UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

_____________



FORM 10-QSB

(Mark One)



|       |                                                                                   
|------ | ----------------------------------------------------------------------------------
|[ X ]  | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 
|       |                                                                                   
|       | For the quarterly period ended March 31, 2006                                     
|       |                                                                                   
|[    ] | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
|       |                                                                                   
|       | For the transition period from  to                                                



Commission File Number: 000-49690



MCKENZIE BAY INTERNATIONAL, LTD.(Exact Name of Small Business Issuer as Specified in Its Charter)



|                                                                                                     |                                            
|---------------------------------------------------------------------------------------------------- | -------------------------------------------
|Delaware(State or Other Jurisdiction of
Incorporation or Organization)                               | 51-0386871(IRS Employer Identification No.)
|                                                                                                     |                                            
|37899 Twelve Mile Road, Ste. 300
Farmington Hills, MI 48331
(Address of Principal Executive Offices)



(248) 489-1961(Issuers Telephone Number, Including Area Code)



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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    NoX



APPLICABLE ONLY TO CORPORATE ISSUERS

On May 17, 2006 there were 32,218,462 shares outstanding of the issuers common stock.



Transitional Small Business Disclosure Format (check one):  Yes    NoX





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MCKENZIE BAY INTERNATIONAL, LTD.

(A development-stage company)

INDEX TO FORM 10-QSB



|                                                                     |                                                                                                                                                |   | 
|-------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | - | 
|                                                                     | Page Number                                                                                                                                   
|                                                                     |                                                                                                                                               
|Part I. Financial Information                                        |                                                                                                                                               
|                                                                     |                                                                                                                                               
|Item 1.  Financial Statements                                        | 1                                                                                                                                             
|                                                                     | Condensed Consolidated Balance Sheets as of March 31, 2006 (unaudited) and September 30, 2005                                                  | 1
|                                                                     | Condensed Consolidated Statements of Loss and Comprehensive Loss for the three months and six months ended March 31, 2006 and 2005 (unaudited) | 2
|                                                                     | Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2006 and 2005 (unaudited)                                   | 3
|                                                                     | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                               | 6
|Item 2.  Managements Discussion and Analysis or Plan of Operation   | 17                                                                                                                                            
|Item 3.  Controls and Procedures                                     | 19                                                                                                                                            
|                                                                     |                                                                                                                                               
|Part II.  Other Information                                          |                                                                                                                                               
|                                                                     |                                                                                                                                               
|                                                                     |                                                                                                                                               
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds | 20                                                                                                                                            
|Item 6.  Exhibits                                                    | 21                                                                                                                                            
|                                                                     |                                                                                                                                                |  
|Signatures                                                           | 22                                                                                                                                            
|                                                                     |                                                                                                                                               









-ii-



PART I.  FINANCIAL INFORMATION



Item 1.

Financial Statements.



MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries

(A development-stage company)

CONDENSED CONSOLIDATED BALANCE SHEETS





|                                                                                |   |                |   |   |                    |   |  |  | 
|------------------------------------------------------------------------------- | - | -------------- | - | - | ------------------ | - |  |  | 
|                                                                                |   | March 31,
2006 |   |   | September 30, 2005 |  
|                                                                                |   | (Unaudited)    |   |   |                    |  
|ASSETS                                                                         
|Current:                                                                        |   |                |   |   |                    |  
|Cash and cash equivalents                                                       | $ | 79,482         |   | $ | 123,221            |  
|Refundable taxes and other receivables                                          |   | 19,564         |   |   | 53,396             |  
|Prepaid expenses and deposits                                                   |   | 98,249         |   |   | 160,920            |  
|Reclamation cash bond                                                           |   | 41,000         |   |   | 41,000             |  
|Deferred issue and finance costs (note 3)                                       |   | 405,294        |   |   | 328,750            |  
|Total current assets                                                            |   | 643,589        |   |   | 707,287            |  
|Property and equipment                                                          |   | 126,277        |   |   | 26,551             |  
|Other assets                                                                    |   | 38,716         |   |   | 38,599             |  
|Total assets                                                                    | $ | 808,582        |   | $ | 772,437            |  
|                                                                                |   |                |   |   |                    |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                 
|Current:                                                                        |   |                |   |   |                    |  
|Bank indebtedness                                                               | $ | 53,533         |   | $ | 97,720             |  
|Accounts payable and accrued liabilities                                        |   | 2,555,831      |   |   | 3,147,469          |  
|Loan from directors                                                             |   | -              |   |   | 72,600             |  
|Convertible promissory notes, net of discount                                   |   | 214,200        |   |   | 199,052            |  
|Promissory notes                                                                |   | -              |   |   | 1,750,000          |  
|Current portion of long-term debt                                               |   | 167,193        |   |   | 354,664            |  
|Reclamation and closure liabilities                                             |   | 40,000         |   |   | 40,000             |  
|Total current liabilities                                                       |   | 3,030,757      |   |   | 5,661,505          |  
|Secured convertible debentures, net of discount (note 3)                        |   | 87,029         |   |   | -                  |  
|Liability for derivative instruments (note 3)                                   |   | 5,251,000      |   |   | -                  |  
|Long-term debt, less current portion                                            |   | 1,250,020      |   |   | 1,087,711          |  
|Total liabilities                                                               |   | 9,618,806      |   |   | 6,749,216          |  
|Commitments and Contingencies                                                   |   |                |   |   |                    |  
|Stockholders equity (deficit):                                                 |   |                |   |   |                    |  
|Common stock - $0.001 par value (note 4):                                       |   |                |   |   |                    |  
|150,000,000 shares authorized, 31,079,856
and 30,686,376 issued and outstanding |   | 30,980         |   |   | 30,586             |  
|Additional paid in capital                                                      |   | 22,071,099     |   |   | 22,245,971         |  
|Deficit accumulated during the development stage                                |   | (30,231,744    | ) |   | (27,597,311        | )
|Accumulated other comprehensive loss                                            |   | (680,559       | ) |   | (656,025           | )
|Total stockholders deficit                                                     |   | (8,810,224     | ) |   | (5,976,779         | )
|Total liabilities and stockholders deficit                                     | $ | 808,582        |   | $ | 772,437            |  



(See accompanying notes to condensed consolidated financial statements)





-1-



MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries

(A development-stage company)

CONDENSEDCONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(Unaudited)

|                                                                                                  |                  |                              |   |   |                            |   |   |                          |   |   |            |   |   |                        |   |  |  |  |  | 
|------------------------------------------------------------------------------------------------- | ---------------- | ---------------------------- | - | - | -------------------------- | - | - | ------------------------ | - | - | ---------- | - | - | ---------------------- | - |  |  |  |  | 
|                                                                                                  | Cumulative  from |                             
|                                                                                                  |                  | Three months ended
March 31, |   |   | Six months ended
March 31, |   |   | inception  on August 23, |  
|                                                                                                  |                  | 2006                         |   |   | 2005                       |   |   | 2006                     |   |   | 2005       |   |   | 1996 to March 31, 2006 |  
|Revenue                                                                                           | $                | -                            |   | $ | -                          |   | $ | -                        |   | $ | -          |   | $ | 12,825                 |  
|Expenses:                                                                                         |                  |                              |   |   |                            |   |   |                          |   |   |            |   |   |                        |  
|Mineral properties and exploration activities                                                     |                  | 298                          |   |   | 156,401                    |   |   | 9,152                    |   |   | 177,545    |   |   | 7,576,952              |  
|Research and development, net                                                                     |                  | 145,723                      |   |   | 373,854                    |   |   | 539,487                  |   |   | 1,266,630  |   |   | 3,629,293              |  
|General administration                                                                            |                  | 126,757                      |   |   | 104,809                    |   |   | 215,968                  |   |   | 186,541    |   |   | 2,142,938              |  
|Employee wages and benefits                                                                       |                  | 115,038                      |   |   | 16,051                     |   |   | 236,334                  |   |   | 28,121     |   |   | 1,684,084              |  
|Management wages and benefits                                                                     |                  | 218,656                      |   |   | 213,424                    |   |   | 443,101                  |   |   | 372,969    |   |   | 4,721,906              |  
|Professional fees                                                                                 |                  | 121,167                      |   |   | 228,723                    |   |   | 262,169                  |   |   | 446,568    |   |   | 3,479,130              |  
|Promotion and travel                                                                              |                  | 46,193                       |   |   | 58,750                     |   |   | 99,158                   |   |   | 119,374    |   |   | 1,334,406              |  
|Depreciation                                                                                      |                  | 1,512                        |   |   | 1,830                      |   |   | 3,011                    |   |   | 3,664      |   |   | 414,604                |  
|Other expense (income):                                                                           |                  |                              |   |   |                            |   |   |                          |   |   |            |   |   |                        |  
|Interest, amortization of debt discounts and finance charges (note 6)                             |                  | 504,146                      |   |   | 653,227                    |   |   | 1,016,352                |   |   | 1,335,680  |   |   | 2,988,644              |  
|Asset impairments                                                                                 |                  | -                            |   |   | -                          |   |   | -                        |   |   | -          |   |   | 1,626,821              |  
|Incorporation and reorganization costs                                                            |                  | -                            |   |   | -                          |   |   | -                        |   |   | -          |   |   | 152,051                |  
|Realized loss on marketable securities                                                            |                  | -                            |   |   | -                          |   |   | -                        |   |   | -          |   |   | 1,242,242              |  
|Gain on sale of property and equipment                                                            |                  | -                            |   |   | -                          |   |   | -                        |   |   | -          |   |   | (26,806                | )
|Gain on settlement of debt                                                                        |                  | -                            |   |   | (176,570                   | ) |   | -                        |   |   | (176,570   | ) |   | (176,667               | )
|Interest income                                                                                   |                  | (3,811                       | ) |   | (88                        | ) |   | (8,299)                  |   |   | (88        | ) |   | (88,096                | )
|Gain on fair value of derivative liability                                                        |                  | (182,000                     | ) |   | -                          |   |   | (182,000                 | ) |   | -          |   |   | (182,000               | )
|Refundable exploration tax credit and mining tax                                                  |                  | -                            |   |   | -                          |   |   | -                        |   |   | -          |   |   | (421,905               | )
|Net loss before income taxes and cumulative effect of change in accounting principle for SFAS 142 |                  | (1,093,679                   | ) |   | (1,630,411                 | ) |   | (2,634,433               | ) |   | (3,760,434 | ) |   | (30,084,772            | )
|Income taxes                                                                                      |                  | -                            |   |   | -                          |   |   | -                        |   |   | -          |   |   | -                      |  
|Loss before cumulative effect of change in accounting principle for SFAS 142                      |                  | (1,093,679                   | ) |   | (1,630,411                 | ) |   | (2,634,433               | ) |   | (3,760,434 | ) |   | (30,084,772            | )
|Cumulative effect of change in accounting principle for SFAS 142                                  |                  | -                            |   |   | -                          |   |   | -                        |   |   | -          |   |   | (146,972               | )
|Net loss                                                                                          | $                | (1,093,679                   | ) | $ | (1,630,411                 | ) | $ | (2,634,433               | ) | $ | (3,760,434 | ) | $ | (30,231,744            | )
|Foreign currency translation adjustment                                                           |                  | (18,384                      | ) |   | 1,307                      |   |   | (24,534                  | ) |   | (152,992   | ) |   | (680,559               | )
|Comprehensive loss                                                                                | $                | (1,112,063                   | ) | $ | (1,629,104                 | ) | $ | (2,658,967               | ) | $ | (3,913,426 | ) | $ | (30,912,303            | )
|Basic and diluted loss per share(note 5)                                                          | $                | (0.04                        | ) | $ | (0.06                      | ) | $ | (0.09                    | ) | $ | (0.14      | ) |   |                        |  

(See accompanying notes to condensed consolidated financial statements)





-2-



MCKENZIE BAY INTERNATIONAL, LTD. And subsidiaries

(A development-stage company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)





|                                                           |   |                            |   |   |                                 |   |   |                 |   | 
|---------------------------------------------------------- | - | -------------------------- | - | - | ------------------------------- | - | - | --------------- | - | 
|                                                           |   |                            |   |   |                                 |   |   | Cumulative from |  
|                                                           |   | Six months ended
March 31, |   |   | inception on August 23, 1996 to |  
|                                                           |   | 2006                       |   |   | 2005                            |   |   | March 31, 2006  |  
|Operating activities:                                      |   |                            |   |   |                                 |   |   |                 |  
|Net loss                                                   | $ | (2,634,433                 | ) | $ | (3,760,434                      | ) | $ | (30,231,744     | )
|Items not affecting cash:                                  |   |                            |   |   |                                 |   |   |                 |  
|Cumulative effect of change in accounting principle        |   | -                          |   |   | -                               |   |   | 146,972         |  
|Depreciation                                               |   | 3,011                      |   |   | 3,664                           |   |   | 414,604         |  
|Amortization of debt discount and deferred finance charges |   | 765,983                    |   |   | 1,222,285                       |   |   | 2,090,075       |  
|Expenses settled through issuance of common stock          |   | -                          |   |   | -                               |   |   | 1,992,184       |  
|Asset impairments                                          |   | -                          |   |   | -                               |   |   | 1,626,821       |  
|Realized loss on marketable securities                     |   | -                          |   |   | -                               |   |   | 1,242,242       |  
|Gain on sale of property and equipment                     |   | -                          |   |   | -                               |   |   | (26,806         | )
|Gain on settlement of debt                                 |   | -                          |   |   | (176,570                        | ) |   | (176,667        | )
|Gain on fair value of derivative liability                 |   | (182,000                   | ) |   | -                               |   |   | (182,000        | )
|Stock-based payments                                       |   | 1,800                      |   |   | 4,050                           |   |   | 2,530,651       |  
|Other                                                      |   | -                          |   |   | -                               |   |   | (30,061         | )
|Net changes in working capital related to operations:      |   |                            |   |   |                                 |   |   |                 |  
|Refundable taxes and other receivables                     |   | 33,693                     |   |   | 13,241                          |   |   | (6,042          | )
|Prepaid expenses and deposits                              |   | 62,671                     |   |   | (577,706                        | ) |   | (47,765         | )
|Accounts payable and accrued expenses                      |   | (592,576                   | ) |   | 1,024                           |   |   | 2,558,936       |  
|Reclamation and closure liabilities                        |   | -                          |   |   | (168,574                        | ) |   | 40,000          |  
|Net cash used in operating activities                      |   | (2,541,851                 | ) |   | (3,439,020                      | ) |   | (18,058,600     | )
|Investing activities:                                      |   |                            |   |   |                                 |   |   |                 |  
|Purchase of marketable securities                          |   | -                          |   |   | -                               |   |   | (1,767,835      | )
|Proceeds from sale of property and equipment               |   | -                          |   |   | -                               |   |   | 100,000         |  
|Proceeds from sale of marketable securities                |   | -                          |   |   | -                               |   |   | 525,593         |  
|Redemption (purchase) of reclamation cash bond             |   | -                          |   |   | -                               |   |   | (41,000         | )
|Purchase of property and equipment                         |   | (102,706                   | ) |   | (2,375                          | ) |   | (2,188,551      | )
|Acquisition of business, net of cash acquired              |   | -                          |   |   | -                               |   |   | (31,286)        |  
|Net cash used in investing activities                      |   | (102,706                   | ) |   | (2,375                          | ) |   | (3,403,079      | )

(continued next page)





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MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries

(A development-stage company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                |   |                            |   |   |                                 |   |   |                 |   | 
|------------------------------------------------------------------------------- | - | -------------------------- | - | - | ------------------------------- | - | - | --------------- | - | 
|                                                                                |   |                            |   |   |                                 |   |   | Cumulative from |  
|                                                                                |   | Six months ended
March 31, |   |   | inception on August 23, 1996 to |  
|                                                                                |   | 2006                       |   |   | 2005                            |   |   | March 31, 2006  |  
|                                                                                |   |                            |   |   |                                 |   |   |                 |  
|Financing activities:                                                           |   |                            |   |   |                                 |   |   |                 |  
|Issuance of notes payable                                                       | $ | -                          |   | $ | -                               |   | $ | 350,000         |  
|(Decrease) increase of bank indebtedness                                        |   | (44,349                    | ) |   | (8,155                          | ) |   | 35,314          |  
|Proceeds from issuance of convertible promissory notes                          |   | -                          |   |   | -                               |   |   | 1,228,280       |  
|Increase in promissory notes                                                    |   | -                          |   |   | 3,000,000                       |   |   | 3,500,000       |  
|Repayment of promissory notes                                                   |   | (1,750,000                 | ) |   | -                               |   |   | (3,500,000      | )
|Repayment of convertible promissory notes                                       |   | -                          |   |   | -                               |   |   | (175,000        | )
|Loan from directors                                                             |   | -                          |   |   | -                               |   |   | 72,600          |  
|Repayment of loan from directors                                                |   | (50,000                    | ) |   | -                               |   |   | (50,000         | )
|Proceeds from secured convertible debt                                          |   | 5,000,000                  |   |   | -                               |   |   | 5,000,000       |  
|Payment of financing fees and issue costs                                       |   | (530,000                   | ) |   | (542,500                        | ) |   | (1,270,000      | )
|Issuance of long-term debt                                                      |   | 159,000                    |   |   | -                               |   |   | 296,435         |  
|Repayment of long-term debt                                                     |   | -                          |   |   | -                               |   |   | (137,435        | )
|Repayment of government assistance                                              |   | (184,084                   | ) |   | (129,465                        | ) |   | (374,209        | )
|Receipt of repayable government assistance                                      |   | -                          |   |   | 86,229                          |   |   | 1,288,978       |  
|Proceeds from sale of common stock                                              |   | -                          |   |   | 545,000                         |   |   | 15,430,558      |  
|Proceeds from sale of options                                                   |   | -                          |   |   | -                               |   |   | 33,160          |  
|Redemption of redeemable common stock                                           |   | -                          |   |   | -                               |   |   | (37,500         | )
|Purchase of common stock for treasury                                           |   | -                          |   |   | -                               |   |   | (149,622        | )
|Net cash provided by financing activities                                       |   | 2,600,567                  |   |   | 2,951,109                       |   |   | 21,541,559      |  
|Effect of foreign currency exchange rate
on
change on cash and cash equivalents |   | 251                        |   |   | (7,630                          | ) |   | (398            | )
|Net increase (decrease) in cash and cash equivalents                            |   | (43,739                    | ) |   | (497,916                        | ) |   | 79,482          |  
|Cash and cash equivalents, beginning of period                                  |   | 123,221                    |   |   | 562,250                         |   |   | -               |  
|Cash and cash equivalents, end of period                                        | $ | 79,482                     |   | $ | 64,334                          |   | $ | 79,482          |  







-4-



MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries

(A development-stage company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)





| |                                                                            |                            |         |  |                                 |         |  |                 |         |  |  |  |  |  |  |  |  |  |  |  | 
| | -------------------------------------------------------------------------- | -------------------------- | ------- |  | ------------------------------- | ------- |  | --------------- | ------- |  |  |  |  |  |  |  |  |  |  |  | 
| |                                                                            |                            |         |  |                                 |         |  | Cumulative from |        
| |                                                                            | Six months ended
March 31, |         |  | inception on August 23, 1996 to |        
| |                                                                            | 2006                       |         |  | 2005                            |         |  | March 31, 2006  |        
| |                                                                            |                            |         |  |                                 |         |  |                 |        
| | Supplemental non-cash financing activities:                                |                            |         |  |                                 |         |  |                 |         | 
| | Cash paid for interest                                                     | $                          | 236,455 |  | $                               | 11,167  |  | $               | 505,784 | 
| | Issuance of common stock in lieu of settlement of debt                     |                            | 22,600  |  |                                 | 74,750  |  |                 | 97,350  | 
| | Issuance of common stock upon conversion of secured convertible debentures |                            | 200,000 |  |                                 | -       |  |                 | 200,000 | 
| | Issuance of common stock in lieu of payment of issue costs                 |                            | -       |  |                                 | 270,000 |  |                 | 550,000 | 
| | Issuance of common stock in lieu of repurchasing redeemable common stock   |                            | -       |  |                                 | 16,250  |  |                 | 202,500 | 
| | Issuance of stock options in lieu of repurchasing redeemable common stock  |                            | -       |  |                                 | -       |  |                 | 605,210 | 
| | Issuance of common stock upon conversion of promissory notes               |                            | -       |  |                                 | 825,000 |  |                 | 850,626 | 
| | Issuance of common stock in lieu of payment of notes payable               |                            | -       |  |                                 | -       |  |                 | 356,424 | 
| | Repurchase of common stock in settlement of accounts receivable            |                            | -       |  |                                 | -       |  |                 | 11,300  | 





(See accompanying notes to condensed consolidated financial statements)





-5-



MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries

(A development-stage company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2006



1.

Nature of operations

McKenzie Bay International, Ltd. and subsidiaries (Company) is a development stage company with no operations.  The Companys primary business activity is the development of wind powered alternative energy systems.  In addition, the Company holds mining claims to a vanadium deposit in Northern Quebec.

2.

Accounting policies

(a)

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and with the instructions to Form 10-QSB.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included.  The accompanying financial statements should be read in conjunction with the audited financial statements included in the Companys Annual Report of Form 10-KSB for the fiscal year ended September 30, 2005.  The balance sheet at September 30, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.  Operating results for the three-months and six-months periods ended March 31, 2006, are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2006.

The accompanying financial statements have been prepared on the basis of the Company continuing as a going concern, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business.  Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.

The Company has suffered recurring losses and has a deficiency in net assets that raise substantial doubt about its ability to continue as a going concern.  The Company's continued existence is dependent upon its ability to raise additional capital and generate profits.  However, management believes that it will be successful at raising additional capital in the short-term (see note 3) and will have profitable operations in the long-term.

The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.







-6-





2.

Accounting policies (continued)

(b) Consolidation

These financial statements include the activities of the Company and its wholly-owned subsidiaries, Lac Doré Mining Inc., Great Western Diamond Company, DERMOND INC., WindStor Power Company and a 62.5% interest in Ptarmigan Energie Inc.  All intercompany balances and transactions have been eliminated in consolidation.

(c) New accounting pronouncements

Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, replaces existing requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  As a result, compensation cost relating to share-based payment transactions will be measured based on the fair value of the equity or liability instruments issued.  This statement does not change the accounting for similar transactions involving parties other than employees.  The Company will be required to adopt this statement on October 1, 2006.  This statement applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date.  Although the Company has not completed its evaluation of the impact of adopting the new statement on its consolidated financial statements, additional compensation costs will be recorded if the use of options for employee and director compensation continues.





-7-



2.

Accounting policies (continued)

(d) Share Based Payment

The Company has stock-based compensation plans which are described in note 4.  The Company uses the fair value method of accounting for all stock options and common shares issued to non-employees for services in accordance with the provisions of SFAS No. 123, and the intrinsic value method for stock options granted to employees, officers and directors in conformity with APB Opinion No. 25 and its related interpretations, as allowed by SFAS No. 123.  Under the fair value method, compensation cost is measured at the date of the grant and recognized over the vesting period, as is the case under the intrinsic value method when the exercise price is lower than the current market price at the date of the grant.

Had the compensation cost for stock options issued to employees, officers and directors been determined based on the fair value method consistent with SFAS No. 123, the Companys net loss and loss per share would have been as follows for the periods ended March 31, 2006 and 2005:

| |  |                                                                                                                                            |   |                              |   |                            |            |   |   |            |   |   |            |   |  |  |  | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------ | - | ---------------------------- | - | -------------------------- | ---------- | - | - | ---------- | - | - | ---------- | - |  |  |  | 
| | 
| |  |                                                                                                                                            |   | Three months ended
March 31, |   | Six months ended
March 31, |           
| |  |                                                                                                                                            |   | 2006                         |   |                            | 2005       |   |   | 2006       |   |   | 2005       |  
| |  |                                                                                                                                            |   |                              |   |                            |            |   |   |            |   |   |            |  
| |  | Net loss, as reported                                                                                                                      | $ | (1,093,679                   | ) | $                          | (1,630,411 | ) | $ | (2,634,433 | ) | $ | (3,760,434 | )
| |  |                                                                                                                                            |   |                              |   |                            |            |   |   |            |   |   |            |  
| |  | Add:  Stock-based employee compensation expense included in reported net loss, net of related tax effects                                  |   | 900                          |   |                            | 2,025      |   |   | 1,800      |   |   | 4,050      |  
| |  |                                                                                                                                            |   |                              |   |                            |            |   |   |            |   |   |            |  
| |  | Deduct:  Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects |   | (420,940                     | ) |                            | (63,855    | ) |   | (475,716   | ) |   | (872,162   | )
| |  | Pro forma net loss                                                                                                                         | $ | (1,513,719                   | ) | $                          | (1,692,241 | ) | $ | (3,108,349 | ) | $ | (4,628,546 | )
| |  |                                                                                                                                            |   |                              |   |                            |            |   |   |            |   |   |            |  
| |  | Basic and diluted loss per share:                                                                                                          |   |                              |   |                            |            |   |   |            |   |   |            |  
| |  | As reported                                                                                                                                | $ | (0.04                        | ) | $                          | (0.06      | ) | $ | (0.09      | ) | $ | (0.14      | )
| |  | Pro forma                                                                                                                                  | $ | (0.05                        | ) | $                          | (0.06      | ) | $ | (0.10      | ) | $ | (0.17      | )
| | 





-8-



2.

Accounting policies (continued)



(d) Share Based Payment



The fair value of options was estimated as of the date of grant using the Black-Scholes option-pricing method with the following weighted average assumptions for the periods ended March 31, 2006 and 2005:

[note1002.gif]



| |                                                                                                         |                   |  |  | 
| | ------------------------------------------------------------------------------------------------------- | ----------------- |  |  | 
| | (e)                                                                                                     | Reclassifications
| | Certain amounts from the prior year have been reclassified to conform to the current year presentation.



3.

Securities Purchase Agreement with Cornell Capital Partners

On October 11, 2005, the Company entered into a Securities Purchase Agreement with Cornell Capital wherein Cornell Capital agreed to purchase up to $5,000,000 of the Companys Secured Convertible Debentures. On the same date, Cornell Capital purchased a Secured Convertible Debenture from the Company in the face amount of $3,000,000.  The principal sum together with accrued but unpaid interest at an annual rate of approximately 10.14% is payable on or before October 11, 2007. On November 14, 2005, Cornell Capital purchased a second Secured Convertible Debenture in the face amount of $2,000,000 with substantially identical terms.

The Company, upon giving three days prior written notice, can redeem a portion or all amounts outstanding under the Secured Convertible Debentures.  The amount paid on redemption will be equal to the amount of principal and accrued interest being redeemed plus a premium calculated as the amount redeemed times the greater of 20% or the percentage difference between the closing bid price of the Companys common stock and $1.10.





-9-



3.

Securities Purchase Agreement with Cornell Capital Partners (continued)



The Secured Convertible Debentures are convertible into shares of the Companys common stock at the option of Cornell Capital.  The number of shares issuable upon a conversion equals the quotient obtained by dividing the then outstanding amount of the Secured Convertible Debenture to be converted by the price per share equal to the lesser of (a) $1.10 or (b) 80% of the lowest closing bid price of the Companys shares for the five trading days immediately preceding the conversion, subject to adjustments set forth in the Secured Convertible Debenture.   If, however, at the time of any conversion:  (1) the number of the Companys shares authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to fund the conversion; (2) its shares are not listed or quoted for trading on the Nasdaq OTC Bulletin Board, Nasdaq Capital Market, New York Stock Exchange, American Stock Exchange or the Nasdaq National Market; (3) the Company has failed to timely satisfy the conversion; or (4) the conversion would be prohibited by the terms of the Secured Convertible Debenture, then, at the option of Cornell Capital, the Company, in lieu of delivering shares, must deliver, an amount in cash equal to the product of the outstanding principal amount to be converted plus any interest due divided by the then conversion price and multiplied by the highest closing price of the shares from date of the conversion notice until the date that such cash payment is made.  Other adjustments of the conversion price are similar to the adjustment to the exercise price of the warrant the Company issued to Cornell Capital as described below.



If an event of default, as defined in the Secured Convertible Debentures, occurs, Cornell Capital may declare the entire unpaid balance of principal and interest due and payable.  If such an event of default  occurs and remains uncured, then the conversion price will be reduced to $0.10 per share.

The Secured Convertible Debentures are secured pursuant to the terms of a Pledge and Escrow Agreement wherein the Company pledged and delivered to an escrow agent 25,000,000 shares of the Companys common stock to secure payment of the Secured Convertible Debentures.  In the event of a default by the Company under the Secured Convertible Debentures or other agreements relating to them, the escrow agent is authorized to deliver the pledged shares to Cornell Capital.  The undelivered shares will not be considered outstanding for purposes of computing earnings per share of the Company.

Pursuant to the Securities Purchase Agreement, the Company issued warrants to Cornell Capital to purchase 5,000,000 shares of the Companys common stock for a period of five years at an exercise price of $1.00 per share, subject to adjustment as set forth in the warrants.  In no event, however, shall Cornell Capital be entitled to exercise a warrant for a number of shares in excess of that number of shares which, upon giving effect to such exercise, would cause the aggregate number of shares of the Companys common stock beneficially owned by Cornell Capital and its affiliates to exceed 4.99% of the outstanding shares of the Companys common stock following such exercise, except within sixty days of the expiration of the warrant.  If at the time of exercise of either of the warrants, the underlying shares are not subject to an effective registration statement under the Securities Act of 1933 or if an event of default under the Secured Convertible Debentures or certain other documents has occurred, Cornell Capital, in lieu of making payment of the exercise price in cash, may elect a cashless exercise in accordance with the formula set forth in the warrants.





-10-



3.

Securities Purchase Agreement with Cornell Capital Partners (continued)



If, subject to the exceptions set forth in the warrants, during the time that the warrants are outstanding, the Company issues or sells, or are deemed to have issued or sold, any shares of common stock for a consideration per share less than a price equal to the then exercise price of the warrants, then the exercise price will be reduced to an amount equal to such consideration per share.  Upon each such adjustment, the number of shares issuable upon exercise of the warrants will be adjusted to the number of shares determined by multiplying the exercise price in effect immediately prior to such adjustment by the number of shares issuable upon exercise of the warrants immediately prior to such adjustment and dividing the product by the exercise price resulting from such adjustment. Similar adjustments will be made upon any issuance or sale by the Company of options to purchase the Companys shares or convertible securities.

On October 11, 2005, the Company also entered into a Registration Rights Agreement with Cornell Capital wherein the Company agreed to prepare and file with the Securities and Exchange Commission (SEC) the registration statement for the resale by Cornell Capital of at least 39,062,500 shares to be issued upon conversion of the Secured Convertible Debentures and 5,000,000 shares underlying the warrants. In the event that the registration statement had not been declared effective by the SEC within 120 days of its filing or if after it having been declared effective by the SEC sales cannot be made pursuant to the registration statement, then the Company will pay liquidated damages of 2% of the liquidated value of the Secured Convertible Debentures outstanding for each thirty day period..  The Company has agreed to indemnify Cornell Capital against certain losses, costs or damages which may arise in connection with the registration statement, including those that may arise under the Securities Act of 1933.

The holder of the Secured Convertible Debentures and warrants has registration rights that required the Company to file a registration statement with the SEC to register the resale of the common stock issuable upon conversion of the Secured Convertible Debentures and the exercise of the warrants.  Under EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, the ability to register stock was deemed to be outside of the Company's control.  Accordingly, the initial estimated aggregate fair value of the derivatives (warrants and conversion feature) of $5,000,000 was recorded as a derivative liability in the consolidated balance sheet, with a corresponding reduction in the face value of the debenture liability treated as debt discount that will be amortized over the life of the debentures.  Changes in the estimated fair value of the derivative liability are recorded in the statement of operations at the end of each reporting period.  At March 31, 2006, the change in the estimated fair value of the derivative liability since the date of issuance of the debentures and warrants resulted in a gain of $182,000.

Pursuant to the Securities Purchase Agreement, the Company paid Yorkville Advisors Management LLC (Yorkville), the general partner of Cornell Capital, a fee of $335,000.  Additionally, the Company has paid a commission of $195,000 in connection with the issuance of the Secured Convertible Debentures to Spencer Clarke LLC.  The Company has deferred and is amortizing these costs on a basis that approximates the interest method over the expected term of the related debt.  Total amortization recorded as finance charges, related to this debt, is $65,253 and $124,706 for the three months and six months ended March 31, 2006 and the unamortized deferred finance costs of the debt is $405,294.





-11-



3.

Securities Purchase Agreement with Cornell Capital Partners (continued)



During the quarter ended March 31, 2006, $200,000 of the Secured Convertible Debentures were converted into 370,880 common shares.  The principal amount of the Secured Convertible Debentures outstanding on March 31, 2006 was $4,800,000.  The debt discount attributable to the conversion feature is being amortized as additional non-cash interest expense over the life of the debt using the effective interest method.  Total amortization recorded as interest expense during the three months ended March 31, 2006 is $287,029 and the unamortized discount of the debt is $4,712,971 as at March 31, 2006.

In addition, the Company issued  warrants to Spencer Clarke LLC for the purchase of 37,088 shares of the Companys common stock, at a price equal to the conversion price, plus $0.05 per share, for a period of 5 years. The Company agreed to  issue additional warrants to Spencer Clarke to the extent that the number of shares underlying the warrants will be  equal to 10% of the number of shares acquired by Cornell Capital upon conversion of the Secured Convertible Debentures.



4.

Common stock



The following table summarizes the activity related to common stock and additional paid in capital for the six months ended March 31, 2006:

|                                                                             |            |   |              |   |                            |  |   |            |  |  |  |  |  |  |  |  |  | 
|---------------------------------------------------------------------------- | ---------- | - | ------------ | - | -------------------------- |  | - | ---------- |  |  |  |  |  |  |  |  |  | 
|                                                                             |           
|                                                                             | Shares     |   | Common stock |   | Additional paid in capital |  |   | Total     
|Balance, September 30, 2005                                                  | 30,686,376 | $ | 30,586       | $ | 22,245,971                 |  | $ | 22,276,557
|Reclassification of warrants and options to derivative liability             | -          |   | -            |   | (422,000)                  |  |   | (422,000) 
|Stock options issued for compensation                                        | -          |   | -            |   | 900                        |  |   | 900       
|Balance, December 31, 2005                                                   | 30,686,376 |   | 30,586       |   | 21,824,871                 |  |   | 21,855,457
|                                                                             |            |   |              |   |                            |  |   |           
|Common shares issued for settlement of loan from director                    | 22,600     |   | 23           |   | 22,577                     |  |   | 22,600    
|Common shares issued on conversion of secured convertible debenture (note 3) | 370,880    |   | 371          |   | 199,629                    |  |   | 200,000   
|Stock option compensation                                                    | -          |   | -            |   | 900                        |  |   | 900       
|Stock option services                                                        | -          |   | -            |   | 23,122                     |  |   | 23,122    
|                                                                             |            |   |              |   |                            |  |   |           
|Balance, March 31, 2006                                                      | 31,079,856 | $ | 30,980       |   | 22,071,099                 |  | $ | 22,102,079



On March 9, 2006, the shareholders approved an increase in the aggregate number of common shares the company is authorized to issue from 75,000,000 shares to 150,000,000 shares.





-12-



4.

Common stock (continued)

(a)

Share-based incentive plans

The Company has three share-based incentive plans, each being limited so that options to acquire no more than 2,500,000 common shares per plan may be outstanding at any one time.

Under the 2001 Employee Incentive Stock Option Plan, options may be granted at an exercise price equal to the market price on the date of the grant.  All options expire no later than ten years from the grant date.  In the event an option is granted to an employee who owns 10% or more of the voting power of common stock of the Company, the purchase price of each share shall be 110% of the market price on the date of grant and the expiration date of the option shall be no more than five years from the date of grant of such option.  As of March 31, 2006, options to purchase an aggregate of 1,440,000 common shares have been issued under this plan.

Under the 2001 Employee Non-Qualified Stock Option Plan, options may be granted to employees or certain non-employees at an exercise price as determined by the administrator of the plan on the date of the grant.  The options expire ten years from the date of grant.  As of March 31, 2006, options to purchase an aggregate of 1,830,000 common shares have been issued under this plan.

Under the 2001 Directors Non-Qualified Stock Option Plan, options may be granted to directors of the Company or certain non-employees for terms of up to ten years at an exercise price as determined by the administrator on the date of the grant.  The options vest over three years.  As of March 31, 2006, options to purchase an aggregate of 2,189,314 common shares have been issued under this plan.

The following tables contain information with respect to all options granted by the Company, in addition to those granted under the preceding incentive plans:



[note2001.jpg]





-13-



4.

Common stock (continued)



|                                                                                                                                                                                        |                                                                       |                                 |                    |   |  |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------- | ------------------ | - |  |  |  | 
|                                                                                                                                                                                        | (b)
Stock warrants                                                    |                                 |                   
|                                                                                                                                                                                        |                                                                       |                                 |                   
|                                                                                                                                                                                        | Warrants outstanding for the purchase of common stock are as follows: |                                
|                                                                                                                                                                                        |                                                                       |                                 |                   
|                                                                                                                                                                                        |                                                                       |                                 | Number
of warrants |  
|                                                                                                                                                                                        |                                                                       | Outstanding, September 30, 2005 | 2,554,461          |  
|                                                                                                                                                                                        |                                                                       | Issued                          | 5,000,000          |  
|                                                                                                                                                                                        |                                                                       | Expired                         | (66,143            | )
|                                                                                                                                                                                        |                                                                       | Outstanding, December 31, 2005  | 7,488,318          |  
|                                                                                                                                                                                        |                                                                       | Issued                          | 37,088             |  
|                                                                                                                                                                                        |                                                                       | Expired                         | (15,730            | )
|                                                                                                                                                                                        |                                                                       | Outstanding, March 31, 2006     | 7,509,676          |  
|                                                                                                                                                                                       
|The warrants outstanding at March 31, 2006, can be exercised at prices ranging from  $0.57 to $2.25.  The expiration dates of the warrants range from April 08, 2006 to March 22, 2011.



5.

Basic and diluted loss per common share



Basic and diluted net loss per share the three months and six months ended March 31, 2006 and 2005 have been computed as follows:

|                                                              |   |                                                                                                                                                                                              |  |   |                            |                                   |      |             |  |      |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------------------------- | --------------------------------- | ---- | ----------- |  | ---- | ----------- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                                                              |   |                                                                                                                                                                                              |  |   |                            |                                   |      |             |  |      |             | 
|                                                              |   | Three months ended March 31,                                                                                                                                                                 |  |   | Six months ended March 31, |                                  
|                                                              |   | 2006                                                                                                                                                                                         |  |   | 2005                       |                                   |      | 2006        |  |      | 2005        | 
|                                                              |   |                                                                                                                                                                                              |  |   |                            |                                   |      |             |  |      |             | 
|Net loss                                                      | $ | (1,093,679)                                                                                                                                                                                  |  | $ | (1,630,411)                |                                   | $    | (2,634,433) |  | $    | (3,760,434) | 
|Total weighted average number of common shares and equivalent |   | 30,776,662                                                                                                                                                                                   |  |   | 28,093,859                 |                                   |      | 30,831,270  |  |      | 26,839,146  | 
|Net loss per common share                                     | $ | (0.04)                                                                                                                                                                                       |  | $ | (0.06)                     |                                   | $    | (0.09)      |  | $    | (0.14)      | 
|                                                              |   |                                                                                                                                                                                              |  |   |                            |                                   |      |            
|                                                              |   | The following outstanding common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders as they had an anti-dilutive effect: | 
|                                                              |   |                                                                                                                                                                                              | 
|                                                              |   |                                                                                                                                                                                              |  |   |                            | Shares at end of
period March 31,
|                                                              |   |                                                                                                                                                                                              |  |   |                            |                                   | 2006 |             |  | 2005 |            
|                                                              |   |                                                                                                                                                                                              |  |   |                            |                                   |      |             |  |      |            
|                                                              |   | Shares issuable upon exercise of stock options                                                                                                                                               |  |   | 15,520,714                 |                                   |      | 14,498,484  | 
|                                                              |   | Shares issuable upon exercise of warrants                                                                                                                                                    |  |   | 7,509,676                  |                                   |      | 2,164,931   | 
|                                                              |   | Shares issuable upon conversion of convertible promissory notes                                                                                                                              |  |   | 183,745                    |                                   |      | 80,200      | 
|                                                              |   | Shares issuable upon conversion of secured convertible debentures                                                                                                                            |  |   | 6,960,344                  |                                   |      | -           | 







-14-



6.

Interest, amortization of debt discounts and finance charges



Interest and finance charges consists of:



[note3001.jpg][note3003.gif]





-15-





|                    
|--------------------
|7.
Subsequent events

Securities Purchase Agreement with Cornell Capital Partners



On April 25, 2006, the Company entered into a Securities Purchase Agreement (Agreement) with Cornell Capital Partners (Cornell Capital). Upon the terms and subject to the conditions contained in the Agreement, the Company agreed to sell to Cornell Capital and Cornell Capital agreed to purchase up to $1,500,000 of secured Convertible Debentures.



Pursuant to the Agreement, Cornell Capital purchased a Secured Convertible Debenture from the Company in the face amount of $500,000 for a like amount on April 25, 2006. The principal sum together with accrued but unpaid interest at an annual rate of 10% is payable on or before April 18, 2008.



The terms and conditions of the Agreement are substantially the same as the previous Securities Purchase Agreement as described in Note 3 with the following exceptions:



1.

For the purposes of determining the price to redeem debentures or convert the debentures to common stock are based on $0.75 per share as opposed to $1.10 per share.



2.

The company has pledged as security a further 10,869,564 shares of common stock pursuant to a Pledge and Escrow Agreement.



Pursuant to the Agreement, the Company agreed to pay Yorkville a fee of $37,500 from the proceeds of the sale of each of the Secured Convertible Debentures. The Company also agreed to pay Yorkville a structuring fee of $10,000 proportionally from each disbursement. These fees will be amortized over the life of the Agreement.



The Company has and will continue to pay to Spencer Clarke LLC, 6% of the proceeds received from Cornell Capital from the sale of the Secured Convertible Debentures. This fee will be deferred and amortized over the life of the Secured Convertible debentures. In addition, the Company agreed to issue  warrants to Spencer Clarke LLC for the purchase of shares of the Companys common stock at a price equal to the conversion price of the Secured Convertible Debentures, plus $0.05 per share, for a period of 5 years. The number of shares underlying the warrants will be equal to 10% of the number of shares acquired by Cornell Capital upon conversion of the Secured Convertible Debentures.



Pursuant to the Agreement, the Company has issued a warrant to Cornell Capital to purchase 5,000,000 shares for a period of five years at an exercise price of $0.75 per share, subject to adjustment as set forth in the warrant. In no event, however, shall the holder of the warrant be entitled to exercise the warrant for a number of shares in excess of that number of shares which, upon giving effect to such exercise, would cause the aggregate number of shares of common stock beneficially owned by the holder and its affiliates to exceed 4.99% of the outstanding shares of common stock following such exercise, except within sixty days of the expiration of the warrant. If at the time of exercise of the warrant, the underlying shares are not subject to an effective registration statement under the Securities Act of 1933 or if an event of default under the Secured Convertible Debentures or certain other documents has occurred, the holder of the warrant, in lieu of making payment of the exercise price in cash, may elect a cashless exercise in accordance with the formula set forth in the warrant.



The Company has the right, at its option, provided that the shares issuable under the warrant are registered as described below, to force Cornell Capital to exercise the warrant in whole or in part if the closing bid price of its common stock is $1.25 or greater for 15 consecutive trading days and such bid price is higher than the then exercise price of the warrant.









7.

Subsequent events (continued)



Securities Purchase Agreement with Cornell Capital Partners (continued)



On April 25, 2006, the Company also entered into a Registration Rights Agreement with Cornell Capital wherein the Company agreed to prepare and file with the SEC a registration statement for the resale by Cornell Capital of at least 13,586,956 shares to be issued upon conversion of the Secured Convertible Debentures and 5,000,000 shares underlying the warrants. The registration statement was filed with the SEC on May 12, 2006. In the event that the registration statement is not declared effective by the SEC not later than August 16, 2006 or if after it has been declared effective by the SEC, and sales cannot be made pursuant to the registration statement, then the Company will pay liquidated damages of 2% of the liquidated value of the Secured Convertible Debentures for each 30 day period..  The Company has agreed to indemnify Cornell Capital against certain losses, costs or damages which may arise in connection with the registration statement, including those that may arise under the Securities Act of 1933.





-16-





Item 2.

Managements Discussion and Analysis or Plan of Operation.





Development of WindStor



Phase 1 of the optimization of the WindStor system (WindStor) and WindStor Wind Turbine (WWT) was completed during the quarter.  Analytical Design Service Corporation (ADSC) provided a redesign of the 100 kilowatt (kW) prototype, installed at the Université du Québec en Abitibi-Témiscamingue, in Rouyn-Noranda, Québec Canada,engineering improvements into 200 kW configuration capable of operating in lighter winds (Class 3) which we anticipate will be capable of being cost effective to end users at certain electricity selling prices.  ADSCs improvements to the WWT have provided what we believe to be are unique vertical axis wind turbine technology and we are preparing filing(s) for additional patent protection.  There can be no assurance that any WindStor we may install will perform as we expect or that any additional patent(s) will be issued.



We are in the process of preparing the application for building permits and letting bids for the construction and installation work at Pioneer Bluff, in Ishpeming, Michigan in connection with the installation of our first WindStor project.  In addition to obtaining the requisite permits, certain other conditions must be satisfied before any agreement for the installation and sale of power becomes binding on the other party.  There can be no assurance that the conditions will be satisfied.



During the quarter we also entered into an additional non-binding Power Purchase Agreements (PPAs), continued discussions with prospective customers and issued a variety of proposals for WindStor projects.  Any binding contract entered into will depend upon, among other things, the receipt by us of adequate funding to pay for the units and complete installation.



The initial phase of testing of the 100 kW WWT prototype concluded during this quarter finishing with the successful installation and autonomous operation of our Supervisory Control And Data Acquisition, (SCADA) system, a computer system for gathering and analyzing real time data.  The SCADA system is used to monitor and control our WindStor system.  We will continue to use the prototype as a testing platform for ongoing improvements we expect and will implement and test for the WWT.



During the quarter we spent approximately $125,000 on WindStor related Research and Development.



Our business model continues to focus on retained ownership of the WindStor installations and the sale of electricity generated by WWTs to WindStor customers.  If our WindStor prototype performs as we anticipate and WindStor operates successfully in initial commercial installations, we will seek debt financing to fund a portion of future WindStor installations.We will, however, require significant amounts of capital to install WindStor and for general and administrative expenses.  For foreign WWT opportunities, we intend to sell the WindStor system to the interested party.



Our anticipated near term allocation of funding is as follows, if we are able to obtain the funds:



|                               |            |           
|------------------------------ | ---------- | ----------
|USE                            | AMOUNT     | TIME FRAME
|                               |            |           
|Ishpeming installation         | $650,000   | 2 Months  
|Five 200kW WWT Fabrications    | $1,500,000 | 6 Months  
|Installation and Commissioning | $500,000   | 6 Months  





If we are successful in obtaining funds to be utilized in connection with WindStor, in addition to the near term allocation described above, we intend to allocate them as follows (based on the maximum amount of funds received):







-17-





|                                                                                                    |            
|--------------------------------------------------------------------------------------------------- | -----------
|Marketing of WWTs and WindStor                                                                      | $3,000,000 
|Continued WWT development, fund WWTs and repayment of promissory notes and other corporate purposes | $7,000,000 
|TOTAL                                                                                               | $10,000,000





We have reduced the number of Sales Representatives from 18 companies to 11 in the United States.  Each will be paid upon the completion of a WindStor project utilizing one or more WWTs installed through their efforts. Two agents will receive $35,000 for each of the first 10 WWTs they sell.  Thereafter and for other agents, payment will be $20,000 per WWT installed.  Certain of the agents will also receive a 2% carried equity interest in each WindStor system they sell.



Each of the agents has represented to us that it has expertise in the sale and promotion of energy products.



Lac Doré Mining Co.



We continue to investigate the market possibilities for divesting the Lac Doré deposit.  We  have not received any indications of interest for a purchase.  We have contacted specialists in mine construction and recovery chemistry, who were instrumental in the pre-feasibility study of Lac Doré, to provide technical support in the divestiture of the deposit.



We only intend to continue the maintenance of our claims rather than any other activities at Lac Doré.  Whether the refining technology developed during the preliminary feasibility study is part of a potential sale of Lac Doré will depend upon the value allocation.  We may consider a license of the technology rather than sale if the prospects of increased value is determined.



Cash Requirements for 2006 Fiscal Year Administrative Costs



As noted above, we must obtain substantial additional capital to engage in our proposed businesses.



Our approximate cash requirements for administrative costs for the fiscal year ending September 30, 2006 (including direct support of subsidiary operations) follows:



|                                                                                                       |         
|------------------------------------------------------------------------------------------------------ | --------
|Use                                                                                                    | Amount  
|Employee salaries                                                                                      | $600,000
|Professional costs (includes consultants, outside accountants, independent auditors and legal counsel) | $300,000
|General and administrative (includes lease obligations, travel and other administrative costs)         | $500,000



Neither we nor our subsidiaries will be able to continue commercial or administrative functions for more than a few months unless substantial additional funding becomes available.



As stated in the notes to our consolidated financial statements, because we have suffered recurring losses and a have a deficiency in net assets and working capital, there is substantial doubt about our ability to continue as a going concern.  Our auditors have included a statement to that effect in their report dated December 20, 2005 on our consolidated financial statements for the fiscal year ended September 30, 2005.







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Additional Employees and other Employment related activities



Currently, we have 10 fulltime employees.  WindStor Power Co. will need to add a number of employees in anticipation of successful commercial roll out of WindStor and the WWT.  Additions include project managers and administrative personnel.  McKenzie Bay International, Ltd. intends to add administrative personnel, including a controller.



Off-Balance Sheet Arrangements



We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.



Forward-Looking Statements



This Form 10-QSB contains statements that are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as estimates, anticipates, plans, believes, projects, expects, intends, predicts, potential, future, may, contemplates, will, should, could, would or the negative of such terms or other comparable terminology. These statements relate to our future operations and financial performance or other future events.  Many of the forward-looking statements are based on current expectations, management beliefs, certain assumptions made by our management and estimates and projections about our industry.



Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict with respect to timing, extent, likelihood and degree of occurrence.  Therefore, actual events, results, performance or achievements may differ materially from the events, results, performance or achievements expressed, forecasted or contemplated by any such forward-looking statements.  In addition to factors described in this Quarterly Report on Form 10-QSB for the quarter ended March 31, 2006, and other periodic reports filed with the SEC including those disclosed in our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2005 under the caption FORWARD LOOKING STATEMENTS AND CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK, which disclosure is hereby incorporated by reference, could cause actual results to differ from those described in the forward-looking statements.



Item 3.  Controls and Procedures.



An evaluation was conducted under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2006. Based on that evaluation, the CEO and CFO concluded that our controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.



There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.







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PART II.

OTHER INFORMATION



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.



The responses to Sections 1 and 3 of our Current Report on Form 8-K dated April 25, 2006 are hereby incorporated by reference.



We did not receive any offering proceeds within the meaning of Rule 463 under the Securities Act of 1933 during the period covered by this report.



Item 4.

Submission of Matters to a Vote of Security Holders.



Our Annual Meeting of Stockholders of was held on March 9, 2006.  The following table includes the name of each person elected as a director at the meeting:



|                         |                                   |                                       |                           
|------------------------ | --------------------------------- | ------------------------------------- | --------------------------
|Name of Elected Director | Number of Votes Cast For Election | Number of Votes Withheld For Election | Number of Broker Non-Votes
|Gregory N. Bakeman       | 23,526,417                        | 221,817                               | 5,315,970                 
|Gary L. Westerholm       | 23,526,417                        | 221,817                               | 5,315,970                 
|John W. Sawarin          | 18,819,481                        | 4,928,753                             | 5,315,970                 
|Rocco J. Martino         | 23,526,417                        | 221,817                               | 5,315,970                 
|Stephen D. McCormick     | 23,527,417                        | 220,817                               | 5,315,970                 
|Donald C. Harms          | 23,526,417                        | 221,817                               | 5,315,970                 
|John A. Popp             | 23,524,317                        | 223,917                               | 5,315,970                 
|William H. Damon III     | 23,526,417                        | 221,817                               | 5,315,970                 
|Anand Gangadharan        | 23,526,417                        | 221,817                               | 5,315,970                 



Other than the persons named in the above table, no directors term of office continued after the meeting.



At the meeting, shareholders approved an amendment to Article Fourth of our Certificate of Incorporation

to increase the aggregate number of shares of common stock, $.001 par value, which we are authorized to issue from 75,000,000 to 150,000,000. 21,992,057 votes were cast in favor of the amendment, 1,671,129 were cast against the amendment, 85,048 votes abstained and there were 5,315,970 broker non-votes.



No other matters were voted upon at the meeting.











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Item 6.

Exhibits.



|              |                                                                                                                                                                                                                                                                                                                                                     
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber | Description                                                                                                                                                                                                                                                                                                                                         
|2.1           | Share Purchase Agreement between McKenzie Bay International, Ltd. and Jacquelin Dery, Laurent Mondou and Experts Conseils Dermond Inc. of February 12, 2002. Previously filed as an exhibit to Amendment No. 2 to our registration statement on Form 10-SB and hereby incorporated by reference.                                                    
|3.1           | Certificate of Incorporation, as amended prior to March 28, 2006. Previously filed as an exhibit to our registration statement on Form 10-SB and hereby incorporated by reference.                                                                                                                                                                  
|3.2           | Amendment to Certificate of Incorporation dated March 28, 2006. **                                                                                                                                                                                                                                                                                  
|3.3           | Bylaws. Previously filed as an exhibit to our registration statement on Form 10-SB and hereby incorporated by reference.                                                                                                                                                                                                                            
|4.1           | See Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                           
|4.3           | Specimen Stock Certificate. Previously filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002 and hereby incorporated by reference.                                                                                                                                                                   
|4.4           | Form of Warrant. Previously filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002, and hereby incorporated by reference.                                                                                                                                                                             
|4.5           | Form of Subscription Agreement. Previously filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002 and hereby incorporated by reference.  Previously filed as an exhibit to our Quarterly Report on Form 10-QSB for the quarterly period year ended June 30, 2004 and hereby incorporated by reference.
|4.6           | Promissory Note and Warrant issued on August 13, 2004, letter of August 16, 2004 amending certain terms and Debenture setting forth certain terms.  Previously filed as an exhibit to our Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2004 and hereby incorporated by reference.                                      
|4.7           | Promissory Note and Warrant issued on September 7, 2004 and Debenture setting forth certain terms.  Previously filed as an exhibit to our Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2004 and hereby incorporated by reference.                                                                                      
|4.8           | Form of Debenture dated July 14, 2005 payable to Centre local de développement MRC Rouyn-Noranda and related Loan Agreement, Suretyship and form of warrant.  Previously filed as an exhibit to Post-Effective Amendment No. 2 to our registration statement on Form SB-2, file number 333-119493 and hereby incorporated by reference.             
|4.9           | Form of Promissory Note issued to Gary L. Westerholm. Previously filed as an exhibit to our registration statement on Form SB-2, file number 333-129673, and hereby incorporated by reference.                                                                                                                                                      
|4.10          | Form of Secured Convertible Debentures issued to Cornell Capital Partners, LP.  Previously filed as an exhibit to our registration statement on Form SB-2, file number 333-129673, and hereby incorporated by reference.                                                                                                                            
|4.11          | Form of Secured Convertible Debentures issued to Cornell Capital Partners, LP pursuant to Securities Purchase Agreement as of April 18, 2006.  Previously filed as an exhibit to Post-Effective Amendment No. 1 to our registration statement on Form SB-2, file number 333-129673, and hereby incorporated by reference.                           
|4.12          | Form of warrants issued to Cornell Capital Partners, LP.  Previously filed as an exhibit to our registration statement on Form SB-2, file number 333-129673, and hereby incorporated by reference.                                                                                                                                                  
|4.13          | Form of warrant issued to Cornell Capital Partners, LP pursuant to Securities Purchase Agreement as of April 18, 2006. Previously filed as an exhibit to Post-Effective Amendment No. 1 to our registration statement on Form SB-2, file number 333-129673, and hereby incorporated by reference.                                                   
|31.1          | Rule 13a-14(a) Certification. **                                                                                                                                                                                                                                                                                                                    
|32.1          | Section 1350 Certification.. **                                                                                                                                                                                                                                                                                                                     



**

Filed herewith.





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SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





|                     |                                  |                                                                                                          
|-------------------- | -------------------------------- | ---------------------------------------------------------------------------------------------------------
|                     | McKENZIE BAY INTERNATIONAL, LTD.
|                     |                                 
|                     |                                 
|Date:  May 18 , 2006 | By:                              | /s/ Gregory N. Bakeman                                                                                   
|                     |                                  | Gregory N. Bakeman
Principal Executive Officer, Principal Financial Officer and  Chief Accounting Officer







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