UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549



FORM
10-Q



|☑ | QUARTERLY
        REPORT UNDER SECTION 13 OR 15(d)
        OF THE SECURITIES EXCHANGE ACT OF 1934
        
        For
        the quarter ended JUNE 30, 2012                      
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                     
|☐ | TRANSITION
        REPORT UNDER SECTION 13 OR 15 (d)
        OF
        THE SECURITIES EXCHANGE ACT OF 1934
        
        For
        the transition period from _______to_______





Commission
File No. 333-57946



ALUMIFUEL
POWER CORPORATION

(Exact
Name of Registrant as Specified in its Charter)





|Nevada                              | 88-0448626             
|----------------------------------- | -----------------------
|(State
    or other jurisdiction of | (IRS
    Employer      
|incorporation
    or organization)  | Identification
    No.)



7315
East Peakview Avenue

Englewood,
Colorado 80111

(Address
of principal executive offices) (Zip code)



(303)
796-8940

(Registrant's
telephone number including area code)



(Former
name, address and fiscal year)






Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☑
No ☐



Indicate
by a check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company.

|Large
    accelerated filer ☐ | Accelerated
    filer ☐        
|----------------------------- | -------------------------------
|Non-accelerated
    filer ☐   | Smaller
    reporting company ☑



Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑



Number
of shares of common stock outstanding at August 1, 2012: 2,123,847,187







ALUMIFUEL
POWER CORPORATION AND SUBSIDIARIES



Index
to Financial Statements

(Unaudited)









|                                                                                                                                                           |     | Page
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ----
|                                                                                                                                                           |     |     
|Consolidated
    Balance Sheets at June 30, 2012 (Unaudited) and December 31, 2011                                                                         | F-2
|Consolidated
    Statement of Operations for the three and six months ended June 31, 2012 and the three and six months ended June 30, 2011
    (Unaudited) | F-3
|Consolidated
    Statement of Changes in Shareholders' Deficit for the six months ended June 30, 2012 (Unaudited)                                          | F-4
|Consolidated
    Statement of Cash Flows for the six months ended June 30, 2012 and the six months ended June 30, 2011 (Unaudited)                         | F-5
|Notes
    to Financial Statements                                                                                                                          | F-6
|Item
    2. Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                          | 25 
|Item
    3. Quantitative and Qualitative Disclosures About Market Risk                                                                                     | 28 
|Item
    4T. Controls and Procedures                                                                                                                       | 28 
|Part
    II – Other Information                                                                                                                            | 29 
|Signatures                                                                                                                                                 | 31 





ALUMIFUEL
POWER CORPORATION AND SUBSIDIARIES

Consolidated
Balance Sheets





|                                                                                                                                          | June 30,    |              | December 31,
|----------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------ | ------------
|                                                                                                                                          | 2012        |              | 2011        
|                                                                                                                                          | (Unaudited) |              | (Audited)   
|Assets                                                                                                                                    |             |              |             
|Cash                                                                                                                                      | $           | 4,045        |             
|Accounts receivable                                                                                                                       |             | —            |             
|Deposits                                                                                                                                  |             | —            |             
|Prepaid expenses                                                                                                                          |             | 36,000       |             
|Notes receivable (Note 4)                                                                                                                 |             | 8,000        |             
|Work in progress (Note 1)                                                                                                                 |             | —            |             
|Other current assets                                                                                                                      |             | 421          |             
|Total current assets                                                                                                                      |             | 48,465       |             
|Property and equipment, less accumulated depreciation of $4,604 (2012) and $4,016 (2011) (Note 1)                                         |             | 2,287        |             
|Deferred debt issuance costs (Note 4)                                                                                                     |             | 21,378       |             
|Total long-term assets                                                                                                                    |             | 23,665       |             
|Total assets                                                                                                                              | $           | 72,129       |             
|Liabilities and Shareholders’ Deficit                                                                                                     |             |              |             
|Current liabilities:                                                                                                                      |             |              |             
|Accounts and notes payable:                                                                                                               |             |              |             
|Accounts payable, related party (Note 3)                                                                                                  | $           | 201,497      |             
|Accounts payable, other                                                                                                                   |             | 710,259      |             
|Derivative liability, convertible notes payable (Note 4)                                                                                  |             | 474,869      |             
|Notes payable, related party (Note 3)                                                                                                     |             | 38,852       |             
|Notes payable, other (Note 4)                                                                                                             |             | 311,782      |             
|Convertible notes payable, net of discount of 144,586 (2012) and 189,916 (2011) (Note 4)                                                  | 171,014     |              |             
|Litigation contingency (Note 7)                                                                                                           |             | 360,803      |             
|Payroll liabilities (Note 7)                                                                                                              |             | 111,145      |             
|Accrued expenses (Note 7)                                                                                                                 |             | 207,232      |             
|Dividends payable (Note 9)                                                                                                                |             | 29,452       |             
|Accrued interest payable:                                                                                                                 |             |              |             
|Interest payable, convertible notes (Note 4)                                                                                              |             | 59,244       |             
|Interest payable, related party notes (Note 3)                                                                                            |             | 6,103        |             
|Interest payable, notes payable other (Note 4)                                                                                            |             | 16,686       |             
|Total current liabilities                                                                                                                 |             | 2,698,937    |             
|Capital leases (Note 7)                                                                                                                   |             | 1,166        |             
|Long-term convertible notes payable net of current portion, net of discount of $0 (2012) and $61,569(2011)                                |             | —            |             
|Total long-term liabilities                                                                                                               |             | 1,166        |             
|Total liablities                                                                                                                          |             | 2,700,104    |             
|Commitments and contingencies                                                                                                             |             | —            |             
|Shareholders’ deficit: (Notes 1 & 9)                                                                                                      |             |              |             
|Preferred stock, $.001 par value; 10,000,000 shares authorized, 404,055 (2012) and 521,162 (2011) shares issued and outstanding           |             | 404,055      |             
|Common stock, $.001 par value; 3,000,000,000 shares authorized, 1,893,847,187 (2012) and 927,629,201 (2011) shares issued and outstanding |             | 1,893,847    |             
|Additional paid-in capital                                                                                                                |             | 13,344,971   |             
|Accumulated deficit                                                                                                                       |             | (20,702,820) |             
|Total shareholders' deficit of the Company                                                                                                |             | (5,059,947)  |             
|Non-controlling interest (Note 1)                                                                                                         |             | 2,431,972    |             
|Total shareholders' deficit                                                                                                               |             | (2,627,975)  |             
|Total liabilities and shareholders' deficit                                                                                               | $           | 72,129       |             

















ALUMIFUEL
POWER CORPORATION AND SUBSIDIARIES

Consolidated
Statements of Operations

(Unaudited)







|                                                                              |   | Three months  |   | Three months |   | Six months    |   | Six months 
|----------------------------------------------------------------------------- | - | ------------- | - | ------------ | - | ------------- | - | -----------
|                                                                              |   | ended         |   | ended        |   | ended         |   | ended      
|                                                                              |   | June 30,      |   | June 30,     |   | June 30,      |   | June 30,   
|                                                                              |   | 2012          |   | 2011         |   | 2012          |   | 2011       
|Revenue (Note 1)                                                              |   |               |   |              |   |               |   |            
|Reactor sales                                                                 | $ | 61,134        | $ | -            | $ | 61,134        |   |            
|Consulting fees                                                               |   | -             |   | -            |   |               | $ | 2,574      
|Total revenue                                                                 |   | 61,134        |   | -            |   | 61,134        |   | 2,574      
|Cost of goods sold (Note 1)                                                   |   | (32,918)      |   |              |   | (32,918)      |   | (123)      
|Gross profit                                                                  |   | 28,216        |   | -            |   | 28,216        |   | 2,451      
|Operating costs and expenses:                                                 |   |               |   |              |   |               |   |            
|Reactor production                                                            |   | -             |   | -            |   | (7,089)       |   | -          
|Product development expense (Note 1)                                          |   | -             |   | -            |   | 593           |   | 830        
|Selling, general and administrative expenses                                  |   |               |   |              |   |               |   |            
|Related party (Note 3)                                                        |   | 72,975        |   | 102,525      |   | 157,335       |   | 218,125    
|Stock-based compensation (Note 9)                                             |   | 69,000        |   | 25,000       |   | 83,581        |   | 345,833    
|(Gain) loss on debt extinguishment (Note 1)                                   |   |               |   |              |   | -             |   | -          
|Depreciation                                                                  |   | 588           |   | 706          |   | 1,176         |   | 1,412      
|Other (Note 6)                                                                |   | 131,773       |   | 214,744      |   | 376,104       |   | 450,787    
|Total operating costs and expenses                                            |   | (274,335)     |   | (342,975)    |   | (611,699)     |   | (1,016,987)
|Loss from operations                                                          |   | (246,120)     |   | (342,975)    |   | (583,483)     |   | (1,014,536)
|Other income (expense)                                                        |   |               |   |              |   |               |   |            
|Interest (expense) income, amortization of convertible note discount (Note 4) |   | (112,990)     |   | (112,106)    |   | (293,668)     |   | (167,866)  
|Interest expense (Notes 3 & 4)                                                |   | (3,410)       |   | (41,367)     |   | (88,398)      |   | (134,322)  
|Fair value adjustment of derivative liabilities (Note 4)                      |   | 33,716        |   | (246,462)    |   | (296,452)     |   | 195,660    
|                                                                              |   | (82,684)      |   | (399,935)    |   | (678,518)     |   | (106,528)  
|Loss before income taxes                                                      |   | (328,803)     |   | (742,910)    |   | (1,262,001)   |   | (1,121,064)
|Income tax provision (Note 8)                                                 |   | -             |   | -            |   | -             |   | -          
|Net loss                                                                      |   | (328,803)     |   | (742,910)    |   | (1,262,001)   |   | (1,121,064)
|Net loss attributable to non-controlling interest (Note 1)                    |   | 10,231        |   | 21,114       |   | 17,889        |   | 57,667     
|Net loss attributable to Company                                              | $ | (318,572)     | $ | (721,796)    | $ | (1,244,112)   | $ | (1,063,397)
|Basic and diluted loss per common share                                       | $ | (0.01)        | $ | (0.01)       | $ | (0.01)        | $ | (0.01)     
|Weighted average common shares outstanding (Notes 1 & 9)                      |   | 1,548,176,199 |   | 415,705,838  |   | 1,270,556,251 |   | 370,477,533









ALUMIFUEL
POWER CORPORATION AND SUBSIDIARIES

Statement
of Changes in Shareholders’ Deficit

Six
months ended June 30, 2012

(Unaudited)







|                                                                                                   | Common stock  |  | Preferred stock |           | Additional paid-in |  | Accumulated |  | Non-controlling |           | Total shareholders
|-------------------------------------------------------------------------------------------------- | ------------- |  | --------------- | --------- | ------------------ |  | ----------- |  | --------------- | --------- | ------------------
|                                                                                                   | Shares        |  | Par value       |           | Shares             |  | Par value   |  | capital         |           | deficit           
|Balance at December 31, 2011                                                                       | 927,629,201   |  | $               | 927,629   |                    |  | 521,162     |  | $               | 521,162   |                   
|January 2012, issuance of convertible notes (Note 4)                                               | -             |  |                 | -         |                    |  | -           |  |                 | -         |                   
|January through June 2012, issuance of common stock in private placements (Note 9)                 | 70,000,000    |  |                 | 70,000    |                    |  | -           |  |                 | -         |                   
|January through March 2012, issuance of common stock to convertible noteholders (Notes 4 & 9)      | 799,324,766   |  |                 | 799,325   |                    |  | -           |  |                 | -         |                   
|January through June 2012, issuance of common stock on conversion of debt (Notes 4 & 9)            | 66,300,000    |  |                 | 66,300    |                    |  | -           |  |                 | -         |                   
|January through June 2012, redemption of preferred stock (Note 9)                                  | -             |  |                 | -         |                    |  | (110,857)   |  |                 | (110,857) |                   
|January through June 2012, dividends on Series B Preferred Stock (Note 9)                          | -             |  |                 | -         |                    |  | -           |  |                 | -         |                   
|January through June 2012, changes in ownership of subsidiary common stock by Parent (Note 1)      | -             |  |                 | -         |                    |  | -           |  |                 | -         |                   
|January through June 2012, issuance of common stock on preferred stock conversion (Note 9)         | 10,593,220    |  |                 | 10,593    |                    |  | (6,250)     |  |                 | (6,250)   |                   
|January through June 2012, issuance of common stock for services (Note 9)                          | 20,000,000    |  |                 | 20,000    |                    |  | -           |  |                 | -         |                   
|January through June 2012, issuance of warrants to purchase common stock (Note 9)                  | -             |  |                 | -         |                    |  | -           |  |                 | -         |                   
|Equity of AlumiFuel Power International, Inc. subsidiary, net of non-controlling interest (Note 1) | -             |  |                 | -         |                    |  | -           |  |                 | -         |                   
|Net loss                                                                                           | -             |  |                 | -         |                    |  | -           |  |                 | -         |                   
|Balance at June 30, 2012                                                                           | 1,893,847,187 |  | $               | 1,893,847 |                    |  | 404,055     |  | $               | 404,055   |                   







ALUMIFUEL
POWER CORPORATION AND SUBSIDIARIES

Consolidated
Statements of Cash Flows

(Unaudited)





|                                                                            |   | Six months  |  |   | Six months 
|--------------------------------------------------------------------------- | - | ----------- |  | - | -----------
|                                                                            |   | ended       |  |   | ended      
|                                                                            |   | June 30,    |  |   | June 30,   
|                                                                            |   | 2012        |  |   | 2011       
|Cash flows from operating activities:                                       |   |             |  |   |            
|Net loss                                                                    | $ | (1,262,001) |  | $ | (1,121,064)
|Adjustments to reconcile net loss to net cash used by operating activities: |   |             |  |   |            
|Non-cash interest expense (Note 9)                                          |   | 62,577      |  |   | 45,000     
|Stock based compensation (Note 9)                                           |   | 77,581      |  |   | 345,833    
|Shares issued for services (Note 9)                                         |   | -           |  |   | -          
|Debt issuance costs (Note 4)                                                |   | 24,998      |  |   | 24,482     
|Beneficial conversion feature (Note 9)                                      |   | -           |  |   | 27,107     
|Allowance for bad debt (Note 5)                                             |   | 8,780       |  |   | -          
|Depreciation and amortization                                               |   | 1,176       |  |   | 1,412      
|(Decrease) increase in derivative liability (Note 4)                        |   | 296,436     |  |   | (195,660)  
|Amortization of discount on debentures payable (Note 3)                     |   | 289,501     |  |   | 167,866    
|Change in non-controlling interest (Note 1)                                 |   | (5,373)     |  |   |            
|Changes in operating assets and liabilities:                                |   |             |  |   |            
|Accounts and other receivables                                              |   | (9,099)     |  |   | -          
|Work in progress                                                            |   | -           |  |   | -          
|Prepaid expenses and other assets                                           |   | 472         |  |   | 589        
|Accounts payable and accrued expenses                                       |   | 132,282     |  |   | 120,720    
|Related party payables (Note 3)                                             |   | 89,793      |  |   | 218,758    
|Dividends payable (Note 9)                                                  |   | (17,049)    |  |   | -          
|Interest payable                                                            |   | 1,311       |  |   | 44,901     
|Net cash used in operating activities                                       |   | (308,615)   |  |   | (320,056)  
|                                                                            |   |             |  |   |            
|Cash flows from investing activities:                                       |   |             |  |   |            
|Purchase of equipment                                                       |   | -           |  |   | -          
|Issuance of notes receivable (Note 5)                                       |   | -           |  |   | -          
|Net cash used in investing activities                                       |   | -           |  |   | -          
|Cash flows from financing activities:                                       |   |             |  |   |            
|Increase in bank overdraft (Note 1)                                         |   | -           |  |   | -          
|Proceeds from convertible notes (Note 4)                                    |   | 184,000     |  |   | 35,000     
|Proceeds from notes payable, related (Note 3)                               |   | 38,300      |  |   | 201,700    
|Proceeds from notes payable, other (Note 4)                                 |   | 255,250     |  |   | 221,450    
|Proceeds from sales of common stock (Note 9)                                |   | 11,000      |  |   | -          
|Prodeeds from sales of subsidiary equity (Notes 1 & 9)                      |   | 41,038      |  |   | 20,000     
|Payments under capital leases (Note 7)                                      |   | (778)       |  |   | -          
|Payments on notes payable (Note 4)                                          |   | (63,835)    |  |   | (110,000)  
|Payments on notes payable, related (Note 3)                                 |   | (34,086)    |  |   | (50,510)   
|Payments to placement agents (Note 4)                                       |   | (10,000)    |  |   | -          
|Payments on redemption of preferred stock (Note 4)                          |   | (110,857)   |  |   | -          
|Net cash provided by financing activities                                   |   | 310,032     |  |   | 317,640    
|Net change in cash and cash equivalents                                     |   | 1,417       |  |   | (2,416)    
|Cash and cash equivalents:                                                  |   |             |  |   |            
|Beginning of period                                                         |   | 2,628       |  |   | 11,213     
|End of period                                                               | $ | 4,045       |  | $ | 8,797      
|Supplemental disclosure of cash flow information:                           |   |             |  |   |            
|Cash paid during the period for:                                            |   |             |  |   |            
|Income taxes                                                                | $ | -           |  | $ | -          
|Interest                                                                    | $ | 7,135       |  | $ | 17,017     
|Noncash financing transactions:                                             |   |             |  |   |            
|Notes and interest payable converted to stock                               | $ | 409,652     |  | $ | 212,897    
|Notes and interest payable converted to stock, related                      | $ | -           |  | $ | 42,849     



















Note
1: Basis of presentation



The interim
unaudited financial statements presented herein have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”) and for the three and six month periods ended June 30, 2012 and 2011 include the financial
statements of AlumiFuel Power Corporation (the “Company”) and its subsidiaries HPI Partners, LLC (“HPI”),
AlumiFuel Power, Inc. (“API”), AlumiFuel Power Technologies, Inc. ("APTI") and 76% owned subsidiary AlumiFuel
Power International, Inc. ("AFPI").



Certain information
and footnote disclosures normally included in unaudited financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and regulations. All of the intercompany accounts have been eliminated
in consolidation. The interim unaudited financial statements should be read in conjunction
with the Company’s annual financial statements for the year ended December 31, 2011, notes and accounting policies thereto
included in the Company’s Annual Report on Form 10-K.



In the
opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair
presentation of operating results for the interim periods presented have been made. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the year.



The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company
had minimal revenue during the six months ended June 30, 2012, and has an accumulated deficit of $20,702,820 from its inception
through that date. These factors, among others, may indicate that the Company will be unable to continue as a going concern for
a reasonable period of time.



Interim
financial data presented herein are unaudited.



Formation
of AlumiFuel Power International, Inc.



In
February 2010, the Company formed its subsidiary, AFPI. In connection with the formation of the AFPI, the Company and AFPI executed
a License Agreement through which AFPI received certain international marketing rights and the rights to utilize certain intellectual
property from the Company for exploitation in countries and territories outside of North America in exchange for 25,000,000 shares
of the Company's $0.001 par value common stock. In addition, the Company purchased 15,000,000 shares of AFPI common stock at $0.01
per share. On July 31, 2011, the Company and AFPI executed a Patent Purchase Agreement through which the Company sold AFPI the
international patent rights to certain of the Company's intellectual property. In exchange for the sale of these rights, the Company
received 7,500,000 shares of AFPI common stock valued at $10,275,000, the market value of the stock on the Deutsche Börse
Frankfurt Stock Exchange on the agreement date. As of December 31, 2011, AFPI had issued
a total of 13,911,864 shares of its common stock in the private placements, warrant exercises, stock issued to consultants and
stock issued to officers and directors in exchange for fees. As a result, the total number of AFPI shares outstanding at December
31, 2011 and June 30, 2012 was 62,411,864.



During
the six month period ended June 30, 2012, the Company sold a total of 300,000 shares of AFPI to a private investors for a total
of Euro 30,000 or approximately $40,000 and recorded expense on the transfer of 3,000 shares to a consultant valued at $1,383
which is reflected on the statements of changes in stockholders' deficit. In addition, the Company purchased 15,378 shares at
a cost of $5,676. As a result, the Company owned 47,073,213 shares of AFPI common stock at June 30, 2012. We maintain a custody
account for our cash and securities in Germany which had a cash balance of $497 that is reflected as Cash on our balance sheet.



The
Deutsche Börse Exchange recently announced the closing in December 2012 of the First Quotation Board, the exchange on which
AFPI's common stock currently trades. The Company is exploring its options with respect to qualifying for the Entry Standard level
of the Deutsche Börse, which has higher entry and trading standards. There is no assurance that AFPI will qualify for or
be successful in listing on the Entry Standard. Accordingly, the Company is also exploring the feasibility of listing AFPI's common
stock one or more foreign junior stock exchanges should listing on the Deutsche Börse not be available.



The
value of all shares of AFPI held by the Company have been eliminated on consolidation of the financial statements at June 30,
2012 as intercompany accounts with 15,338,651 held by shareholders other than the Company representing 24.6% of the outstanding
common shares of AFPI as of that date. This represents a non-controlling interest in AFPI that totaled $2,431,972 based on AFPI's
outstanding total equity of $9,895,518 at June 30, 2012. In addition, $72,789 in the net loss of AFPI for the six month period
ended June 30, 2012 has been attributed to the non-controlling interest of those stockholders.



Formation
of AlumiFuel Power Technologies, Inc.



In
December 2011, we formed a new wholly owned subsidiary, AlumiFuel Power Technologies, Inc. ("APTI"), but didn't begin
significant operations until February 2012. APTI was formed as a separate entity to leverage the Company's hydrogen generation
technology to take advantage of potential complimentary technologies.





Note
2:	Summary of Significant Accounting Policies



Use
of Estimates



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



Cash
and Cash Equivalents



The Company
considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents.
Cash equivalents at June 30, 2012 were $-0-.



Stock-based
Compensation



The
Company has certain stock option plans approved by its stockholders, and also grants options and warrants to consultants outside
of its stock option plan pursuant to individual agreements.



The Company
accounts for compensation expense for its stock-based employee compensation plans and issuances of options and warrants to consultants
in accordance with ASC Topic 718, formerly known as SFAS No. 123R "Share Based Payment" which replaced SFAS No. 123,
"Accounting for Stock-Based Compensation"(“SFAS No. 123”) and supersedes Opinion No. 25 of the Accounting
Principles Board, "Accounting for Stock Issued to Employees" (APB 25). The Company has elected the modified-prospective
method, under which prior periods are not revised for comparative purposes. See Note 5. Capital Stock for further information
on the Company's stock options plans and other warrant/option issuances.



Debt
Issue Costs



The costs
related to the issuance of debt are capitalized and amortized to interest expense using the straight-line method over the lives
of the related debt. The straight-line method results in amortization that is not materially different from that calculated under
the effective interest method.



Financial
Instruments



At June
30, 2012, the fair value of the Company’s financial instruments approximate their carrying value based on their terms and
interest rates.



Loss
per Common Share



Loss
per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock
options, warrants, and common stock underlying convertible promissory notes are not considered in the calculations for the periods
ended June 30, 2012 and June 30, 2011, as the impact of the potential common shares, which totaled approximately 2,510,140,000
(June 30, 2012) and 221,179,000 (June 30, 2011), would be anti-dilutive and decrease loss per share. Therefore, diluted loss per
share presented for the three and six month periods ended June 30, 2012 and June 30, 2011 is equal to basic loss per share.



Accounting
for obligations and instruments potentially settled in the Company’s common stock



In connection
with any obligations and instruments potentially to be settled in the Company's stock, the Company accounts for the instruments
in accordance with ASC Topic 815, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in
a Company’s Own Stock".This issue addresses the initial balance sheet classification and measurement of contracts
thatare indexed to, and potentially settled in, the Company's stock.Under this pronouncement, contracts are initially
classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially measured at fair
value and subsequentlyaccounted for based on the then current classification. Contracts initially classified as equity
do not recognize subsequent changes in fair value as long as the contracts continue to be classified asequity. For contracts
classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the
financial statements as long as the contracts remainclassified as assets or liabilities. If contracts classified as assets
or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included
inearnings. The classification of a contract is reassessed at each balance sheet date.



Revenue
Recognition



Revenues
on product sales are recognized upon shipment of the product to the customer. Payment terms are typically 30 to 60 days net due
following order delivery, depending on the customer. Fee revenues for research and development contracts are typically recognized
on milestone dates outlined in the contracts. In instances where definable dates are not outlined, fee revenue is recognized when
received.



Derivative
Instruments



In connection
with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain
circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument
or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances
may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument.
The Company accounts for derivative instruments under the provisions of ASC Topic 815, “Derivatives and Hedging”,
formerly known as, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".



Recently
issued accounting pronouncements



In
June 2011, the FASB issued ASU 2011-05 to require an entity to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in
two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income
as part of the statement of equity.  ASU 2011-05 will be effective for the Company beginning February 1, 2012, and the
Company will be required to apply it retrospectively. The adoption of this standard may only impact the presentation of our financial
statements and will have no impact on the reported results.



In
May 2011, the FASB issued new authoritative guidance to provide a consistent definition of fair value and ensure that fair value
measurements and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This guidance
changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. This guidance
is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company does not
expect that the adoption of this guidance will have a material impact on its financial statements.





Note
3: Related Party



Related
Party Accounts Payable



The Company's
president and treasurer accrue a monthly management fee from the Company of $8,000 and 2,000 and from AFPI of $7,500 and $3,500,
respectively, for their services as managers. This amount totaled $126,000 for the six month period ended June 30, 2012. As of
June 30, 2012, the Company owed $129,293 to its officers for management services.



In September
2009, the Company's board directors authorized a bonus program for the Company's officers related to their efforts raising capital
to fund the Company's operations. Accordingly, the Company's president and secretary are eligible to receive a bonus based on
50% of the traditional "Lehman Formula" whereby they will receive 2.5% of the total proceeds of the first $1,000,000
in capital raised by the Company, 2.0% of the next $1,000,000, 1.5% of the next $1,000,000, 1% of the next $1,000,000 and .5%
of any proceeds above $4,000,000. The amount is capped at $150,000 per fiscal year. During the six month period ended June 30,
2012, the Company expensed $2,835 under this bonus plan, and of that $2,309 remained unpaid at that date.



API and/or
AFTI pay a management fee of $6,500 per month to a company owned by the Company’s officers for services related to their
bookkeeping, accounting and corporate governance functions. For the six months ended June 30, 2012, these management fees totaled
$39,000. As of June 30, 2012, the Company owed $51,350 in accrued fees and related expenses.



The Company
rents office space, including the use of certain office machines, phone systems and long distance fees, from a company owned by
its officers at the rate of $1,200 per month, based on the amount of space occupied by the Company and use of the office equipment
and services. Rent expense totaled $7,200 for the six months ended June 30, 2012.



Accounts
payable to related parties consisted of the following at June 30, 2012:



|Management
    fees, rent and bonus payable to officers |                                           | $ | 182,952    
|------------------------------------------------------- | ----------------------------------------- | - | -----------
|Accrued
    expenses payable to subsidiary officer      |                                           |   | 18
    ,545
|                                                        | Total
    accounts payable, related party |   | $          



Related
Party Notes Payable



AlumiFuel
Power Corporation



At June
30, 2012 and 2011, the Company owed $1,555 and $15,910, respectively, to its president for loans made to it from time-to-time
on demand notes with 8% interest. These amounts include $700 and $30,200 loaned during the six month periods ended June 30, 2012
and 2011, respectively, along with payments of $16,007 in principal and $191 in accrued interest during the 2011 period. There
was $44 and $462 in accrued interest payable at June 30, 2012 and 2011, respectively.



At both
June 30, 2012 and 2011, the Company owed the president of API $1,511 in loans on demand notes with 8% interest. A payment of $2,988
in principal and $12 in accrued interest was made during the six months ended June 30, 2011. As of June 30, 2012 and 2011 there
was accrued interest payable of $184 and $61, respectively.



During
the six month period ended June 30, 2012, the Company's secretary loaned the Company $2,000 on a demand note with 8% interest.
The entire principal balance on this note along with $1 in interest was repaid during the quarter leaving no balance due.



At June
30 2012 and 2011, the Company owed $531 and $78,698, respectively, to a company owned by its president on demand notes with 8%
interest. These amounts include $12,160 and $83,600 loaned during the six month periods ended June 30, 2012 and 2011, respectively,
along with payments of $11,736 in principal and $113 in accrued interest during the 2012 period and $22,248 in principal and $302
in interest during the 2011 period. There was $13 and $1,425 in accrued interest payable at June 30, 2012 and 2011, respectively.



At June
30 2012 and 2011, the Company owed $5,435 and $1,800, respectively, to a company affiliated with its Secretary on demand notes
with 8% interest. These amounts include $4,500 loaned during the six month periods ended June 30, 2012. There was $408 and $121
in accrued interest payable at June 30, 2012 and 2011, respectively.



At both
June 30, 2012 and 2011, the Company owed $2,165 in principal on certain promissory notes issued to a partnership affiliated with
the Company’s president with interest rate of 8% and due on demand. As of June 30, 2012 and 2011, the Company owed $368
and 194, respectively, in accrued interest on these notes.



At both
June 30, 2012 and 2011, the Company owed a partnership affiliated with its president and secretary $5,000 on a note with an interest
rate of 8% per annum and due on demand. As of both June 30, 2012 and 2011, $5,000 in principal with $1,287 (2012) and $885 (2011)
in accrued interest was payable at those dates.



At June
30, 2012 and 2012, the Company owed $3,976 and $1,681, respectively, to a company owned by the Company's officers on demand notes
with an interest rate of 8%. These amounts include $15,950 and $1,500 loaned during the six month periods ended June 30, 2012
and 2011, respectively, along with payments of $13,242 in principal and $158 in accrued interest during the 2012 period and $20
in principal and $5 in interest during the 2011 period. There was $41 and $15 in accrued interest payable at June 30, 2012 and
2011, respectively.



At June
30, 2012 and 2012, the Company owed $12,476 and $41,266, respectively, to a corporation affiliated with the Company's officers
on demand notes with interest at 8%. These amounts include payments of $7,107 in principal and $493 in accrued interest during
the 2012 period and $7,134 in principal and $616 in interest during the 2011 period. There was $751 and $1,271 in accrued interest
payable on these notes at June 30, 2012 and 2011, respectively.



At June
30, 2012 and 2011, the Company owed $350 and $19,500, respectively, to a corporation affiliated with the Company's officers on
demand notes with an interest rate of 8%. No further loans or payments were made on these notes during either the 2012 or 2011
six month periods. There was $265 and $11 in accrued interest payable on these notes at June 30, 2012 and 2011, respectively.



During
the six month period ended June 30, 2012, a corporation owned by the Company's secretary loaned the Company a total of $9,270
in various demand notes with interest of 8%. During the six month period ended June 30, 2012 a total of $6,270 in principal and
$2 in interest was repaid leaving a balance of $3,000 in principal and $3 in accrued interest payable at June 30, 2012.



At June
30, 2012 and 2011, the Company owed $2,853 and $25,300, respectively, to an affiliate of the Company's president on notes carrying
an interest rate of 8% per annum and due on demand. No additional loans or payments were made on these notes in 2012. During the
six month period ended June 30, 2011, the noteholder sold the principal balance on $21,616 of these notes to an unaffiliated third
party at which time the Company agreed to reissue new convertible notes for that amount. Also during the six month period ended
June 30, 2011, $17,300 in additional loans were received from this entity. There was $139 and $1,932 in accrued interest payable
on these notes at June 30, 2012 and 2011, respectively.



At June
30, 2012 and 2011, the Company owed $0 and $16,000 to an affiliate of the Company's president on notes due on demand at 8% interest.
During the six month period ended June 30, 2011, this entity sold the principal balance on $16,000 of these notes to an unaffiliated
third party at which time the Company agreed to reissue new convertible notes for that amount. During the six month period ended
June 30, 2011, $7,000 in additional loans were received from this entity. There was $1,829 and $1,528 in accrued interest payable
on these notes at June 30, 2012 and 2011, respectively.



During
the six months ended June 30, 2011, a corporation affiliated with the Company's officers loaned $19,500 to the Company. These
had an interest rate of 8% and were due on demand. The entire balance of these notes totaling $19,500 along with accrued interest
of $11 remained unpaid at June 30, 2011. The entire balance of these notes was repaid in the third quarter of 2011 leaving an
interest balance due of $536 on these notes at June 30, 2012.



HPI
Partners, LLC



In
2009, various notes issued by HPI were converted to equity by its officers. Following those conversions, $235 in interest remained
due and payable, which was outstanding at both June 30, 2012 and 2011.



Total



Total notes
and interest payable to related parties consisted of the following at June 30, 2012:



|Notes
    payable to officers; interest at 8% and due on demand                       |                                                         | $ | 1,555 
|------------------------------------------------------------------------------------- | ------------------------------------------------------- | - | ------
|Notes
    payable to affiliates of Company officers; interest at 8% and due on demand |                                                         |   | 37,297
|                                                                                      | Notes
    payable, related party                        |   |       
|Interest
    payable related party                                                    |                                                         |   | 6,103 
|                                                                                      | Total
    principal and interest payable, related party |   | $     





Note
4: Notes Payable



AlumiFuel
Power Corporation



At June
30, 2012 and 2011, the Company owed $209,050 and $48,650, respectively, to an unaffiliated trust at an interest rate of 8% and
due on demand. During the six months ended June 30, 2012, the trust loaned the Company$236,250 and sold $33,150 in principal on
these notes to an unaffiliated third party that converted that balance to common stock of the Company. Please see note Note 9
Capital Stock below for further information on this transaction. The Company made payments on these notes during the six month
period ended June 30, 2012 totaling $3,785 in principal and $915 in accrued interest. During the six month period ended June 30,
2011, $42,849 of these notes were converted to 9,020,935 shares of our common stock and $900 in accrued interest was paid on these
notes. There was $3,016 and $9,552 in accrued interest payable on these notes at June 30, 2012 and 2011, respectively.



At June
30, 2012 and 2011, the Company owed $32,732 and $37,208, respectively, to an unaffiliated third party with interest payable at
8% and due on demand. During the six month period ended June 30, 2012, no payments of principal or interest were made on these
notes. During the six month period ended June 30, 2011, $37,150 in additional loans were received from this entity and the entity
sold the principal balance on $16,500 of these notes to an unaffiliated third party at which time the Company agreed to reissue
new convertible notes for that amount. There was $1,638 and $2,227 in accrued interest payable on these notes at June 30, 2012
and 2011, respectively.



In December
2011, an unaffiliated third party loaned the Company $26,000. This note is due on demand and bears interest at 8% per annum. The
entire principal balance of $26,000 and accrued interest of $1,088 remained outstanding at June 30, 2012.



During
the six month period ended June 30, 2012, an unaffiliated third party loaned us $13,000. This note was due on April 1, 2012 and
carries an interest rate of 60% per annum. As of June 30, 2012, the entire $13,000 balance of this note was due with $2,286 in
accrued interest payable.



During
the six month period ended June 30, 2012, an unaffiliated third party loaned us $6,000 on a demand note with 8% interest. The
entire principal balance of $6,000 with $225 in unpaid interest remained payable on these notes at June 30, 2012.



During
the year ended December 31, 2010 a note payable in the amount of $30,000 was issued and repaid to an unaffiliated third party
leaving an interest balance due of $57. This amount remained unpaid as of both June 30, 2012 and 2011.



AlumiFuel
Power, Inc.



In November
and December 2011, the API issued three promissory notes payable to an unaffiliated third party for a total of $60,000 in accounts
receivable financing. These notes are due on or before April 1, 2012 and accrue loan funding and administration fees equal to
$20 per $1,000 loaned, which is equates to an effective interest rate of 24% per annum, are payable monthly. This loan was repaid
from proceeds received on accounts receivable related to the sale of the Company's PBIS-2000 portable balloon inflation system
and related AlumiFuel cartridge sales to the United State Air Force. A total of $2,400 in funding and administration fees were
paid during the six months ended June 30, 2012. As of June 30, 2012, the entire principal balance had been repaid but $3,450 in
unpaid administration fees were due and payable.



AlumiFuel
Power International, Inc.



In
February 2011, an unaffiliated third party loaned the Company $75,000. This note calls for a payment of $50,000 in thirty days
with a balance due no later than 90 days from its issuance and carries and interest rate of 12% per annum. The $50,000 was repaid
during during the quarter ended June 30, 2011. No further payments have been made on this note leaving a balance due at both June
30, 2012 and 2011 of $25,000 with interest payable of $4,274 (2012) and $1,298 (2011).



During
the quarter ended March 31, 2012, $26,100 in accrued interest payable to an unaffiliated third party was converted to a convertible
promissory note leaving an interest balance due on June 30, 2012 of $5.



HPI
Partners, LLC



In
2009, various notes issued by HPI were converted to equity by third parties. Following those conversions, $647 in interest remained
due and payable, which was outstanding at both June 30, 2012 and 2011.



Total



Notes and
interest payable to others consisted of the following at June 30, 2012:



|Notes
    payable, non-affiliates; interest at 8% and due on demand  |                                                 | $ | 273,782
|-------------------------------------------------------------------- | ----------------------------------------------- | - | -------
|Notes
    payable, non-affiliates; interest at 60% and due on demand |                                                 |   | 13,000 
|Notes
    payable, non-affiliates; interest at 12% and due on demand |                                                 |   | 25,000 
|                                                                     | Notes
    payable                               |   |        
|Interest
    payable, non-affiliates                                 |                                                 |   | 16,686 
|                                                                     | Total
    principal and interest payable, other |   | $      



Certain
of our demand promissory notes contain provisions for conversion to common stock at market price on the date of conversion.



AlumiFuel
Power Corporation Convertible Promissory Notes and Debentures



Convertible
Notes and Debentures with Embedded Derivatives:



From
time-to-time, we issue convertible promissory notes and debentures with conversion features that we have determined represent
an embedded derivative as they are convertible into a variable number of shares upon conversion. Accordingly, these notes are
not considered to be conventional debt under ASC 815 and the embedded conversion feature must be bifurcated from the debt host
and accounted for as a derivative liability. The Company believes that the aforementioned embedded derivatives meet the criteria
of ASC 815, and should be accounted separately as derivatives with a corresponding value recorded as a liability. Accordingly,
the fair value of these derivative instruments are recorded as a liability on the consolidated balance sheet with the corresponding
amount recorded as a discount to the notes in the period in which they are issued. Such discount is accreted from the date of
issuance to the maturity dates corresponding notes. The change in the fair value of the liability for derivative contracts is
credited to other income (expense) in the consolidated statements of operations at the end of each quarter. The face amount of
the corresponding notes are stripped of their conversion feature due to the accounting for the conversion feature as a derivative,
which is recorded using the residual proceeds to the conversion option attributed to the debt.



Convertible
Debentures



In September
2009 through January 2010 we issued $435,000 of 6% unsecured convertible debentures in transactions with private investors (the
“Debentures”).



Among other
terms of the offering, the Debentures are due in January 2013 (the “Maturity Date”), unless prepayment of the Debentures
is required in certain events, as called for in the agreements. The Debentures are convertible at a conversion price (the “Conversion
Price”) for each share of common stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg,
LP) of the Company’s common stock for the twenty (20) trading days immediately preceding the date of conversion. In addition,
the Debentures provide for adjustments in the case of certain corporate actions.



Each Debenture
bears interest, in arrears, at six percent (6%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash
or shares of our common stock at the Conversion Price with a default interest rate of eighteen percent (18%) per annum.



The Company
may redeem the Debentures for an amount now equal to 131%.



Further
terms call for the Company to maintain sufficient authorized shares reserved for issuance under the agreement equal to 300% of
the number of shares issuable upon conversion of the debentures. In addition, if the closing bid price of the Common Stock is
below $0.05 on three (3) consecutive trading days, then the Company shall seek to implement a reverse stock split in a ratio of
at least one-for-five. On March 10, 2010, the Company was notified by the placement that the closing bid price of the Common Stock
was below $0.05 on three (3) consecutive trading days and made demand under the agreement that the Company seek shareholder approval
for a reverse stock split. As of the filing of this report, the Company has not convened a meeting of stockholders to consider
the reverse split.



Debt issuance
costs totaling $188,810 are being amortized over the three year terms of the Debentures or such shorter period as the debentures
may be outstanding. Accordingly, as the debentures are converted to common stock, that amount of debt issuance costs attributable
to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of June 30, 2012, $173,270
of these costs had been expensed as debt issuance costs.



The beneficial
conversion feature (an embedded derivative) included in the Debentures resulted in an initial debt discount of $435,000 and an
initial loss on the valuation of derivative liabilities of $71,190 for a derivative liability balance of $506,190 at issuance.



During
the six months ended June 30, 2012, the debenture holders have converted a total of $84,000 in face value of the debentures to
186,333,333 shares of our common stock, or $0.00045 per share. As a result of these transactions, the Company recorded a decrease
to the derivative liability of $113,929 and as of June 30,2012, the total face value of the Debentures outstanding was $69,500.



The fair
value of the Debentures was calculated at June 30, 2012 utilizing the following assumptions:



|Fair
    Value | Term        | Assumed
    Conversion Price | Volatility
    Percentage | Interest
    Rate
|-------------- | ----------- | ---------------------------- | ------------------------- | -----------------
|$92,667        | 3
    years | $0.00015                     | 182%                      | 0.25%            



2011
Convertible Notes



During
the year ended December 31, 2011, the Company entered into four separate note agreements with an institutional investor for the
issuance of a convertible promissory notes in the aggregate amount of $152,500 on the following dates and in the following amounts
(together the "2011 Convertible Notes"):



|Date
    of Issue | Amount  | Due
    Date         
|----------------- | ------- | ---------------------
|5/13/11           | $35,000 | February 13,
    2012
|9/2/11            | $35,000 | May 30, 2012         
|10/24/11          | $40,000 | July 20, 2012        
|2/12/11           | $42,500 | September 7,
    2012





Among other
terms, the 2011 Convertible Notes are due on the dates above, unless prepayment is required in certain events, as called for in
the agreements. The 2011 Convertible Notes are convertible at a conversion price (the “Conversion Price”) for each
share of common stock equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock
for the ten (10) trading days immediately preceding the date of conversion. In addition, the 2011 Convertible Notes provide for
adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the
common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale
of assets, where there is a change in control of the Company.



The outstanding
principal balance the 2011 Convertible Notes bear interest at eight percent (8%) per annum, payable in cash or shares of our common
stock at the Conversion Price. Upon the occurrence of an Event of Default (as defined in the 2011 Convertible Notes), the Company
is required to pay interest to the Holder of each outstanding note at twenty-two percent (22%) per annum and the Holder may at
its option declare the 2011 Convertible Notes, together with all accrued and unpaid interest, to be immediately due and payable.



The Company
is able at its option to prepay the 2011 Convertible Notes beginning ninety-one days following their issuance until 180 days following
their issuance in an amount equal to 150% of the outstanding principal and interest. Further terms called for the Company to maintain
sufficient authorized shares reserved for issuance under the 2011 Convertible Notes.



We received
net proceeds from the 2011 Convertible Notes of $142,500 after debt issuance costs of $10,000 paid for lender legal fees. These
debt issuance costs will be amortized over the terms of the 2011 Convertible Notes or such shorter period as the Notes may be
outstanding. Accordingly, as the 2011 Convertible Notes are converted to common stock prior to their expiration date, that amount
of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion
dates. As of June 30, 2012, $9,822 of these costs had been expensed as debt issuance costs. At December 30, 2011, the unpaid principal
balance on these notes was $117,500.



The
beneficial conversion feature (an embedded derivative) included in the 2011 Convertible Notes resulted in total initial debt discounts
of $142,500 and a total initial loss on the valuation of derivative liabilities of $83,182 for a derivative liability balance
of $235,682 total for their issuances.



During
the six month period ended June 30, 2012, the note holders converted the entire $139,000 in face value and $3,000 in accrued interest
to 338,043,746 shares of our common stock, or $0.0004 per share. As a result of these transactions, the Company recorded a decrease
to the derivative liability of $225,500 for the converted notes as of June 30, 2012, and the total face value of the 2011 Convertible
Notes outstanding was $13,500.



At June
30, 2012, the Company revalued the derivative liability balance of the remaining outstanding 2011 Convertible Notes. As a result,
for the period from their issuance to June 30, 2012, the Company has recorded an adjustment and reduced the previously recorded
liabilities by $208,682 resulting in a derivative liability balance of $27,000 at June 30, 2012.



The fair
value of the Debentures was calculated at June 30, 2012 utilizing the following assumptions:



|Fair
    Value | Term         | Assumed
    Conversion Price | Volatility
    Percentage | Interest
    Rate
|-------------- | ------------ | ---------------------------- | ------------------------- | -----------------
|$27,000        | 9
    months | $0.0001                      | 117%                      | 0.18%            









2012
Convertible Notes



During
the six month period ended June 30, 2012, the Company entered into four separate note agreements with an institutional investor
for the issuance of a convertible promissory notes in the aggregate amount of $134,000 on the following dates and in the following
amounts (together the "2012 Convertible Notes"):



|Date
    of Issue | Amount  | Due
    Date         
|----------------- | ------- | ---------------------
|1/24/12           | $36,000 | October 19,
    2012 
|3/7/12            | $33,000 | December 5,
    2012 
|4/12/12           | $32,500 | January 16,
    2013 
|5/10/12           | $32,500 | February 13,
    2013



Among other
terms, the 2012 Convertible Notes are due on the dates above, unless prepayment is required in certain events, as called for in
the agreements. The 2012 Convertible Notes are convertible at a conversion price (the “Conversion Price”) for each
share of common stock equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock
for the ten (10) trading days immediately preceding the date of conversion. In addition, the 2012 Convertible Notes provide for
adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the
common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale
of assets, where there is a change in control of the Company.



The outstanding
principal balance the 2012 Convertible Notes bear interest at eight percent (8%) per annum, payable in cash or shares of our common
stock at the Conversion Price. Upon the occurrence of an Event of Default (as defined in the 2012 Convertible Notes), the Company
is required to pay interest to the Holder of each outstanding note at twenty-two percent (22%) per annum and the Holder may at
its option declare the 2012 Convertible Notes, together with all accrued and unpaid interest, to be immediately due and payable.



The Company
is able at its option to prepay the 2012 Convertible Notes beginning ninety-one days following their issuance until 180 days following
their issuance in an amount equal to 150% of the outstanding principal and interest. Further terms called for the Company to maintain
sufficient authorized shares reserved for issuance under the 2012 Convertible Notes.



We received
net proceeds from the 2012 Convertible Notes of $124,000 after debt issuance costs of $10,000 paid for lender legal fees. These
debt issuance costs will be amortized over the terms of the 2012 Convertible Notes or such shorter period as the Notes may be
outstanding. Accordingly, as the 2012 Convertible Notes are converted to common stock prior to their expiration date, that amount
of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion
dates. As of June 30, 2012, $3,889 of these costs had been expensed as debt issuance costs.



The
beneficial conversion feature (an embedded derivative) included in the 2012 Convertible Notes resulted in total initial debt discounts
of $134,000 and a total initial loss on the valuation of derivative liabilities of $96,167 for a derivative liability balance
of $230,167 total for their issuances.









The fair
value of the 2012 Convertible Notes was calculated at each issue date utilizing the following assumptions:



|Issuance
    Date | Fair
    Value | Term         | Assumed
    Conversion Price | Market
    Price on Grant Date | Volatility
    Percentage | Interest
    Rate
|----------------- | -------------- | ------------ | ---------------------------- | ------------------------------ | ------------------------- | -----------------
|1/24/12           | $60,000        | 9
    months | $0.0006                      | $0.0014                        | 220%                      | 0.09%            
|3/7/12            | $66,000        | 9
    months | $0.0005                      | $0.0011                        | 133%                      | 0.14%            
|4/12/12           | $66,667        | 9
    months | $0.00045                     | $0.0014                        | 140%                      | 0.17%            
|5/10/12           | $37,500        | 9
    months | $0.0004                      | $0.0009                        | 112%                      | 0.17%            



At June
30, 2012, the Company revalued the derivative liability balance of the remaining outstanding 2011 Convertible Notes. As a result,
for the period from their issuance to June 30, 2012, the Company has recorded an adjustment and increased the previously recorded
liabilities by $27,833 resulting in a derivative liability balance of $258,000 at June 30, 2012.



The fair
value of the Debentures was calculated at June 30, 2012 utilizing the following assumptions:



|Fair
    Value | Term         | Assumed
    Conversion Price | Volatility
    Percentage | Interest
    Rate
|-------------- | ------------ | ---------------------------- | ------------------------- | -----------------
|$258,000       | 9
    months | $0.0001                      | 127%                      | 0.18%            



Converted
AFPI Notes



In November
and December 2011, two holders of certain demand promissory notes issued by AFPI totaling $125,000 sold them to an unaffiliated
third party investor. As part of this transaction, the Company agreed to amend the terms of the convertible notes for the new
holder (the "Converted AFPI Notes"). These notes in the amounts of $50,000, $50,000 and $25,000 were past due, carry
had an effective interest rate of 48% in the case of the two $50,000 notes, and 12% in the case of the $25,000 note. We agreed
to allow conversion of the Converted AFPI Notes into shares of our common stock at a 50% discount to the lowest three trading
prices in the ten days prior to conversion. The principal balance on these notes was $85,000 at December 31, 2011. In addition,
in January 2012, we agreed to convert $22,500 in accrued interest on these notes to a convertible note with the same conversion
terms, interest at a rate of 8% and due in 12 months.



The
beneficial conversion feature (an embedded derivative) included in the Converted AFPI Notes resulted in an initial debt discount
of $147,500 and an initial loss on the valuation of derivative liabilities of $110,133 for a derivative liability balance of $257,633
at issuance.



The fair
value of the Converted AFPI Notes was calculated at issue date utilizing the following assumptions:



|Issuance
    Date | Fair
    Value | Term          | Assumed
    Conversion Price | Market
    Price on Grant Date | Volatility
    Percentage | Interest
    Rate
|----------------- | -------------- | ------------- | ---------------------------- | ------------------------------ | ------------------------- | -----------------
|4/4/2011          | $58,824        | 3
    months  | $0.0009                      | $0.0021                        | 179%                      | 0.25%            
|12/1/2011         | $83,333        | 6
    months  | $0.0006                      | $0.0021                        | 199%                      | 0.07%            
|12/1/2011         | $83,333        | 6
    months  | $0.0006                      | $0.0021                        | 199%                      | 0.07%            
|1/2/12            | $32,143        | 12
    months | $0.0007                      | $0.0015                        | 226%                      | 0.11%            



During
the six month period ended June 30, 2012, the note holders converted $85,000 face value of the notes to 201,271,021 shares of
our common stock, or $0.0004 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability
of $158,929 for the converted notes and as of June 30, 2012, and the total face value of the Converted AFPI Notes outstanding
was $22,500.



At June
30, 2012, the Company revalued the derivative liability balance of the remaining outstanding Converted AFPI Notes. As a result,
for the period from their issuance to June 30, 2012, the Company has recorded an adjustment and decreased the previously recorded
liabilities by $212,633 resulting in a derivative liability balance of $45,000 at June 30, 2012.



The fair
value of the Debentures was calculated at June 30, 2012 utilizing the following assumptions:



|Fair
    Value | Term          | Assumed
    Conversion Price | Volatility
    Percentage | Interest
    Rate
|-------------- | ------------- | ---------------------------- | ------------------------- | -----------------
|$45,000        | 12
    months | $0.0004                      | 163%                      | 0.20%            



November
2011 Note



In November
2011, a holder of debt issued by AFPI totaling $52,000 sold that debt to an unaffiliated third party investor. As part of this
transaction, the Company agreed to amend the terms of the debt for the new holder in the form of an amended promissory note (the
"November 2011 Note"). The November 2011 Note matures in November 2012, carries an interest rate of 12% and is convertible
into shares of our common stock at a 50% discount to the lowest trading price in the three days prior to conversion. The Company
may prepay the notes at any time they remain outstanding at 150% of the outstanding principal balance, however, the holder may
convert the notes to stock within three days of such notice.



The beneficial
conversion feature (an embedded derivative) included in the November 2011 Note resulted in an initial debt discount of $52,000
and an initial loss on the valuation of derivative liabilities of $86,667 for a derivative liability balance of $138,667 at issuance.



During
the three month period ended March 31, 2012, the note holders converted the entire $39,000 face value of the notes to 73,666,667
shares of our common stock, or $0.0005 per share. As a result of these transactions, the Company recorded a decrease to the derivative
liability of $55,714 for these notes and as of March 31, 2012 and June 30, 2012, the total face value of the Debentures outstanding
was $-0-.



January
2012 Convertible Notes



In January
2012 we issued two convertible notes of $25,000 each for a total of $50,000 to an unaffiliated third party investor. These notes
are due six months from issuance, carry interest at 10% per annum and are convertible at $0.0012 per share. The Company has determined
that the conversion feature does not represent an embedded derivative as the conversion price was known and was not variable making
it conventional. The Company determined there was a beneficial conversion feature related to the January 2012 Convertible Notes
based on the difference between the conversion price of $0.0012 and the market price of the Company’s common stock on the
issue dates and recorded as interest expense $4,167 with an offset to additional paid-in capital.



January
2012 Interest Note



In January
2012, we converted a total of $26,100 in interest payable on $75,000 in notes of the Company and AFPI to a unaffiliated note holder
to a convertible note. This note is due in January 2013 and carries an interest rate of 8% per annum. The note is convertible
into shares of our common stock at a 50% discount to the lowest three trading prices in the ten days prior to conversion.



The beneficial
conversion feature (an embedded derivative) included in the January 2012 Interest Note resulted in an initial debt discount of
$26,100 and an initial loss on the valuation of derivative liabilities of $11,186 for a derivative liability balance of $37,286
at issuance.



The fair
value of the Converted AFPI Notes was calculated at issue date utilizing the following assumptions:



|Issuance
    Date | Fair
    Value | Term          | Assumed
    Conversion Price | Market
    Price on Grant Date | Volatility
    Percentage | Interest
    Rate
|----------------- | -------------- | ------------- | ---------------------------- | ------------------------------ | ------------------------- | -----------------
|1/2/12            | $37,286        | 12
    months | $0.0007                      | $0.0014                        | 226%                      | 0.11%            



At June
30, 2012, the Company revalued the derivative liability balance of the remaining outstanding January 2012 Interest Note. As a
result, for the period from their issuance to June 30, 2012, the Company has recorded an adjustment and increased the previously
recorded liabilities by $37,286 resulting in a derivative liability balance of $52,200 at June 30, 2012.



The fair
value of the convertible note was calculated at June 30, 2012 utilizing the following assumptions:



|Fair
    Value | Term         | Assumed
    Conversion Price | Volatility
    Percentage | Interest
    Rate
|-------------- | ------------ | ---------------------------- | ------------------------- | -----------------
|$52,200        | 6
    months | $0.0001                      | 163%                      | 0.20%            



Total



Total debentures
and convertible notes and interest payable consisted of the following at June 30, 2012:



|Short-term
    liabilities:                                                                                                                                                 |                                                                        |   |       
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | - | ------
|Convertible
    Debentures; non-affiliates; interest at 7% and due three years from issue date; outstanding principal of $69,500 face value;
    net of discount of $35,986 |                                                                        | $ | 33,514
|2011
    Convertible Notes; non-affiliate; interest at 8%; due May through September 2012; $13,500 face value net of discount of $3,022                                     |                                                                        |   | 10,478
|2012
    Convertible Notes; non-affiliate, interest at 8%; due May 2012; $134,000 face value net of discount of $81,278                                                     |                                                                        |   | 52,722
|Converted
    AFPI Notes; non-affiliate; interest at 8%; currently due; $22,500 face value net of discount of $11,250                                                       |                                                                        |   | 11,250
|January
    2012 Convertible Notes; non-affiliate; interest at 8%; due January 2013                                                                                         |                                                                        |   | 50,000
|January
    2012 Interest Note; non-affiliate; interest at 8%; due January 2013; $26,100 face value net of discount of $13,050                                              |                                                                        |   | 13,050
|                                                                                                                                                                            | Total
    short-term convertible notes                                 |   | $     
|Interest
    payable, short-term convertible notes                                                                                                                          |                                                                        |   | 59,244
|                                                                                                                                                                            | Total
    principal and interest payable, short-term convertible notes |   | $     









Note
5: Notes Receivable



From
time-to-time beginning in 2008, the Company has loaned funds to FastFunds Financial Corporation (“FFFC”), an affiliate
in which the Company is a 35% stockholder, to assist FFFC in payment of its ongoing payment obligations. This amount totaled $307,578
at December 31, 2011. An additional $8,780 in loans were made during the six months ended June 30, 2012 Each of these outstanding
loans carries an interest rate of 8% per annum and are due on demand. Management of the Company evaluated the likelihood of payment
on these notes and has determined that an allowance of the entire balance due is appropriate. Accordingly, the Company recorded
bad debt expense totaling $307,578 including $8,780 in the six month period ended June 30, 2012. The Company has allowed for all
interest due on these notes and did not record any interest receivable during the six month period ended June 30, 2012. During
the six month period ended June 30, 2012, however, FFFC made interest payments totaling $31,680 which was recorded against interest
expense during the quarter.



As
of June 30, 2012, the Company had $8,000 due from an affiliated publicly traded company. This note carries interest at 8% per
annum and is due on demand. The entire principal balance of $8,000 plus $421 in accrued interest remained receivable at June 30,
2012.





Note
6: Other Expense



Other expense
for the three and six month periods ended June 30, 2012 and 2011 consisted of the following:



|                                   |   | Three
    months ended June 30, 2012 |   | Three
    months ended June 30, 2011 |   | Six
    months ended June 30, 2012 |   | Six
    months ended June 30, 2011
|---------------------------------- | - | ------------------------------------ | - | ------------------------------------ | - | ---------------------------------- | - | ----------------------------------
|General
    and administrative     | $ | 41,614                               | $ | 74,564                               | $ | 102,057                            | $ | 143,636                           
|Salaries
    and employee benefits |   | 55,095                               |   | 94,220                               |   | 151,398                            |   | 207,209                           
|Legal
    and accounting           |   | 5,538                                |   | 31,814                               |   | 19,638                             |   | 55,874                            
|Professional
    services          |   | 29,526                               |   | 14,146                               |   | 103,011                            |   | 44,068                            
|                                   | $ | 131,773                              | $ | 214,744                              | $ | 376,104                            | $ | 450,787                           





Note
7: Commitments and Contingencies



Payroll
Liabilities



Following
the formation of API in May 2008, the HPI hired certain former employees of Hydrogen Power, Inc. and maintained an office in Seattle,
Washington for a period of approximately five months. During that time, the HPI paid wages to these employees without the benefit
of a payroll management service. Upon the HPI’s move from Seattle to Philadelphia, Pennsylvania in October 2008, the Company
retained the services of a payroll management service to handle its payroll functions. As a result, the Company recorded $52,576
in payroll liabilities due from wages paid to its employees and has increased that amount quarterly for penalties and interest
leaving a total due of $95,158 at December 31, 2011. The company recorded additional expense of $7,358 during the six months ended
June 30, 2012 leaving a balance due of $102,518 as of that date. This amount is included on the balance sheets at June 30, 2012
as “payroll liabilities”. In addition, the president of API converted $138,462 in wages payable to him to shares of
the Company's Series B Preferred Stock in August 2011. We have recorded a total of $8,629 for payroll liabilities due by the Company
on this conversion for total payroll liabilities of $111,147.





Office
Lease Agreement



Effective
on July 1, 2009, API entered into a lease for office and laboratory space in the University City Science Center in Philadelphia,
Pennsylvania. Totaling approximately 2,511 square feet, the term of the agreement was for five years and six months expiring on
December 31, 2014. In addition, the Company was obligated to pay certain common area maintenance fees that was $1,886 per month
during 2011.



In November
2011, the Company determined it could no longer sustain the significant payments under the lease and vacated the premises. On
November 30, 2011, API was notified that a Judgment by Confession had been entered against it in the Court of Common Pleas Philadelphia
County in Philadelphia, Pennsylvania by Wexford-UCSC II, L.P., its former landlord. The Judgment by Confession assesses total
damages of $428,232, which is comprised of the following: $73,995 for unpaid monthly rent, maintenance fees, interest and late
charges for the period through November 30, 2011; attorney's fees of $5,000; rent and maintenance charges of $10,020 for December
2011; and the value of future rent payments for the period from January 1, 2012 to December 31, 2014 of $339,217. The complaint
alleges a breach of contract and event of default for API related to this lease. The Company intends to negotiate with the landlord
to settle the judgment as expeditiously as possible. The judgment amount totaling $360,803 in addition to rent amounts already
contained in "accounts payable, other" is recorded as "litigation contingency" on our balance sheets at June
30, 2012.



Capital
Leases



In April
2010 we leased a copier for a period of three years at $129 per month. The contract includes a buyout at lease end for $1 at which
time we will own the machine. We have capitalized the value of this machine at January 1, 2011 in the amount of $3,240 based on
the then current value with an expected life of 3 years from the lease date and are depreciating this asset over that period.
That amount was included in "property and equipment" under the assets portion of our balance sheet with the corresponding
liability for future payments placed under "capital leases" in our liabilities. As each monthly payment is made, the
amount under capital leases is reduced to reflect the balance due under the lease. Accordingly, a total of $389 was reduced in
the "capital leases" account for payments made in the six month period ended June 30, 2012, leaving a balance of $1,166
as of that date.





Note
8: Income Tax



The Company
records its income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes”.
The Company has incurred significant net operating losses since inception resulting in a deferred tax asset, which was fully allowed
for; therefore, the net benefit and expense resulted in $-0- income taxes.





Note
9: Capital Stock



Preferred
Stock



During
the six months ended June 30, 2012, 6,250 shares ($6,250) of our Series B Preferred Stock were converted to 10,593,220 shares
of our common stock. We recorded an expense of $8,580 for the difference in the conversion price ($0.00059) and the market price
on the conversion date. This amount is included in "stock based compensation" on our statements of operations.



Also during
the six month period ended June 30, 2012, we redeemed a total of 110,857 shares ($110,857) of our Series B Preferred Stock. The
Series B Preferred includes a redemption premium of 5% during the first year of issuance therefore the total redemption amount
was $116,400. The balance of $5,543 for the redemption premium was recorded as interest expense on our statements of operations
for the period ended June 30, 2012.



As a result
of these transactions there were 404,055 shares of our Series B Preferred Stock outstanding at June 30, 2012. There were $29,452
in dividends payable on our Series B Preferred stock at June 30, 2012, including $17,049 in dividend expense for the six month
period then ended.



Common
Stock



During
the period six month period ended June 30, 2012, the Company issued 10,000,000 shares of common stock in a private placement to
unaffiliated investors for total proceeds of $5,000 or $0.0005 per share. We recorded $6,000 in "stock compensation cost"
in our statements of operations for the six months ended June 30, 2012 to record the beneficial conversion feature relating to
the difference between the market price and the sales price on the date of issuance.



During
the six month period ended June 30, 2012, we issued a total of 799,324,766 shares of our common stock on the conversion of $352,849
in principal and interest on our various convertible promissory notes. In addition to the face value of the notes, the Company
recorded $495,358 in additional expense for the derivative liability for a total cost to the Company of $848,207 or $0.001 per
share.



During
the six month period ended June 30, 2012, we issued 66,300,000 shares of our common stock to a noteholder upon conversion of $33,150
in promissory notes. In addition to the face value of the notes, the Company recorded $58,410 in additional expense for the difference
between the conversion price ($0.0005) and the market price on the issuance dates for a total cost to the Company of $91,560 or
$0.0014 per share.



In May
2012, we executed a consulting agreement with an unaffiliated third party through which we paid the consultant 20,000,000 shares
of our common stock valued at $20,000 reflecting the market price on the date of issuance. In addition, we issued three year warrants
to purchase up to 30,000,000 shares of our common stock at exercise prices of $0.0015 (10,000,000 shares), $0.002 (10,000,000
shares) and $0.004 (10,000,000 shares). These warrants were valued at $25,000 using the Black-Scholes option pricing model. As
the consulting agreement carries a six month term, the value of the shares and warrants totaling $45,000 will be expensed over
that six month term. Accordingly, the Company recorded $9,000 in "stock-based compensation" expense in the six month
period ended June 30, 2012.



In May
2012, we issued 60,000,000 shares to three unaffiliated purchasers of common stock that participated in private placements of
our common stock in the previous six months. Due to delays in issuing the stock to these investors, the Company agreed to lower
the purchase price for the shares to $0.003 per share. We recorded a total of $60,000 as "stock compensation cost" in
our statements of operations for the six months ended June 30, 2012 based on the market value of these shares on the date of issuance.



Warrants



In May
2012, we executed a consulting agreement with an unaffiliated third party through which we issued three year warrants to purchase
up to 30,000,000 shares of our common stock at exercise prices of $0.0015 (10,000,000 shares), $0.002 (10,000,000 shares) and
$0.004 (10,000,000 shares). These warrants were valued at $25,000 using the Black-Scholes option pricing model. As the consulting
agreement carries a six month term, the value of the warrants totaling $25,000 will be expensed over that six month term of the
agreement.





|A
    summary of the activity of the Company’s outstanding warrants at December 31, 2011 and June 30, 2012 is as follows: |  | Warrants   |  | Weighted-average
    exercise price |  | Weighted-average
    grant date fair value
|------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ----------------------------------- |  | ------------------------------------------
|Outstanding
    and exercisable at December 31, 2011                                                                      |  | 68,253,528 |  | $         
    0.05                 |  | $        
    0.05                        
|Granted                                                                                                                   |  | 30,000,000 |  | 0.003                               |  | 0.0016                                    
|Expired/Cancelled                                                                                                         |  | 25,078,528 |  | 0.13                                |  | 0.06                                      
|Exercised                                                                                                                 |  | -          |  | -                                   |  | -                                         
|Outstanding
    and exercisable at June 30, 2012                                                                          |  | 73,175,000 |  | $         
    0.007                |  | $      
    0.018                         



The
following table sets forth the exercise price range, number of shares, weighted average exercise price and remaining contractual
lives of the warrants by groups as of June 30, 2012:



|Exercise
    price range |  | Number
    of options outstanding |  | Weighted-average
    exercise price |  | Weighted-average
    remaining life
|------------------------ |  | --------------------------------- |  | ----------------------------------- |  | -----------------------------------
|$0.10
    to $0.18       |  | 25,000                            |  | 0.12                                |  | 0.4
    years                      
|$0.05
    to $0.06       |  | 150,000                           |  | 0.06                                |  | 0.3
    years                      
|$0.01
    to $0.01       |  | 43,000,000                        |  | 0.01                                |  | 4.2
    years                      
|$0.0015
    to $0.0004   |  | 30,000,000                        |  | 0.0025                              |  | 2.8
    years                      
|                         |  | 73,175,000                        |  | $      
    0.06                    |  | 3.4
    years                      









Stock
Options



All options
outstanding at June 30, 2012 are fully vested and exercisable. A summary of outstanding stock option balances under the 2005 Stock
Incentive Plan and the 2009 Stock Incentive Plan at December 31, 2011 and at June 30, 2012 is as follows:



2005
Stock Incentive Plan

|                                                     | Options |  | Weighted-average
    exercise price |  | Weighted-average
    remaining contractual life (years) |  | Aggregate
    intrinsic value
|---------------------------------------------------- | ------- |  | ----------------------------------- |  | ------------------------------------------------------- |  | -----------------------------
|Outstanding
    at December 31, 2011                 | 425,000 |  | $0.35                               |  | 2.00                                                    |  | $0                           
|Options
    granted                                  | -       |  | -                                   |  | -                                                       |  | -                            
|Outstanding
        at
        June
        30, 2012 | 425,000 |  | $0.35                               |  | 0.5                                                     |  | $0                           









2009
Stock Incentive Plan

|                                                     | Options    |  | Weighted-average
    exercise price |  | Weighted-average
    remaining contractual life (years) |  | Aggregate
    intrinsic value
|---------------------------------------------------- | ---------- |  | ----------------------------------- |  | ------------------------------------------------------- |  | -----------------------------
|Outstanding
    at December 31, 2011                 | 20,000,000 |  | $0.075                              |  | 3.7                                                     |  | $0                           
|Options
    granted                                  | -          |  | -                                   |  | -                                                       |  | -                            
|Outstanding
        at
        June
        30, 2012 | 20,000,000 |  | $0.075                              |  | 2.2                                                     |  | $0                           





Note
10: Subsequent Events



During
the month ended July 31, 2012, we issued an additional 230,000,000 shares of our common stock upon the conversion of a total of
$18,250 principal value of various convertible notes.



Management
has determined that there are no further events subsequent to the balance sheet date that should be disclosed in these financial
statements.







Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



General:



The following
discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s
consolidated financial statements and notes thereto for the years ended December 31, 2011 and 2010.



The independent
auditors’ reports on our financial statements for the years ended December 31, 2011 and 2010 include a “going concern”
explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans
in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 1 to the audited consolidated
financial statements for the year ended December 31, 2011.



While we
have prepared our financial statements on the basis that we are a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised
a substantial doubt about our ability to continue as a going concern in their audit reports for the years ended December 31, 2011
and 2010.



The
Company is a an early production stage alternative energy company that generates hydrogen gas and steam for multiple niche applications
requiring on-site, on-demand fuel sources. Our hydrogen drives fuel cells for back-up, remote, and portable power, fills inflatable
devices such as weather balloons, and can replace costly, hard-to-handle and high pressure K-Cylinders. Our steam/hydrogen output
is also being designed to drive turbine-based underwater propulsion systems and auxiliary power systems. We have significant differentiators
in performance, adaptability, safety and cost-effectiveness in its target market applications, with no external power required
and no toxic chemicals or by-products.



We have
completed the design and engineering modifications necessary and have begun limited production of our Portable Balloon Inflation
Systems. In October 2011,we announced we were awarded a contract to deliver a PBIS-2000 Portable Balloon Inflation System to the
Air Force Special Operations Command (AFSOC). This unit was delivered in April 2012 and includes 360 cartridges as well as a spare
parts kit, a tool kit and two days of training by our engineers at the customer’s site. The PBIS-2000 expands the capability
of our current family of hydrogen generators, which includes the PBIS-1000 (for 100g balloons) and the PBIS-lite (designed for
30g pieball balloons). The PBIS-2000 generates sufficient hydrogen to inflate a 200g weather balloon within 20 minutes using up
to 6 AlumiFuel Cartridges contained in a single reactor vessel; this represents significantly more hydrogen than is required for
the PBIS-1000. While the footprint, weight and safety features of the PBIS-2000 are similar to the PBIS-1000, the configuration
has been modified such that the system operates at ambient (atmospheric) pressure (below 10 psig) so that the user never has to
deal with a high pressure system such as the industry standard K-Cylinder (2265 psig).



LIQUIDITY
AND CAPITAL RESOURCES



To address
the going concern situation addressed in our financial statements at December 31, 2011 and 2010, we anticipate we will require
over the next twelve months approximately $1,000,000 of additional capital to fund the Company’s operations. This amount
does not include any amounts that may be necessary to pay off existing debt or accrued expenses. We presently believe the source
of funds will primarily consist of several components that include: debt financing, which may include further loans from our officers
or directors as detailed more fully in the accompanying financial statements; the sale of our equity securities in private placements
or other equity offerings or instruments; as well as minimal cash flows from operations through the production of PBIS reactors
and the resultant sales of AlumiFuel cartridges. As in 2011, during 2012 we anticipate a significant amount of capital resources
will come from convertible debt instruments. These instruments typically contain a significant discount to the market value of
our common stock of up to 50% causing the issuance of shares below market value prices causing substantial dilution to our stockholders.



During
the six months ended June 30, 2012, we received a net of approximately $310,032 from our financing activities, primarily from
the issuance of notes payable from various sources totaling $477,750 as well as sales of Company common stock totaling $11,000
and sales of AFPI stock by the Corporation of $41,038. This was offset by payments on notes payable totaling $97,921 as well as
redemptions of preferred stock of $110,857. This compared to cash provided by financing activities of $317,640 in the six months
ended June 30, 2011 derived from proceeds from the issuance of notes payable totaling $458,150 and sales of AFPI common stock
of $20,000. This was offset by payments on notes payable of $150,510.



In the
six month period ended June 30, 2012, net cash used in operating activities was $308,615. This compared to net cash used in operating
activities of $320,056 for six month period ended June 30, 2011. The 2012 amount included a $1,262,001 net loss that included
approximately $755,700 in non-cash charges and credits to operating assets and liabilities primarily from amortization of discount
on debentures payable and an increase in derivative liability on the Company's convertible notes and debentures of totaling $585,937.
This compares to a net loss of $1,121,064 in the six months ended June 30, 2011 that included a non-cash loss of approximately
$416,000 primarily from stock based compensation expense of $345,833 related to the issuance of stock to consultants that was
offset by a decrease in derivative liability on the Company's convertible notes of $195,660.



We can
make no assurance that we will be successful in raising the funds necessary for our working capital requirements as suitable financing
may not be available and we may not have the ability to sell either equity or debt securities under acceptable terms or in amounts
sufficient to fund our needs. This includes no assurance that we will be successful in our efforts to raise capital through sales
of AFPI common stock on the European markets. Our inability to access various capital markets or acceptable financing could have
a material adverse effect on our commercialization efforts, results of operations and deployment of our business strategies and
severely threaten our ability to operate as a going concern.



During
the remainder of our fiscal year and for the foreseeable future, we will be concentrating on raising the necessary working capital
through acceptable debt instruments and equity financing to insure our ability to continue our research and implement other business
strategies including funding our newly acquired alternative energy business. To the extent that additional capital is raised through
the sale of equity or equity related securities such as convertible notes, the issuance of such securities has resulted and will
continue to result in significant dilution to our current shareholders.



(b)	Results
of Operations



Six
Month Period ended June 30, 2012 vs. June 30, 2011





In September
2011, the Company received an order from the United State Air Force Strategic Operations Command to produce one PBIS-2000 portable
balloon inflation device. This order, originally scheduled for delivery in the first quarter of 2012, was delivered in April 2012.
Accordingly, the Company did not recognize the revenue from this sale in the amount of $61,134 until delivery of the unit early
in the second quarter of 2012.



The Company
recorded an asset as "Work in progress" totaling $31,092 on our balance sheet at March 31, 2012, reflecting the cost
of producing the PBIS-2000 through that date. This amount included parts, labor and other expenses directly related to production
of the PBIS-2000 and AlumiFuel cartridges being manufactured for sale under the Air Force contract. Upon payment for the unit
in the quarter ended June 30, 2012, a total of $32,918 for costs related to producing the PBIS-2000 was expensed and is presented
on our statements of operations a "Cost of goods sold".



For the
six month period ended June 30, 2012, our total revenue was $61,134 from the sale of a PBIS-2000 unit and AlumiFuel cartridges
versus $2,574 from fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project in the 2010 period.
The costs of goods sold related to production of the PBIS-2000 reactor for the six month period ended June 30, 2012 was $32,918
for gross profit of $28,216 for the period. Similar costs of goods sold for the six month period in 2010 was $123 for gross profit
of 2,451. The loss from operations for the six month period ended June 30, 2012 was $583,483 versus $1,014,536 in the six month
period ended June 30, 2011. Due to a credit from a vendor of an overcharge from 2011, reactor production costs were $(7,088) for
the six months ended June 30, 2012. The losses included $157,335 and $218,125 in 2012 and 2011, respectively, comprised of related
party expense that included officer and key employee management fees as well as rent paid to related parties. These amounts were
lower in 2012 due to a decrease in related parties. The losses also include $83,581 and $345,833 in stock based compensation primarily
for costs related to the issuance of common stock to consultants in both periods as well as shares issued to stockholders for
delays in issuance of private placement certificates in 2012.



The balance
of $376,104 and $450,787 for “other” SG&A expenses in the six month periods ended June 30, 2012 and June 30, 2011
was comprised of the following:



|                                   |   | Six
    months ended June 30, 2012 |   | Six
    months ended June 30, 2011
|---------------------------------- | - | ---------------------------------- | - | ----------------------------------
|General
    and administrative     | $ | 102,057                            | $ | 143,636                           
|Salaries
    and employee benefits |   | 151,398                            |   | 207,209                           
|Legal
    and accounting           |   | 19,638                             |   | 55,874                            
|Professional
    services          |   | 103,011                            |   | 44,068                            
|                                   | $ | 376,104                            | $ | 450,787                           



The “other”
SG&A expense during the nine months ended September 30, 2011 included a decrease in general and administrative expenses as
the Company worked to keep costs down with across the board expense cuts. Salaries and benefits decreased due to the loss of subsidiary
employees. Legal and accounting costs also decreased. Professional services increased as the Company experienced increases in
consulting fees during the 2012 period as compared to the 2011 period including significant costs related to a custodian account
in Europe related to its International subsidiary.



The company
recorded $(678,518) in “other income (expense)” during the six months ended June 30, 2012 as compared to $(106,538)
in the six months ended June 30, 2011. This incrase is primarily attributed to fair value adjustments of derivative liabilities
related to the Company's various convertible notes as the Company's stock price has decreased. The Company experienced increases
in interest expense with the addition of additional notes payable in the 2012 period versus the 2011 period as well as for beneficial
conversion features on debt converted to stock for the difference in the conversion price versus the market price on the conversion
date.



Three
Month Period ended June 30, 2012 vs. June 30, 2011



For the
three month period ended June 30, 2012 we recorded revenue of $61,134 from the sale of one PBIS-2000 unit and accompanying AlumiFuel
cartridges as compared to revenue of $2,574 from fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development
project during the three month period ended June 30, 2011. Costs of goods sold were $32,918 in the three month period ended June
30, 2012 for gross profit of $28,216. Our total operating costs and expenses in 2012 were $274,335 versus $342,976 for the three
month period in 2011. The loss included $72,975 and $102,525 in 2012 and 2011, respectively, comprised of related party expense
that included officer and key employee management fees as well as rent paid to related parties. These amounts were lower in 2012
with the decrease in 2011 in related parties at the Company's subsidiaries. The 2012 expense also includes $69,000 in stock based
compensation for costs related to the issuance of common stock on the conversion of Series B Preferred and the issuance of restricted
stock at a below market price. Stock based compensation expense totaled $25,000 in the three months ended June 30, 2011 primarily
for costs related to the issuance of stock to consultants during that period.



The balance
of $131,773 and $214,744 for “other” SG&A expenses in the three month periods ended June 30, 2012 and June 30,
2011 was comprised of the following:



|                                   |   | Three
    months ended June 30, 2012 |   | Three
    months ended June 30, 2011
|---------------------------------- | - | ------------------------------------ | - | ------------------------------------
|General
    and administrative     | $ | 41,614                               | $ | 74,564                              
|Salaries
    and employee benefits |   | 55,095                               |   | 94,220                              
|Legal
    and accounting           |   | 5,538                                |   | 31,814                              
|Professional
    services          |   | 29,526                               |   | 14,146                              
|                                   | $ | 131,773                              | $ | 214,744                             



The “other”
SG&A expense during the three months ended June 30, 2012 included a decrease in general and administrative expenses as the
Company worked to keep costs down, specifically office rent. Salaries and benefits decreased due to a decrease in subsidiary employees.
Legal and accounting costs also decreased at the subsidiary level. Professional services increased as the Company incurred significant
fees related to its custodian account in Europe related to sales of small portions of the Company's stock in AFPI. There were
no similar fees during the June 30, 2011 period.



The company
recorded $(274,335) in “other income (expense)” during the three months ended June 30, 2012 as compared to $(342,975)
in the three months ended June 30, 2011. This decrease is primarily attributed to fair value adjustments of derivative liabilities
related to the Company's various convertible notes with the decrease in the notes outstanding and resultant decrease in the fair
value adjustment expense. Interest expense, amortization of convertible note discount showed no significant changes for the comparable
periods.



Item
3. Quantitative and Qualitative Disclosures About Market Risk



Not
applicable



Item
4T. Controls and Procedures



Evaluation
of Disclosure Controls and Procedures



A review
and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO")
who is also the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that review and evaluation,
the CEO concluded that as of June 30, 2012 disclosure controls and procedures, were effective at ensuring that the material information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application
of SEC rules and forms.



Management’s
Report on Internal Controls over Financial Reporting



Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive
and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:



| | • | Pertain
                                                                                                         to the maintenance of
                                                                                                         records that in reasonable
                                                                                                         detail accurately and
                                                                                                         fairly reflect our transactions
                                                                                                         and dispositions of our
                                                                                                         assets;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Provide
                                                                                                         reasonable assurance
                                                                                                         our transactions are
                                                                                                         recorded as necessary
                                                                                                         to permit preparation
                                                                                                         of our financial statements
                                                                                                         in accordance with GAAP,
                                                                                                         and that receipts and
                                                                                                         expenditures are being
                                                                                                         made only in accordance
                                                                                                         with authorizations of
                                                                                                         our management and directors;
                                                                                                         and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Provide
                                                                                                         reasonable assurance
                                                                                                         regarding prevention
                                                                                                         or timely detection of
                                                                                                         unauthorized acquisition,
                                                                                                         use or disposition of
                                                                                                         our assets that could
                                                                                                         have a material effect
                                                                                                         on the financial statement.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted
that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance
that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.



Our
CEO/CFO has evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e)
and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to the extent possible
given the limited personnel resources and technological infrastructure in place to perform the evaluation. Based upon our management’s
discussions with our auditors and other advisors, our CEO/CFO believe that, during the period covered by this report, such internal
controls and procedures were not effective as described below.



Due to
the small size and limited financial resources, our administrative assistant, corporate secretary and chief executive officer
are the only individuals involved in the accounting and financial reporting. As a result, there is limited segregation of duties
in the accounting function, leaving all aspects of financial reporting and physical control of cash primarily in the hands of
two individuals. This limited segregation of duties represents a material weakness. We will continue to periodically review our
disclosure controls and procedures and internal control over financial reporting and make modifications from time to time considered
necessary or desirable.



This Quarterly
Report does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting
firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.



Changes
in Internal Control over Financial Reporting



There
have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably
likely to materially affect, the Company’s internal controls over financial reporting.





PART
II – OTHER INFORMATION



Item
1. Legal Proceedings



None.



Item
2. Unregistered Sales of Equity Securities



In May
2012, we executed a consulting agreement with an unaffiliated third party through which we paid the consultant 20,000,000 shares
of our common stock valued at $20,000 reflecting the market price on the date of issuance of $0.001.



In May
2012, we issued 60,000,000 shares to three unaffiliated purchasers of common stock that participated in private placements of
our common stock in the previous six months. Due to delays in issuing the stock to these investors, the Company agreed to lower
the purchase price for the shares to $0.003 per share. We recorded a total of $60,000 as "stock compensation cost" in
our statements of operations for the six months ended June 30, 2012 based on the market value of these shares on the date of issuance.



During
the three month period ended June 30, 2012, we issued a total of 490,591,451 shares of our common stock on the conversion of $153,100,
or $0.0003 per share, in principal and interest on our various convertible promissory notes.



We offered
and sold the securities in reliance on an exemption from federal registration under Section 4(2) of the Securities Act of 1933
and Rule 506 promulgated thereunder. We relied on this exemption and rule based on the fact that there were a limited number of
investors, all of whom were accredited investors and (i) either alone or through a purchaser representative, had knowledge and
experience in financial and business matters such that each was capable of evaluating the risks of the investment, and (ii) we
had obtained subscription agreements from such investors indicating that they were purchasing for investment purposes only. The
securities were not registered under the Securities Act and may not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements. The disclosure contained herein does not constitute an offer to sell
or a solicitation of an offer to buy any securities of the Company, and is made only as permitted by Rule 135c under the Securities
Act.



Item
3. Defaults upon Senior Securities



None.



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



None



Item
5. Other Information



None.



Item
6. Exhibits



|Exhibits: |                                                                                                 
|--------- | ------------------------------------------------------------------------------------------------
|31.1      | Certification
        pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
|32.1      | Certification
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.    





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.





| | ALUMIFUEL
    POWER CORPORATION
| | -------------------------------
| | (Registrant)                   



|Date:
    August 17, 2012 | By:
    /s/ Henry Fong                                         
|------------------------- | ---------------------------------------------------------------
|                          | Henry
    Fong                                                 
|                          | Principal
    Executive Officer and Principal Financial Officer
|                          |