft gross weight on each segment resulting in better fuelefficiency.

The Company’saccess to the patents was obtained from the Employment Agreement discussedabove with its President, and were not assigned any value because  all of the costs and obligations incurred inconnection with obtaining access to the patents were not paid to its Presidentbut were paid to AMUC, its stockholders and creditors aggregating approximately$3,519,000 and were expensed at the reorganization date of December 9, 2004 andreflected in the accompanying financial statements as “Related partyreorganization costs.”

9

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**3.             TRANSACTIONS WITH AMERICANUTILICRAFT CORPORATION**

The Company waseffectively reorganized from American Utilicraft Corporation (“AMUC”) throughthe issuance of 111,444,769 Common shares to AMUC and 294,000 common sharesissued directly to AMUC stockholders, effective for accounting purposes as of December9, 2004.  AMUC distributed the shares itreceived to its stockholders.

AMUC was engaged in the development of theFF-1080-300ER prior to the forming of UAI. As consideration for the release of any claims to the patent rights(Note 2), the Company paid approximately $1,095,000 to AMUC or directly to itscreditors and assumed liabilities for deferred compensation to former officersand employees of AMUC of approximately $1,892,000 and debt to an officer ofapproximately $532,000.  Such amountshave been reflected as “Related party reorganization costs” in the accompanyingstatements of operations as discussed in Note 2.

Since the Company acquired none of the assets of AMUCnor assumed any business formerly operated by AMUC, no financial statements of AMUCare presented.  The reorganizationtransactions were accounted for at the fair value of cash paid and liabilitiesassumed.

**4.**             **CAPITALSTRUCTURE DISCLOSURES**

The Company’s capital structure is not complex.  The Company is authorized to issue 25,000,000shares of preferred stock with a par value of $.0001 per share.  The Company is authorized to issue475,000,000 shares of common stock with a par value of $.0001 per share.

Preferred stock 

No shares of preferred stock have been issued as ofMarch 31, 2007.

Common stock 

Each common stock share has one voting right and theright to dividends if and when declared by the Board of Directors.

Stock options, warrants and other rights 

As of March 31, 2007, the Company has not adopted anyemployee stock option plans.

Valuation of stock issued for services 

Effective May 6, 2005, the Company issued 20,000,000shares to two executive officers for services rendered in connection withpre-incorporation services and their agreement to serve as directors.  The shares were valued at $.07 per sharebased on shares issued in February and March 2005 for cash at $.10 pershare.  Management of the Companyestimated the value below the cash price of $.10 per share because the sharescontained no registration rights and contain resale restrictions.  The expense is reflected in the accompanyingstatements of operations under “compensation and related costs.”

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Warrants 

A summary of all the Company’s warrants outstanding atMarch 31, 2007, December 31, 2006 and 2005, respectively and the changes duringthe years then ended is presented in the following table.
|                                          | ** ** | **AMUC  Stockholders** | ** ** | **PacifiCorp** | ** ** | **Related  Party** | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------|------------|--------------------|------------|------------|------------|
|                                     |       |                   |       |           |       |               |       |       |       |
| Warrants  outstanding, December 31, 2004 |       | 17,287,664             |       | —         |       | —             |       | 17,287,664 |       |
|                                     |       |                   |       |           |       |               |       |       |       |
| Issued                                   |       | —                 |       | 60,000,000     |       | —             |       | 60,000,000 |       |
|                                     |       |                   |       |           |       |               |       |       |       |
| Warrants  outstanding, December 31, 2005 |       | 17,287,664             |       | 60,000,000     |       | —             |       | 77,287,664 |       |
|                                     |       |                   |       |           |       |               |       |       |       |
| Issued                                   |       | —                 |       | —         |       | 1,084,388          |       | 1,084,388  |       |
|                                     |       |                   |       |           |       |               |       |       |       |
| Exercised                                |       | —                 |       | (2,502,960     | )          | —             |       | (2,502,960 | )          |
|                                     |       |                   |       |           |       |               |       |       |       |
| Warrants outstanding,  December 31, 2006 |       | 17,287,664             |       | 57,497,040     |       | 1,084,388          |       | 75,869,092 |       |
|                                     |       |                   |       |           |       |               |       |       |       |
| Issued                                   |       |                   |       |           |       | 250,000            |       | 250,000    |       |
|                                     |       |                   |       |           |       |               |       |       |       |
| Exercised                                |       | —                 |       | (320,000       | )          | —             |       | (320,000   | )          |
|                                     |       |                   |       |           |       |               |       |       |       |
| Warrants outstanding,  March 31, 2007    |       | 17,287,664             |       | 57,177,040     |       | 1,334,388          |       | 75,799,092 |       |

As of March 31,2007, the Company has outstanding warrants issued to AMUC stockholders that areexercisable to purchase 17,287,664 shares of the Company’s common stock atprices ranging from $.10 to $5.00 per share. All such warrants expire in January 2008.  See Note 6 for a description of warrantsissued in connection with a financing agreement to purchase 60,000,000 sharesof common stock.

In January and March 2006, the Company agreed to issuewarrants to its President to purchase 897,416 and 186,972, respectively, sharesof common stock in lieu of paying interest and for consideration of defaultrisk on the additional loans made to the Company during 2005 and 2006 (Note7).  The warrants are exercisable at$1.00 per share over three years from April 15, 2006 and March 31, 2006.

In March of 2007, the Company issued warrants its VicePresident and Chief Financial Officer 250,000 warrants to purchase 250,000shares of common stock as part of his employment agreement.  The warrants are exercisable at $.50 pershare.

**5.**             **INCOMETAXES**

The Company accounts for corporate income taxes inaccordance with SFAS No. 109, *Accounting forIncome Taxes*.  Under SFAS No.109, deferred tax assets and liabilities are recognized for the estimatedfuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases.  In addition,future tax benefits, such as those from net operating loss carry forwards, arerecognized to the extent that realization of such benefits is more likely thannot.  Deferred tax assets and liabilitiesare measured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.   The effect on deferred taxassets and liabilities of a change in tax rates is recognized in the periodthat includes the enactment date.

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**At March 31, 2007, December 31,2006 and December 31, 2005, the Company’s only deferred tax assets are offsetby a valuation allowance, (there were no deferred tax liabilities) whichtotaled approximately $3,045,000, $2,912,000 and $2,335,660, respectively(using an anticipated effective tax rate of 34%) and was attributable to itsnet operting tax loss carryforwards of approximately $6,500,000 incurred sinceinception.  These operating losses expirefrom 2024 through 2026.**

A reconciliation of income tax expense at thestatutory federal rate of 34% to income tax expense at the Company’s effectivetax rate is as follows: 
| ** **                              | ** ** | ** **            | ** ** | ** **          | ** ** | ** **          | ** ** | **Period From**    | ** ** |
|-----------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **Three Months** | ** ** | ** **          | ** ** | ** **          | ** ** | **December 9,**    | ** ** |
| ** **                              | ** ** | **Ended**             | ** ** | **Year Ended** | ** ** | **Year Ended** | ** ** | **2004**                | ** ** |
| ** **                              | ** ** | **March**             | ** ** | **December**        | ** ** | **December**        | ** ** | **(Inception) to** | ** ** |
| ** **                              | ** ** | **31,**               | ** ** | **31,**             | ** ** | **31,**             | ** ** | **March 31,**      | ** ** |
| ** **                              | ** ** | **2007**              | ** ** | **2006**            | ** ** | **2005**            | ** ** | **2007**                | ** ** |
| ** **                              | ** ** | ** **            | ** ** | ** **          | ** ** | ** **          | ** ** | ** **              | ** ** |
| Tax benefit  computed at statutory rate |       | $                     | 133,0000   |                | $          | 577,000             |       | $                       | 1,116,000  |   | $ | 3,045,000 |   |
|                                    |       |                  |       |                |       |                |       |                    |       |
| Increase in  valuation allowance        |       | (133,000              | )          | (577,000            | )          | (1,116,000          | )          | (3,045,000              | )          |
|                                    |       |                  |       |                |       |                |       |                    |       |
|                                    |       | $                     | —     |                | $          | —              |       | $                       | —     |   | $ | — |   |

**6.**             **COMMITMENTSAND CONTINGENCIES**

Funding commitment 

The Company entered into a financing agreement (the “Agreement”)effective September 12, 2005 with PacifiCorp Funding Partners Trust (“PacifiCorp”)to provide equity financing of a minimum of $40,000,000 and a maximum of$80,000,000 through the exercise of warrants for the purchase of up to60,000,000 shares.  The terms of thewarrants are as follows:

(i)                                     Warrantsfor the purchase of 20 million shares are exercisable at $.50 per share for aperiod of 360 days after execution of the Agreement (the exercise period hasbeen extended to June 30, 2007 by the Company);

(ii)                                  Warrantsfor the purchase of 30 million shares are exercisable at $1.50 per share for aperiod of 540 days after execution of the Agreement (the exercise period hasbeen extended to June 30, 2007 by the Company);

(iii)                               And,warrants for the purchase of 10 million shares are exercisable at $2.50 pershare for a period of 720 days after execution of the Agreement.

As consideration for PacifiCorp’s funding efforts, theCompany and two executive officers collectively agreed to contribute a total of80,000,000 shares (the “PacifiCorp Shares”) of restricted common stock of theCompany to PacifiCorp.  The PacifiCorpShares consist of 60,584,260 common shares newly issued by the Company toPacifiCorp (these shares are considered legally issued and outstanding and areentitled to full voting rights and dividends, provided that in the eventPacifiCorp fails to meet its funding obligations and the subsequent return ofany portion of the shares, PacifiCorp will have an obligation to repay anydividends on returned shares), and a total of 19,415,740 common sharespersonally transferred to PacifiCorp from the two executive officers.

In the event that PacifiCorp fails to exercisewarrants sufficient to generate the minimum funding ($40,000,000) within 540days following the execution of the Agreement (effectively, March 6, 2007),extended by the Company to June 30, 2007, upon demand, PacifiCorp will beobligated to return all of the PacifiCorp Shares to the Company and return allunexercised warrants for cancellation or resale.  The Agreement allows the parties torenegotiate the terms of exercise of the warrants, whether as to exercise priceor period, in the event of the establishment of a public market for the Company’scommon stock.

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The 60,584,260 newPacifiCorp Shares issued by the Company were not valued under the provisions ofSFAS 123R since there is no performance commitment other than to return theshares.  The value of the above warrants wasdetermined by management to be insignificant and, accordingly, no value wasassigned to the warrants.  Any sharesreturned by PacifiCorp due to failure to exercise sufficient warrants togenerate the minimum funding will be returned pro-rata to the Company and theexecutive officers.  Though PacifiCorpmay be obligated to return the PacifiCorp Shares, upon obtaining authorizationfrom an Officer of the Company, it is authorized to transfer such shares tothird parties during the period the Agreement remains in effect. Because thenew PacifiCorp shares are contingently returnable until the minimum funding of$40,000,000 is reached, all unearned shares as of December 31, 2006 (58,363,129common shares) have been excluded from the weighted average common shares usedin computing basic net loss per share until all necessary conditions have beensatisfied or when the shares are no longer returnable.

During the year ended December 31, 2006, PacifiCorptransferred funds totaling $1,466,439 to the Company for exercise of warrantsfor the purchase of 2,502,960 shares at an exercise price of $.50 pershare.  Notwithstanding the fact thatPacifiCorp has only paid for the purchase of 2,502,960 shares as of December31, 2006, it has requested and obtained transfer of a total of 5,078,160PacifiCorp Shares to third parties. Since the Company has not retained a security interest in the PacifiCorpShares and retains no right to demand return of the shares from a third partyin the event PacifiCorp defaults on its minimum funding obligations as ofDecember 31, 2006, the Company has recognized 2,221,131 of the 60,584,260PacifiCorp Shares transferred as “earned.” In addition, 711,829 of the19,415,740 previously issued and outstanding shares personally transferred bythe two executive officers, have also been considered as “earned.”

During the three months ended March 31, 2007,PacifiCorp transferred funds totaling $160,000 to the Company for exercise ofwarrants for the purchase of 320,000 shares at an exercise price of $.50 pershare.  Notwithstanding the fact thatPacifiCorp has only paid for the purchase of 3,252,960 shares as of March 31,2007, it has requested and obtained transfer of a total of 5,078,160 PacifiCorpShares to third parties.  Since theCompany has not retained a security interest in the PacifiCorp Shares andretains no right to demand return of the shares from a third party in the eventPacifiCorp defaults on its minimum funding obligations as of March 31, 2007,the Company has recognized 2,463,467 of the 60,584,260 PacifiCorp Shares transferredas “earned.” In addition, 789,493 of the 19,415,740 previously issued andoutstanding shares personally transferred by the two executive officers, havealso been considered as “earned.”

The Companyprotects its rights with respect to return of the PacifiCorp Shares (in theevent PacifiCorp fails to meet its minimum funding obligation) by maintainingcontrol over the certificates representing PacifiCorp Shares that areregistered in the name of PacifiCorp (i.e., the shares that have not beentransferred to third parties) as well as any shares issued upon the exercise ofthe warrants in the name of PacifiCorp (“PacifiCorp Warrant Shares”). As such,the Company is effectively able to insure that PacifiCorp will be able to meetshare return obligations in the event it is unable to meet minimum fundingobligations under the Agreement. 

Operating leases 

The Company is presently obligated under severaloperating leases. 

Ground Lease, City of Albuquerque, New Mexico 

This lease, effective March 31, 2005, is for theCompany’s future primary operations and manufacturing facility.  The City of Albuquerque has agreed to abatecertain portions of the monthly rentals until the end of the initial five yearlease in January 2010.  The abatementresults in 100% of the first year’s rent and 50% of the next four years’ rentto be deferred until January 2010, at which time, the abated rent, aggregating$144,000, will be due and payable. During the first year of the lease, abated monthly rentals of $4,000were accrued. In April 2006, the abated monthly rentals were reduced to $2,000per month.  This abated rent obligationis reflected in the accompanying balance sheet as “Deferred rentobligation.”   During the three monthsended March 31, 2007 and the years ended December 31, 2006 and 2005,respectively, the Company recorded rent expense under this lease of $12,000,$48,000 and $48,000, respectively. 

At the end of theinitial five year period, the lease provides for changes in the annual rentduring each successive five year period throughout its 20 year term based onchanges in the fair market value of the underlying land.

 

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Hanger Lease, City of Albuquerque, New Mexico 

This lease is for temporary space until the Company’spermanent facility is constructed as discussed above.  Monthly rentals are $3,600 on amonth-to-month basis beginning March 1, 2006.  During the three months ended March 31, 2007 and the year ended December31, 2006, the Company recorded lease expense under this lease of $10,800 and$50,699, respectively.

Aircraft Lease, Related Party, J.D. Aero, LLC 

The Company leases an aircraft from a company whollyowned by the Company’s President.  Thelease is for five year term with monthly payments of $2,500. During the threemonths ended March 31, 2007 and the years ended December 31, 2006 and 2005and  for the period from December 9, 2004(inception) through December 31, 2006, the Company recorded rent expense underthis lease of $7,500, $30,000, $21,478 and $58,978, respectively. 

In April 2006, the Company paid $25,489 forelectronics that were added to the aircraft for testing purposes for theFF-1080.  Under terms of the lease, theseadditions remain the property of J.D. Aero, L.L.C. 

The following is a schedule of future minimum rentalpayments required under the above long-term operating leases for the next fivecalendar years: 
| Year   | ** ** | **Amount** | ** ** |
|--------|------------|------------|------------|
|   |       |       |       |
| 2007   |       | $          | 58,500     |   |
| 2008   |       | 78,000     |       |
| 2009   |       | 78,000     |       |
| 2010   |       | 63,000     |       |
|   |       | $          | 277,500    |   |

 

Purchase commitments 

Once production of the Company’s prototype aircraftcommences, purchase commitments will consist primarily of agreements for rawmaterials and parts needed in the Company’s aircraft manufacturing operations.

The Company estimates it will spend approximately$15,000,000 over the next 12 months for its Performance Flight Test Aircraft(“PFTA”), engineering and general and administrative expenses, and FAA Part 25Type Certification.

An engineering contract for the wing design and a windtunnel is in place for approximately $325,000, of which approximately $87,150,has been paid through March 31, 2007, and is reflected in “PFTA/designaircraft” on the accompanying balance sheet.

Executive compensation

The Company is obligated under the terms of employmentcontracts for seven of its executive officers. The terms of the contracts are generally five years and provide forannual salaries of $95,000 to $300,000 each. The annual compensation for these seven executive officers aggregatesapproximately $1,120,000.

The contracts provide for substantial increases basedon certain future events that, if achieved by the Company, would raise theaggregate annual compensation to approximately $1,500,000, subject to inflationadjustments.

The contracts also provide for bonuses based oncertain numbers of aircrafts sold in the future.  Certain officers may earn a bonus based onrates varying from 1¤16 of 1% to 3% of theaircraft’s selling price.

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The employment agreement for the President of theCompany also provides that he will receive a bonus equal to 4% of the “netprofits,” as defined, in each fiscal year.

If there is a change in control, of the Company, asdefined, each officer is subject to significant severance benefits, whichprovide, among other things, for ten times then current salary, allowance tosurrender stock options, receive health benefits for two years and to pay legalexpenses to defend the officer’s contract up to $250,000 each.

Royalties to officer/founder 

As part of the consideration for transferring use ofthe patents to the Company that are owned by the President, in December 2004,the Company agreed to pay royalties in the amount of 3% of the Company’s grossproceeds on all sales of the FF-1080 Series of aircraft to its President.  Such royalties are payable within thirty daysof receipt for payments on such aircraft. Royalties are payable on the first 2000 aircraft sold by the Company.

Pursuant to the employment agreement of the President,if it expires without renewal or is terminated for any reason except one thatwould cause revocation of the patent assignments, the Company may continue thedevelopment, manufacture and sale of the FF-1080 Series of aircraft subject tothe payment of additional royalties equal to 3% of the gross sales of theproducts. This would be in addition to the royalties payable that are discussedabove.

**7.**             **RELATEDPARTY TRANSACTIONS**

As discussed in Note 3, the Company assumed theobligation for loans and advances made to AMUC by J.D. Aero, LLC (“Aero”) andthe Company’s President, of $532,000.  Asof March 31, 2007, these loans and advances, which bear interest at 4% and areunsecured, aggregated $540,241, plus accrued and unpaid interest of $54,320,and are reflected in “Loans and advances from related party” and “Accruedinterest, related party” on the accompanying balance sheet.  For the three months ended March 31, 2007,and the years ended December 31, 2006 and 2005 and the period from December 9,2004 (inception) to December 31, 2006, interest expense of $5,446, $30,393,$23,199 and $59,038, respectively, has been reflected in the accompanyingstatements of operations.

In January and March 2006, the Company agreed to issuewarrants to its President to purchase 897,416 and 186,972, respectively, sharesof common stock in lieu of paying interest and for consideration of defaultrisk on the advance portion of the loans, which were $317,841 at the conversiondate (Note 3).  Accordingly, accruedinterest of $3,378 has been included in additional paid-in capital during theyear ended December 31, 2006.  Thewarrants are exercisable at $1.00 per share over three years from April 15,2006 and March 31, 2006.

In March of 2007, the Company issued warrants its VicePresident and Chief Financial Officer 250,000 warrants to purchase 250,000shares of common stock as part of his employment agreement.  The warrants are exercisable at $.50 pershare.

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**Item 2.Management’s Discussion and Analyses of Financial Condition and Results ofOperation**

The followingdiscussion should be read in conjunction with our consolidated financialstatements provided in this annual report on Form 10-KSB. Certain statementscontained herein may constitute forward-looking statements within the meaningof the Private Securities Litigation Reform Act of 1995. These statementsinvolve a number of risks, uncertainties and other factors that could causeactual results to differ materially, as discussed more fully herein.

Theforward-looking information set forth in this annual report is as of the dateof this filing, and we undertake no duty to update this information. Moreinformation about potential factors that could affect our business andfinancial results is included in the section entitled “Risk Factors” of thisannual report.

The budget forcompletion of the PFTA and FAA certification, both in time and money, islargely based on the availability of funds. If we are unable to obtain required funding on a timely basis, boththese budgets will likely be exceeded, and it will cost more and take longer toaccomplish these tasks.

##### **Overview**

We area development stage research and development company with no product to sell,no revenue stream, significant operating losses and negative cash flow fromoperations.  The Company has incurred netlosses from operations of $9,000,000 for the period from inception to March 31,2007.  Our ability to continue as a goingconcern is subject to sales of stock, the vagaries of the market for our stockand various other factors.  There is noassurance that we can continue as a going concern.

Ourplan is to focus on completing the PFTA and expediting the certification of theFF-1080-300ER in furtherance of our goal to bring the aircraft to market.  We expect these tasks and processes will costapproximately $51,000,000, and take a minimum of 24 months.  We anticipate that the PFTA will costapproximately $11,000,000, and that Phase I and Phase II FAA certification willcost approximately $40,000,000. We expect to continue to fund these operationsthrough private-placement sales of common stock and/or warrants.

PhaseI will include the development of the certification plan, filing of thecertification application, certification of the detailed production engineering,construction of the static test articles and the conformity aircraftsubassemblies, and initial flight tests using the prototype aircraft.  Phase II, which will begin 6 months aftercommencement of Phase I, will include final assembly of the conformity aircraft,certification flight-testing and receipt of final FAA Part 25 TypeCertification.

Toimplement the foregoing time schedule, we expect to complete the detailedengineering of the PFTA and to construct the aircraft during the first 12months of the plan.  The PFTA will be apre-certified, non-production aircraft that will be built under the regulationsfor experimental aircraft.

Uponcompletion of the detailed CAD engineering of the PFTA, we will initiate theFAA Part 25 Type Certification program, which is anticipated to be completedover a 24 month period.  We havecompleted approximately 80% of our detailed CAD engineering, and can finishthis work within two months, pending availability of funds.

Ourbusiness plan calls for completion of up to 36 aircraft during the period inwhich are obtaining the FAA Part 25 Type Certification, depending on customerorders; that is to say we could deliver our first production aircraft and beginrecognizing revenues immediately upon obtaining certification.  We would finance building thesetype-conforming aircraft through production progress payments from customers inaccordance with standard industry practices. Though we have no firm orders secured as of the date of this report, weexpect to begin obtaining orders during the Part 25 Type Certificationprocess.

Notwithstanding the anticipations and estimates setforth in this section, it should be noted that the timeline for the developmentstages has been and may be further delayed due to lack of funding, the timingof FAA reviews and certification, or other factors..

Wecontinue to pursue various direct sales initiatives with prospectivecustomers.  Our current focus is on theinternational market, where we believe buyers would be willing to begincommitting funds to eventual purchases of our planes earlier than theirdomestic counterparts.** **Our current marketing andcustomer-development program is aimed at securing orders for the FF-1080-300ERaircraft.  The Company has imposedthreshold requirements for parties seeking to qualify as distributors.  Prospective distributors must demonstratesufficient finances and business operating history (current financialstatement) to prove that they are viable on-going and solvent companies, andare able to support their current and future aerospace business or MROoperations.

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**Resultsof Operations**

Three Months EndedMarch 31, 2007 Compared to Three Months Ended March 31, 2006

Net sales. The Company remains in the development stage andhas not had any sales since its inception date of December 9, 2004.

Operatingexpenses. The Company remains in the development stage its operating expensesconsisting of compensation related costs, general and administrative expenses,engineering, research and development for the three months ended March 31, 2007and 2006  are comparative for each of theperiods as indicated in the following summary;
|                                        | ** ** | **Three Months**        | ** ** | **Three Months**        | ** ** |
|----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                             | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** |
| Compensation  related costs            |       | $                            | 268,600    |                         | $          | 196,952 |   |
|                                   |       |                         |       |                         |       |
| General and  Administrative Expenses   |       | 108,934                      |       | 169,014                      |       |
|                                   |       |                         |       |                         |       |
| Engineering,  Research and Development |       | 17,224                       |       | 15,469                       |       |
|                                   |       |                         |       |                         |       |
| Interest Expense                       |       | 5,446                        |       | 8,078                        |       |
|                                   |       |                         |       |                         |       |
| Total Operating  Expenses              |       | $                            | 400,204    |                         | $          | 389,513 |   |

 

TheCompensation related costs increased as the Company increased its managementstaff in preparation for the building of the FF-1080 prototype plan and therelated marketing efforts.

TheGeneral and Administrative Expenses decreased as the Company’s did not haveexpenses related to the filing of the SB-2 registration statement in 2006.

NetResult. As the result of the Company not having any sales for the periods, ournet loss for the three months ended March 31, 2007 and 2006, respectively,equaled the total operating expenses for the periods of $(400,204) and$(389,513), respectively.

**Liquidityand Future Capital Requirements**

Sinceinception we initially funded operations from proceeds from a private placement**.**  Wewere initially capitalized with approximately $2,000,000 raised from a privateplacement offering of 20,000,000 shares of common stock on January 19,2005, and have received approximately $1.6 million in additional subscriptionsor for exercise of warrants since then.

We will requireapproximately $15,000,000 to sustain operations over the next 12 months, whichincludes PFTA engineering and construction costs of approximately $11,000,000and general and administrative expenses of approximately $3,000,000. Thebalance will be reserved for contingency items that may occur in thisprocess.  Budgeted amounts not spent dueto cost-savings and additional funds received by the Company will be allocatedto initiate FAA Part 25 Type Certification. We cannot satisfy our current cash requirements without raisingadditional funds through our agreement with PacifiCorp Funding Partners Trustor obtaining debt or equity financing through other qualified lenders orinvestors.

We entered into anAmended Master Financing Agreement (referred to herein as the “PacifiCorpAgreement”) Between PacifiCorp Funding Partners Trust****and Utilicraft Aerospace Industries, Inc. effective asof September 12, 2005. Pursuant to the terms of the PacifiCorp Agreement,PacifiCorp Funding Partners Trust****(“PacifiCorp”),a trust formed under the laws of the Republic of Mauritius****has agreed to potentially provide aminimum of $40,000,000 and a maximum of $80,000,000 in financing through theexercise of warrants (the “PacifiCorp Warrants”) granted to PacifiCorp for thepurchase of up to 60,000,000 shares of our common stock.  The PacifiCorp Agreement provides thatPacifiCorp will utilize its best efforts to provide funding but does notobligate PacifiCorp to exercise any of the PacifiCorp Warrants. The PacifiCorpWarrants consist of (1) warrants for the purchase of 20,000,000 shares ofcommon stock at a price of $0.50 per share, exercisable for a period of 360days (the exercise period has been extended by the Company to June 30, 2007);(2) warrants for the purchase of 30,000,000 shares of common stock at aprice of $1.50 per share, exercisable for a period of 540 days (the exerciseperiod has been extended by the Company to June 30, 2007); and(3) warrants for the purchase of 10,000,000 shares of common stock at aprice of $2.50 per share, exercisable for a period of 720 days.  The PacifiCorp Agreement expressly statesthat the parties reserve the right, without obligation, to renegotiate theterms of exercise of the PacifiCorp

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Warrants,whether as to exercise price or period, in the event of the establishment andbased on the condition (price and volume) of a public market for our commonstock. In addition, the Company, John Dupont and Darby Boland collectivelyagreed to contribute a total of 80,000,000 shares (the “PacifiCorp Shares”) ofrestricted common stock of the Company to PacifiCorp.  The PacifiCorp Shares consist of 60,584,260shares newly issued by the Company, 11,660,000 shares contributed andtransferred by John Dupont personally, and 7,755,740 shares contributed and transferredby Darby Boland personally.  ThePacifiCorp Trustee is entitled to exercise full voting rights relating to thePacifiCorp Shares.  In the event thatPacifiCorp fails to exercise PacifiCorp Warrants sufficient to generate theminimum funding (i.e., $40,000,000) provided for in the PacifiCorp Agreementwithin 540 days following execution (the exercise period has been extended bythe Company to June 30, 2007), PacifiCorp is obligated to return the PacifiCorpShares and all unexercised PacifiCorp Warrants for cancellation.  Notwithstanding the foregoing obligation, thePacifiCorp Agreement allows for transfer of the PacifiCorp Shares to thirdparties but provides that any transfer during the period the PacifiCorpAgreement is in effect requires a counter-party signature from an Officer of theCompany.  No security interest in thePacifiCorp Shares is reserved pursuant to the PacifiCorp Agreement, and absentany subsequent agreement between the parties with respect to resale of thePacifiCorp shares, the Company retains no right to demand return of the sharesfrom a third party in the event PacifiCorp defaults on its obligations.  None of the PacifiCorp Shares or shares to beissued upon exercise of the PacifiCorp Warrants are being registered pursuant tothe registration statement relating to this Annual report.

During the yearended December 31, 2006, PacifiCorp transferred net funds totaling $1,195,439to us for exercise of PacifiCorp Warrants for the purchase of 2,502,960 sharesat an exercise price of $.50 per share. Notwithstanding the fact that PacifiCorp has only paid for the purchaseof 2,502,960 shares as of December 31, 2006, it has requested and obtainedtransfer of a total of 5,078,160 of the PacifiCorp Shares to third parties.

During the threemonths ended March 31, 2007, PacifiCorp transferred net funds totaling $160,000to us for exercise of PacifiCorp Warrants for the purchase of 320,000 shares atan exercise price of $.50 per share.

We protect ourrights with respect to return of the PacifiCorp Shares under the PacifiCorpAgreement (in the event PacifiCorp fails to meet its minimum fundingobligation) by maintaining control over the certificates representingPacifiCorp Shares that are registered in the name of PacifiCorp (i.e., theshares that have not been transferred to third parties). While we do not havethe right to recover shares sold or pledged by PacifiCorp to third-parties, wedo ensure receipt of funds for Warrant exercise prior to permitting transfers fromthe PacifiCorp certificates. Because we also hold the certificates representingshares issued upon the exercise of the PacifiCorp Warrants in the name ofPacifiCorp (“PacifiCorp Warrant Shares”), we can use these shares to partiallyoffset our inability to recover shares held by third-parties. While we cannothave complete assurances as to recovery of all the PacifiCorp Shares in theevent it is unable to meet minimum funding obligations under the PacifiCorpAgreement, we believe that the funds generated by the Warrant exercise providesus with substantial benefits and that the retention of certificatesrepresenting the PacifiCorp Shares and the PacifiCorp Warrant Shares providesus with adequate assurances and protections.

While PacifiCorphas agreed to provide potential financing, we do not intend to stop looking forother means of funding our needs.  Amongother things, we will continue to explore debt and equity financing fromqualified lenders or investors.  ThePacifiCorp Agreement contains no anti-dilution provisions or other restrictionsthat would prevent the Company from obtaining other financing. John Dupont has,when necessary, personally loaned the Company or paid Company expenses tomaintain Company operations.

We do not believethat inflation has had a material impact on our business or operations.

**MaterialCommitments for Expenditures**

Depending on our abilityto arrange financing, we expect to pay one or more other aircraft fabricators asignificant portion of the amount budgeted for construction and assembly of thePFTA during the next 12 months.  We havean agreement with Metalcraft Technologies, Inc., but it is non-exclusive andrequires us to agree to several material terms, including pricing and deliveryschedules, such that we have the flexibility to choose the fabricator we deembest suited to our work.  See “**Liquidity and Future Capital Requirements”**section above for details regarding our plans to finance such expenditures. Inaddition, apart from our current lease obligations for the hangar and assemblyfacility at Double Eagle-II in Albuquerque, New Mexico, we expect to spendbetween $200,000 and $400,000 for leasehold improvements to our facilities tomake them suitable for final assembly of the aircraft.  See “**DESCRIPTIONOF PROPERTY**” section below. Additionally, we have committed topay $323,276 to Analytical Models, Inc. for construction of the windtunnel model and related engineering and testing, of which we have paid a totalof $87,150. We have also contracted with D3 Technologies, Inc. (“D3”) toprovide structural analysis and design integration services. The services to beprovided by D3 will total approximately $137,750; we have paid $52,563 for workdone to date.

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Going Concern

Due to ourcontinuing to be a development stage company and not having generated revenues,in their Notes to our financial statements for the year ended December 31,2006, our independent auditors included an explanatory paragraph regardingconcerns about our ability to continue as a going concern.

The continuationof our business is dependent upon obtaining further financing and achieving abreak even or profitable level of operations. The issuance of additional equity securities by us could result in asignificant dilution in the equity interests of our current or future stockholders.

There are noassurances that we will be able to either (1) achieve a level of revenuesadequate to generate sufficient cash flow from operations; or (2) obtainadditional financing through either private placements, public offerings and/orbank financing necessary to support our working capital requirements.  To the extent that funds generated fromoperations and any private placements, public offerings and/or bank financingare insufficient, we will have to raise additional working capital. No assurancecan be given that additional financing will be available, or if available, willbe on terms acceptable to us.  Ifadequate working capital is not available we may not increase our operations.

These conditionsraise substantial doubt about our ability to continue as a going concern.  The financial statements do not include anyadjustments relating to the recoverability and classification of asset carryingamounts or the amount and classification of liabilities that might be necessaryshould we be unable to continue as a going concern.

##### **Off-Balance Sheet Arrangements**

We arenot a party to any off-balance sheet arrangements and do not engage in tradingactivities involving non-exchange traded contracts. In addition, we have nofinancial guarantees, debt or lease agreements or other arrangements that couldtrigger a requirement for an early payment or that could change the value ofour assets.

**Description of Property**

TheCompany operates from the Double Eagle II Airport in Albuquerque, NewMexico.  We have entered into a GroundLease with the City of Albuquerque for 10 acres located on the Double Eagle IIAirport, at a rate of $48,000 per year for the initial five year period and isadjusted each successive five year period throughout the 20 year term based onchanges in the fair market value of the land. The City of Albuquerque hasagreed to abate certain portions of the monthly rentals until the end of theinitial five years of the lease, in January 2010.  The abatement results in 100% of the firstyear’s rent and 50% of the next four years’ rent to be deferred until January2010, at which time, the abated rent, aggregating $144,000, will be due andpayable.

We planto construct, or have constructed for us, a Final Assembly Facility on thisproperty.  The 80,000 sq. ft. hangar-likestructure will be designed to support the planned production rate of eightaircraft per month or 96 aircraft per year. The facility is also expected toinclude 26,000 sq. ft. of office space. A second 100,000 sq. ft. facility may also be constructed to handlefuture increased production rates.  Weintend to perform the final assembly of all of the FF-1080-300ER aircraft inNew Mexico. Our Quality Assurance flight testing program will be conducted atthe planned facility in New Mexico. Additionally our customer on-site engineering employees will be housedat this facility as well as the final customer flight test and Final Deliveryinspection personnel.

In theinterim, we have also entered into a Hangar Lease with the city, subsequentlyamended by a First Amendment to the Double Eagle II Airport Hangar Lease (theoriginal Hangar Lease, as Amended is referred to herein as the “Amended HangarLease”), which provides for a 14,400 square foot hangar at a rate of $3,600 permonth.  The Amended Hangar Lease alsoprovides that we will pay certain fees relating to maintenance, identificationbadges and refuse containment. The city of Albuquerque has reserved the rightto adjust the rent annually in an amount equal to 3% of the previous yearsrent. The term of the Amended Hangar Lease is month to month, commencing onMarch 1, 2006.

Additionally,we have signed a letter of intent with R&D Development, Inc., an Illinoiscorporation, to construct and lease to us a 40,500 square foot assembly hangar,and a 15,000 square foot attached office facility to complete final assembly ofthe PFTA and up to two FF-1080-300ER aircraft per month The property is anindustrial park space, with runway access and is adjacent to the hangar welease under the Amended Hangar Lease.

TheCompany entered into a Lease Agreement with Plaza II ExecutiveCenter, Inc. on July 25, 2005. Pursuant to the Lease Agreement theCompany leased 1,500 sq. ft. of office space located at 125 Lincoln Avenue,Suite 400, 125 Lincoln Plaza, Santa Fe, New Mexico for an initial term ofeight (8) months beginning on August 1, 2005 and ending on March 1,2006. The lease was automatically extended pursuant to its terms to July 31,2006 and was amended on August 1, 2006 to again extend the term of the lease toJuly 31, 2007. Pursuant to the amendment, the monthly rent on the extendedlease is $2,420 and the lease provides for a minimum $50 monthly supportservice charge, and a $10 per month, per person, kitchen fee.

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**RiskFactors**

We are subject to a highdegree of risk as we are considered to be in unsound financial condition.  These risks factors include, but are notlimited to, our limited operating history, history of operating losses, theinability to obtain for additional capital, the failure to successfully expandour operations, the competition in the aircraft industry from competitors withsubstantially greater resources, the legal and regulatory requirements anduncertainties related to our industry, the loss of key personnel, adverseeconomic conditions, the classification of our common stock as “penny stock,”the absence of any right to dividends, the costs associated with the issuanceof and the rights granted to additional securities, the unpredictability of thetrading of our common stock.  If any oneor more occurs, it could materially harm our business, financial condition orfuture results of operations, and the trading price of our common stock coulddecline

For a more detaileddiscussion as to the risks related to Utilicraft Aerospace Industries, Inc.,our industry and our common stock, please see the section entitled, “Descriptionof Business – Risk Factors,” in our Annual Report on Form 10-KSB, as filed withthe Securities and Exchange Commission on April 27, 2007.

**Impact of Inflation**

Management does notbelieve that general inflation has had or will have a material effect onoperations.

**CriticalAccounting Policies and Estimates**

Use of Estimates

The discussion andanalysis of the financial condition and results of operations are based on thefinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  Note 2 of the Notes describes the significantaccounting policies essential to the financial statements. The preparation ofthese financial statements requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes, some of which may require revision in future periods.  Actual results could differ materially fromthose estimates.

We believe thefollowing to be critical accounting policies and estimates.  That is, they are both important to theportrayal of the Company’s financial condition and results, and they requiresignificant management judgment and estimates about matters that are inherentlyuncertain.  As a result of inherentuncertainty, there is a likelihood that materially different amounts would bereported under different conditions or using different assumptions.  Although we believe that our judgments andestimates are reasonable, appropriate and correct, actual future results maydiffer materially from our estimates.

Stock BasedCompensation

The Companyaccounts for equity instruments issued to employees for services based on thefair value of the equity instruments issued and accounts for equity instrumentsissued to other than employees based on the fair value of the considerationreceived or the fair value of the equity instruments, whichever is morereliably measurable.  The determinedvalue is recognized as an expense in the accompanying statements of operations.

Contingencies

In the normalcourse of business, the Company is subject to certain claims and legalproceedings.  The Company records anaccrued liability for these matters when an adverse outcome is probable and theamount of the potential liability is reasonably estimable.  The Company does not believe that theresolution of these matters will have a material effect upon its financialcondition, results of operations or cash flows for an interim or annual period.

Recently IssuedAccounting Pronouncements

Recentlyissued accounting pronouncements and their effect on us are discussed in thenotes to the financial statements in our December 31, 2006 audited financialstatements that can be found in our Annual Report on Form 10-KSB, as filed withthe Securities and Exchange Commission on April 27, 2007..

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**Item 3. Controls and Procedures**

*Evaluationof Disclosure Controls and Procedures*

Based onan evaluation under the supervision and with the participation of management,our principal executive officer and principal financial officer have concludedthat our disclosure controls and procedures as defined in rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“ExchangeAct”) were effective as of March 31, 2007 to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is (i) recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission rules andforms and (ii) accumulated and communicated to our management, includingour principal executive officer and principal financial officer, as appropriateto allow timely decisions regarding required disclosure.

*Changesin Internal Control over Financial Reporting*

There were nochanges in our internal control over financial reporting during the firstquarter of 2007, which were identified in connection with management’sevaluation required by paragraph (d) of rules 13a-15 and 15d-15 underthe Exchange Act, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**PARTII — OTHER INFORMATION**

**Item 1. Legal Proceedings**

We arecurrently not a party to any material pending legal proceeding.

The Company didnot make adequate provisions for withholding FICA and other taxes from employeecompensation during 2005 and 2006 and the three months ended March 31, 2007,and anticipates the total under-funded obligation, including estimated interestand penalties, to be approximately $382,000. There are possible civil and criminal penalties that may be assessedagainst the Company and its officers unless this shortfall is promptly funded.

**Item 2 - Changes in Securities.**

Recent Sales ofUnregistered Securities

During the quarterending March 31,  2007,  the Company offered and sold the followingsecurities pursuant to securities transaction exemption from the registrationrequirements of the Securities Act of 1933, as amended.

The Company received $160,000 from PacifiCorp for theexercise of 320,000 warrants.

These securities thathave been and will be issued above were issued in a private transactionpursuant to Section 4(2) of the Securities Act of 1933, as amended, (the “SecuritiesAct”).  These convertible securities areconsidered restricted securities and may not be publicly resold unlessregistered for resale with appropriate governmental agencies or unless exemptfrom any applicable registration requirements.

**Item 3 - Defaults Upon Senior Securities.**

 No Response required.

**Item 4 - Submission of Matters to a Vote of SecurityHolders.**

No response required.

**Item 5 - Other Information.**

No response required.

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**Item 6 – Exhibits and Reports on Form 8K.**
| 31.1   |   | Certification by Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 *                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                  |
| 31.2   |   | Certification by Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 *                                                 |
|   |   |                                                                                                                                                  |
| 32.1   |   | Certification by Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 * |
|   |   |                                                                                                                                                  |
| 32.2   |   | Certification by Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 * |

 

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*                      Filedherewith

(b)  Reports on Form8-K.

On March 30, 2007, we filed a Form 8-K announcing the appointment of principal officers for theCompany.

**SIGNATURES**

    Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|                      | ** ** | **Utilicraft Aerospace Industries, Inc. Aal, Inc.** |
|----------------------|------------|-----------------------------------------------------|
|                 |       |                                                |   |   |
|                 |       |                                                |   |   |
| Dated: May 11,  2007 |       | By:                                                 |   | /s/ John Dupont |   |
|                 |       |                                                |   | John Dupont  Chief Executive Officer |
|                 |       |                                                |   |   |
|                 |       |                                                |   |   |
| Dated: May 11,  2007 |       | By:                                                 |   | /s/ Randy Moseley |   |
|                 |       |                                                |   | Randy Moseley  Chief Financial Officer |

 

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