UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q




x
            Quarterly report pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
      quarterly period ended April 30,
2009.


OR


 ̈
            Transition report pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
      transition period from        
      to       .








Commission
File Number: 001-34213




AirSharesTM
EU CARBON ALLOWANCES FUND


(Exact
name of registrant as specified in its charter)




Delaware
            
            61-6339929(State or other jurisdiction of
              incorporation or organization)
            
            (I.R.S. Employer
              Identification No.)




c/o
XShares Advisors LLC


420
Lexington Ave., Suite 2550


New
York, New York 10170


(Address
of principal executive offices) (Zip code)




(212)
867-7400


(Registrant’s
telephone number, including area code)





N/A


(Former
name, former address and former fiscal year, if changed since last
report)




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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


xYes ̈No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈  Yes     ̈ No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large accelerated filer ̈
            
            Accelerated filer   ̈Non-accelerated filer   ̈
            
            Smaller reporting company x(Do not check if a 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    x No





AirSharesTM
EU Carbon Allowances Fund





Table
of Contents





PagePart
      I. FINANCIAL INFORMATIONItem
      1. Condensed Financial Statements.
                        1Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
                        15Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                        19Item
      4. Controls and Procedures.
                        20Part
      II. OTHER INFORMATIONItem
      1. Legal Proceedings.
                        21Item
      1A. Risk Factors.
                        21Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                        21Item
      3. Defaults Upon Senior Securities.
                        21Item
      4. Submission of Matters to a Vote of Security Holders.
                        21Item
      5. Other Information.
                        21Item
      6. Exhibits.
                        21







Part I.
            FINANCIAL
      INFORMATION




Item 1.
            Condensed Financial
      Statements.




Index
to Condensed Financial Statements





Documents
                
                PageCondensed
      Statements of Financial Condition at April 30, 2009 (Unaudited) and July
      31, 2008
                
                
                2Condensed
      Schedule of Investments (Unaudited) at April 30, 2009
                
                
                3Condensed
      Statements of Operations (Unaudited) for the three months ended April 30,
      2009 and 2008, the period from December 11, 2008 (commencement of
      operations) to April 30, 2009 and the period from August 13, 2007
      (inception) to July 31, 2008
                
                
                4Condensed
      Statements of Changes in Shareholders’ Equity (Unaudited) for the period
      from December 11, 2008 (commencement of operations) to April 30, 2009 and
      the period from August 13, 2007 (inception) to July 31,
    2008
                
                
                5Condensed
      Statements of Cash Flows (Unaudited) for the period from December 11, 2008
      (commencement of operations) to April 30, 2009 and the period from August
      13, 2007 (inception) to July 31, 2008
                
                
                6Notes
      to Condensed Financial Statements for the three months ended April
      30, 2009 (Unaudited)
                
                
                7


1





AirSharesTM EU
Carbon Allowances Fund


Condensed
Statements of Financial Condition


At
April 30, 2009 (Unaudited) and July 31, 2008





April 30, 2009
                
                
                July 31, 2008AssetsCash
      and cash equivalents
                
                $
                3,731,981
                
                
                $
                1,000Equity
      in NewEdge USA, LLC trading accounts:Cash
                
                
                1,251,375
                
                
                
                -Unrealized
      loss on open commodity futures contracts
                
                
                (405,838
                )
                
                
                -Total
      assets
                
                $
                4,577,518
                
                
                $
                1,000Liabilities
      and Shareholders’ EquityManagement
      fees payable (Note 3)
                
                $
                2,977
                
                
                $
                -Total
      liabilities
                
                
                2,977
                
                
                
                -Commitments and Contingencies(Notes 3, 4 and 5)Shareholders’
      EquityShares
                
                
                4,573,541
                
                
                
                -Sponsor
      Contribution
                
                
                1,000
                
                
                
                1,000Total
      shareholders’ equity
                
                
                4,574,541
                
                
                
                1,000Total
      liabilities and shareholders’ equity
                
                $
                4,577,518
                
                
                $
                1,000Shares
      of beneficial interest outstanding
                
                
                200,000
                
                
                
                -Net
      asset value per unit
                
                $
                22.87
                
                
                $
                -Market
      value per unit
                
                $
                22.98
                
                
                $
                -




See
accompanying notes to condensed financial statements.


2





AirSharesTM EU
Carbon Allowances Fund


Condensed
Schedule of Investments (Unaudited)


At
April 30, 2009





Open
Futures Contracts





Loss onNumber of
                  
                  
                  Open Commodity
                  
                  
                  % ofContracts
                  
                  
                  Contracts
                  
                  
                  Net AssetsForeign
      ContractsECX
      Carbon Financial Instrument Futures contracts, expire December
      2009
                  
                  
                  141
                  
                  
                  $
                  (245,170
                  )
                  
                  
                  (5.36
                  )ECX
      Carbon Financial Instrument Futures contracts, expire December
      2010
                  
                  
                  33
                  
                  
                  
                  (52,924
                  )
                  
                  
                  (1.16
                  )ECX
      Carbon Financial Instrument Futures contracts, expire December
      2011
                  
                  
                  26
                  
                  
                  
                  (44,841
                  )
                  
                  
                  (0.98
                  )ECX
      Carbon Financial Instrument Futures contracts, expire December
      2012
                  
                  
                  38
                  
                  
                  
                  (62,903
                  )
                  
                  
                  (1.37
                  )238
                  
                  
                  
                  (405,838
                  )
                  
                  
                  (8.87
                  )Market ValueCash
      and cash equivalents
                  
                  
                  
                  
                  
                  
                  3,731,981
                  
                  
                  
                  81.58Total
      cash and cash equivalents
                  
                  
                  
                  
                  
                  
                  3,731,981
                  
                  
                  
                  81.58Cash
      on deposit with broker
                  
                  
                  
                  
                  
                  
                  1,251,375
                  
                  
                  
                  27.36Liabilities
                  
                  
                  
                  
                  
                  
                  (2,977
                  )
                  
                  
                  (0.07
                  )Total
      Net Assets
                  
                  
                  
                  
                  
                  $
                  4,574,541
                  
                  
                  
                  100.00





See
accompanying notes to condensed financial statements.


3




AirSharesTM EU
Carbon Allowances Fund


Condensed
Statements of Operations (Unaudited)


For
the three months ended April 30, 2009 and 2008, the period from


December
11, 2008 (commencement of operations) to April 30, 2009


and
the period from August 13, 2007 (inception) to July 31, 2008





For the three
                  months ended
                  April 30, 2009
                
                
                For the three
                  months ended
                  April 30, 2008
                
                
                For the
                  period from
                  December 11,
                  2008 to
                  April 30, 2009
                
                
                For the
                  period from
                  August 13,
                  2007 to
                  July 31, 2008IncomeIncome (loss)
      on trading of commodity futures contracts:Realized
      loss on closed positions
                
                $
                -
                
                
                $
                -
                
                
                $
                (3
                )
                
                $
                -Change
      in unrealized gain (loss) on open positions
                
                
                793,838
                
                
                
                -
                
                
                
                (405,838
                )
                
                
                -Unrealized
      loss on foreign currency translations
                
                
                (213
                )
                
                
                -
                
                
                
                (149
                )
                
                
                -Interest
      income
                
                
                814
                
                
                
                -
                
                
                
                1,132
                
                
                
                -Other
      income
                
                
                -
                
                
                
                -
                
                
                
                1,000
                
                
                
                -Total
      income (loss)
                
                
                794,439
                
                
                
                -
                
                
                
                (403,858
                )
                
                
                -ExpensesManagement
      fees (Note 3)
                
                
                7,698
                
                
                
                -
                
                
                
                13,254
                
                
                
                -Interest
      expense
                
                
                7,268
                
                
                
                -
                
                
                
                7,268
                
                
                
                -Brokerage
      commissions
                
                
                -
                
                
                
                -
                
                
                
                2,079
                
                
                
                -Total
      expenses
                
                
                14,966
                
                
                
                -
                
                
                
                22,601
                
                
                
                -Net
      income (loss)
                
                $
                779,473
                
                
                $
                -
                
                
                $
                (426,459
                )
                
                $
                -Net
      income (loss) per share outstanding
                
                $
                3.90
                
                
                $
                -
                
                
                $
                (2.13
                )
                
                $
                -Net
      income (loss) per weighted average share outstanding
                
                $
                3.90
                
                
                $
                -
                
                
                $
                (2.13
                )
                
                $
                -Weighted
      average shares outstanding
                
                
                200,000
                
                
                
                -
                
                
                
                200,000
                
                
                
                -





See
accompanying notes to condensed financial statements.


4





AirSharesTM EU
Carbon Allowances Fund


Condensed
Statements of Changes in Shareholders' Equity (Unaudited)


For
the period from December 11, 2008 (commencement of operations) to April 30,
2009


and
the period from August 13, 2007 (inception) to July 31, 2008





Sponsor Contribution
                
                
                Shares
                
                
                TotalBalances,
      at August 13, 2007 (inception)
                
                $
                -
                
                
                $
                -
                
                
                $
                -Initial
      contribution of capital
                
                
                1,000
                
                
                
                -
                
                
                
                1,000Balances,
      at July 31, 2008
                
                
                1,000
                
                
                
                -
                
                
                
                1,000Addition
      of 200,000 shares
                
                
                -
                
                
                
                5,000,000
                
                
                
                5,000,000Net
      loss
                
                
                -
                
                
                
                (426,459
                )
                
                
                (426,459
                )Balances,
      at April 30, 2009
                
                $
                1,000
                
                
                $
                4,573,541
                
                
                $
                4,574,541Shares
      OutstandingAt
      July 31, 2008
                
                
                -
                
                
                
                -
                
                
                
                -At
      April 30, 2009
                
                
                -
                
                
                
                200,000
                
                
                
                200,000Net
      Asset Value Per UnitAt
      August 13, 2007 (inception)
                
                $
                -At
      December 11, 2008 (commencement of operations)
                
                $
                25.00At
      April 30, 2009
                
                $
                22.87





See
accompanying notes to condensed financial statements.


5





AirSharesTM EU
Carbon Allowances Fund


Condensed
Statements of Cash Flows (Unaudited)


For
the period from December 11, 2008 (commencement of operations) to April 30,
2009


and
the period from August 13, 2007 (inception) to July 31, 2008





For the period from
                
                
                For the period fromDecember 11, 2008
                
                
                August 13, 2007to April 30, 2009
                
                
                to July 31, 2008Cash
      Flows from Operating Activities:Net
      loss
                
                $
                (426,459
                )
                
                $
                -Adjustments
      to reconcile net loss to net cash used in operating
      activities:Increase
      in commodity futures trading account - cash
                
                
                (1,251,375
                )
                
                
                -Unrealized
      loss on futures contracts
                
                
                405,838
                
                
                
                -Increase
      in management fees payable
                
                
                2,977
                
                
                
                -Net
      cash used in operating activities
                
                
                (1,269,019
                )
                
                
                -Cash
      Flows from Financing Activities:Issuance
      of shares
                
                
                5,000,000
                
                
                
                1,000Net
      cash provided by financing activities
                
                
                5,000,000
                
                
                
                1,000Net
      Increase in Cash and Cash Equivalents
                
                
                3,730,981
                
                
                
                1,000Cash and Cash
      Equivalents, beginning of period
                
                
                1,000
                
                
                
                -Cash and Cash
      Equivalents, end of period
                
                $
                3,731,981
                
                
                $
                1,000Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for interest
                
                $
                7,268
                
                
                $
                -




See
accompanying notes to condensed financial statements.


6


AirSharesTM
EU Carbon Allowances Fund


Notes
to Condensed Financial Statements


For
the three months ended April 30, 2009 (Unaudited)





NOTE
1.  ORGANIZATION AND BUSINESS




AirSharesTM
EU Carbon Allowances Fund (the “Fund”) was organized as a statutory trust under
the laws of the state of Delaware on August 13, 2007. The Fund is a
commodity pool that issues units of beneficial interest (“Shares”) that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”).




The
investment objective of the Fund is to provide investors with investment results
which correspond to the performance of a basket of exchange-traded futures
contracts for carbon equivalent emissions allowances (“EUAs”), expiring in
December 2009, 2010, 2011 and 2012. An EUA is an entitlement to emit one metric
tonne, or ton, of carbon dioxide equivalent that is transferable under the
European Union Emissions Trading Scheme (the “EU ETS”). The EU ETS is a “cap and
trade” emissions trading program established by the European Union in
furtherance of the joint commitment of its member states under the Kyoto
Protocol to reduce their greenhouse gas emissions. The Kyoto Protocol, which was
adopted pursuant to the United Nations Framework Convention on Climate Change,
seeks to achieve the stabilization of greenhouse gas concentrations in the
atmosphere at a level that would prevent adverse effects on the world’s climate
system resulting from human activities. The developed countries that have
ratified and are parties to the Kyoto Protocol have committed to adopt national
policies and measures intended to return greenhouse gases generally to their
1990 levels. Each such party must meet its commitment over the 5-year period
commencing January 1, 2008 and ending December 31, 2012.




The Fund
accomplishes its objectives through investments in long positions in ICE Futures
ECX Carbon Financial Instrument Futures Contracts (“ECX CFI Futures Contracts”)
expiring in December. ECX CFI Futures Contracts have been developed by the
European Climate Exchange (the “ECE”) and are listed and admitted to trading on
the London-based ICE Platform operated by ICE Futures. These contracts are
standardized contractual instruments for futures on deliverable EUAs issued
under the EU ETS. Each contract provides for delivery of 1,000 EUAs on a
specified date at a specified price.




The Fund
may also invest in other EUA futures contracts expiring in December, including
those that trade on other exchanges. If the EU ETS is extended beyond 2012,
XShares Advisors LLC (the “Sponsor”) will determine and publicly disclose
by no later than September 30, 2012 whether it will extend the operation of
the Fund beyond December 2012. The Fund will not be actively managed in the
sense that it will not engage in activities designed to obtain a profit from, or
to ameliorate losses caused by, changes in the value of its portfolio of EUA
futures contracts.




XShares
Advisors LLC, a Delaware limited liability company, serves as the Sponsor
of the Fund. The Sponsor was formed on March 15, 2006. The Sponsor also
serves as the commodity pool operator of the Fund. The Sponsor is registered as
a commodity pool operator with the Commodity Futures Trading Commission (the
“CFTC”), and is a member of the National Futures Association (the
“NFA”).




On
June 30, 2008, the Sponsor contributed seed capital to the Fund in the
amount of $1,000. No Shares were issued in connection with the Sponsor’s initial
capital contribution. As of April 30, 2009, the Sponsor’s initial contribution
of seed capital has not been redeemed, but may be redeemed at any time upon the
sale of the initial creation basket.




Environmental
Capital Management, LLC (“ECM”), an Arizona limited liability company,
serves as the Fund’s commodity trading advisor (the “CTA”), with primary
responsibility for trading the Fund’s futures contracts and overseeing its
foreign currency hedging activities. ECM is registered with the CFTC as a CTA,
and is a member of the NFA in such capacity.


7




The Fund
issues Shares to authorized purchasers by offering creation baskets consisting
of 100,000 Shares (“Creation Baskets”) through a marketing agent. The Fund
commenced trading on December 11, 2008 following acceptance of a subscription
for an initial order from Citigroup Global Markets, Inc. for 200,000 Shares at
$25.00 per Share ($5.0 million). The Fund issues Shares in Creation Baskets
on a continuous basis, at a price equal to the Fund’s cost of purchasing assets
underlying such Creation Baskets (excluding commissions costs), plus a pro-rata
amount attributable to the excess of uninvested cash and accrued but unearned
interest over accrued but unpaid expenses. In addition, the authorized
purchasers pay the Fund a non-refundable $1,000 per Creation Basket transaction
fee for each Creation Basket issued. Subsequent to the sale of the initial
Creation Basket, Shares can be purchased or sold on a nationally recognized
securities exchange in smaller increments. Shares purchased or sold on a
nationally recognized securities exchange are not purchased or sold at the net
asset value (“NAV”) of the Fund but rather at the market prices quoted on such
exchange.




The
accompanying unaudited condensed financial statements have been prepared in
accordance with Rules 10-01 and 8-03 of Regulation S-X promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) and, therefore, do not
include all information and footnote disclosure required under accounting
principles generally accepted in the United States of America. The financial
information included herein is unaudited, however, such financial information
reflects all adjustments which are, in the opinion of the Sponsor, necessary for
the fair presentation of the condensed financial statements for the interim
period.





In
November 2008, the Fund initially registered 250,000,000 units on Form S-1 with
the SEC. On December 10, 2008, the Fund established its NAV by setting the price
at $25.00 per Share and issued 200,000 Shares in exchange for $5,000,000. The
Fund also commenced investment activities on December 11, 2008 by purchasing ECX
CFI Futures Contracts on the ICE Futures exchange. On December 15, 2008 the Fund
listed its Shares on the NYSE Arca under the ticker symbol “ASO”.




NOTE
2.  ACCOUNTING POLICIES




Revenue
Recognition




Futures
contracts and forward currency contracts are recorded on the trade date. All
such transactions are recorded on the identified cost basis and marked to market
daily. Unrealized gains or losses on open contracts are reflected in the
statements of financial condition and in the difference between the original
contract amount and the market value as of the last business day of the year or
as of the last date of the financial statements. Changes in unrealized gains or
losses between periods and realized gains or losses on closed contracts are
reflected in the statements of operations. The Fund earns interest on assets on
deposit and pays interest on its margin deficit with the Fund’s futures
commission merchant. The Fund also earns interest on assets on deposit with its
custodian.




Foreign
Currency





Open
commodity futures contracts and other assets and liabilities denominated in
foreign currencies are translated into U.S. dollar amounts at the date of
valuation. Purchases and sales of open commodity futures contracts and
other income and expense items denominated in foreign currencies are translated
into U.S. dollar amounts on the respective dates of such
transactions.





The Fund
does not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on open commodity futures contracts from
fluctuations arising from changes in market prices of open commodity futures
contracts.  Such fluctuations are included with the net realized gains or
losses and change in unrealized gains or losses from open commodity futures
contracts.





Net
unrealized gain or loss on foreign currency translations arise from changes in
the fair values of assets and liabilities, other than investments in open
commodity futures contracts, resulting from changes in exchange
rates.




Income
Taxes




The Fund
is taxable as a corporation for U.S. federal income tax purposes. Accordingly,
it is liable for U.S. federal income tax, and applicable state taxes, at the
Fund level at the current corporate rate of 34% plus the applicable state and
local tax rates. The imposition of such taxes affects the computation of the
Fund’s NAV. The Fund’s fiscal year end for tax purposes is July
31.


8




In July
2006, the Financial Accounting Standards Board (the “FASB”) issued
Interpretation No. 48 entitled “Accounting For Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”).
FIN 48 prescribes the minimum recognition threshold a tax position must
meet in connection with accounting for uncertainties in income tax positions
taken or expected to be taken by an entity before being measured and recognized
in the financial statements. Adoption of FIN 48 was required for fiscal
years beginning after December 15, 2006. The Fund adopted FIN 48 upon
commencement of the Fund’s operations on December 11, 2008.




Redemptions




Authorized
purchasers may redeem Shares from the Fund only in blocks of 100,000 Shares
(“Redemption Baskets”). The amount of the redemption proceeds for a Redemption
Basket is equal to the proceeds from the liquidation of futures contracts
underlying the Redemption Basket, plus a pro-rata amount attributable to the
excess of uninvested cash and accrued but unearned interest over accrued but
unpaid expenses. In addition, the authorized purchasers pay the Fund a
non-refundable $1,000 per Redemption Basket transaction fee for each Redemption
Basket redeemed.




Calculation
of NAV




The Fund
calculates its NAV on each trading day by taking the current market value of its
total assets, subtracting any liabilities and dividing the amount by the total
number of Shares issued and outstanding. The Fund uses the ICE Futures
settlement price on that day to determine the value of contracts held on the ICE
Futures exchange. The market value of all open futures contracts traded on any
exchange other than ICE Futures is based upon the settlement price for that
particular futures contract traded on the applicable exchange on the trading
date.




Use
of Estimates




Preparation
of the financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. The Fund’s application of these policies involves
judgments and actual results may differ from the estimates used.




Fair
Value of Financial Instruments




In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (“SFAS 157”) which became effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurement. The
changes to current practice resulting from the application of SFAS 157 relate to
the definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurement. SFAS 157 establishes a fair
value hierarchy that distinguishes between (1) market participant assumptions
developed based on market data obtained from sources independent of the Fund
(observable inputs) and (2) the Fund’s own assumptions about market participant
assumptions developed based on the best information available under the
circumstances (unobservable inputs). The three levels defined by the SFAS 157
hierarchy are as follows:





Level I –
Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.




Level II
– Inputs other than quoted prices included within Level I that are observable
for the asset or liability, either directly or indirectly. Level II assets
include the following: quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means
(market-corroborated inputs).


9




Level III
– Unobservable pricing input at the measurement date for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent that
observable inputs are not available.




In some
instances, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. The level in the fair value hierarchy within which
the fair value measurement in its entirety falls shall be determined based on
the lowest input level that is significant to the fair value measurement in its
entirety.




The
following table summarizes the valuation of securities at April 30, 2009 using
the fair value hierarchy:




At April 30, 2009
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  TotalFutures
      Contracts
                  
                  $
                  (405,838
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (405,838
                  )




NOTE
3.  FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS




Management
Fee




The Fund
pays the Sponsor a management fee, monthly in arrears, in an amount equal to
0.85% per annum of the NAV of the Fund. The management fee is paid in
consideration of the Sponsor’s services as commodity pool operator and for
managing the business and affairs of the Fund. From the management fee, the
Sponsor pays the fees and expenses of the trustee of the Fund (the “Trustee”),
the administrator of the Fund (the “Administrator”), the distributor of the Fund
(the “Distributor”) and the CTA, and certain ordinary expenses of the Fund,
including computer services, legal and accounting fees and expenses, and
printing, mailing and duplication costs.




Offering
Costs and Ongoing Registration Fees




Expenses
incurred in connection with organizing the Fund and the initial offering of the
Shares were paid by the Sponsor. Expenses incurred in connection with the
continuous offering of Shares after the commencement of the Fund’s trading
operations will be paid by the Fund.




Brokerage
Commissions and Fees




The Fund
pays to NewEdge USA, LLC (“NewEdge”), which serves as the Fund’s futures
commission merchant (the “Commodity Broker”), all brokerage commissions,
including applicable exchange fees, NFA fees, give-up fees, pit brokerage fees
and other transaction related fees and expenses charged in connection with
trading activities.




Extraordinary
Fees and Expenses




The Fund
pays all of its extraordinary fees and expenses, if any, as determined by the
Sponsor. Extraordinary fees and expenses are fees and expenses which are
non-recurring and unusual in nature, such as legal claims and liabilities and
litigation costs and any permitted indemnification payments related thereto.
Extraordinary fees and expenses also include material expenses which are not
currently anticipated obligations of the Fund. Routine operational,
administrative and other ordinary expenses are not deemed extraordinary
expenses.




NOTE
4.  CONTRACTS AND AGREEMENTS




The
Commodity Trading Advisor




ECM
serves as the Fund’s CTA, with primary responsibility for trading the Fund’s
futures contracts and overseeing its foreign currency hedging activities. ECM is
registered with the CFTC as a CTA, and is a member of the NFA in such
capacity.


10




For its
services as the CTA, ECM received an initial fee of $25,000 and receives the
greater of an annual minimum charge of $25,000 or an asset charge of 0.1% on the
first $250 million of assets and 0.05% thereafter.




The
Commodity Broker




The
Commodity Broker executes and clears the Fund’s futures transactions and
provides other brokerage-related services. NewEdge may execute foreign exchange
or other over the counter transactions with the Fund, as principal.




A variety
of executing brokers selected by the Sponsor may execute futures transactions on
behalf of the Fund. The executing brokers will give-up all such transactions to
NewEdge, which serves as the Commodity Broker. On average, total charges paid to
the Commodity Broker are approximately $17.50 per round-turn trade.




The
Administrator




The
Sponsor, on behalf of the Fund, has appointed Brown Brothers
Harriman & Co. (“BBH&Co.”) as the Administrator of the Fund.
The Sponsor, the Fund and BBH&Co. have entered into an Administrative Agency
Agreement in connection therewith. Pursuant to the terms of the Administrative
Agency Agreement and under the supervision and direction of the Sponsor,
BBH&Co. prepares and files certain regulatory filings on behalf of the Fund.
BBH&Co. may also perform other services for the Fund pursuant to the
Administrative Agency Agreement as mutually agreed upon by the Sponsor, the Fund
and BBH&Co. from time to time. BBH&Co. also serves as the transfer agent
of the Fund pursuant to the Administrative Agency Agreement.




The
Custodian




BBH&Co.
serves as the custodian of the Fund (the “Custodian”), and the Fund and
BBH&Co. have entered into a Custodian Agreement in connection therewith.
Pursuant to the terms of the Custodian Agreement, BBH&Co. is responsible for
the holding and safekeeping of assets delivered to it by the Fund, and
performing various administrative duties in accordance with instructions
delivered to BBH&Co. by the Fund.




For its
services as both the Administrator and the Custodian to the Fund, the Sponsor
pays BBH&Co. the greater of an annual minimum charge of $175,000 or an asset
charge of 0.08% on the first $1 billion of assets and 0.0615%
thereafter.




The
Trustee




Wilmington
Trust Company, a Delaware banking corporation, is the sole Trustee of the Fund.
The Trustee’s duties and liabilities with respect to the offering of the Shares
and the management of the Fund are limited to its express obligations under the
Amended and Restated Declaration of Trust and Trust Agreement of the Fund (the “Trust
Declaration”).




The Trust
Declaration provides that the Trustee is compensated by the Sponsor, and is
indemnified by the Sponsor against any expenses it incurs relating to or arising
out of the formation, operation or termination of the Fund, or the performance
of its duties pursuant to the Trust Declaration, except to the extent that such
expenses result from the gross negligence or willful misconduct of the
Trustee.




The
Distributor




The
Sponsor, on behalf of the Fund, has appointed ALPS Distributors, Inc.
(“ALPS”) to assist the Sponsor and BBH&Co., in its capacity as the
Administrator, with certain functions and duties relating to the creation and
redemption of blocks of 100,000 Shares (“Baskets”), including receiving and
processing orders from authorized purchasers to create and redeem Baskets,
coordinating the processing of such orders and related functions and
duties.


11




For its
services as Distributor to the Fund, the Sponsor will pay ALPS a fee in an
amount to be agreed upon from time to time. ALPS will waive all fees for the
first two years of the contract.




NOTE
5.  FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES




Market
Risk




The Fund
holds EUA futures contracts, as well as cash and short-term fixed income debt
securities as a result of the inherent leverage in a futures position. Because
of the limited diversification of the Fund’s assets, fluctuations in the value
of the underlying EUA futures contracts greatly affect the price of the Shares.
The market risk associated with the Fund’s commitments to purchase commodities
is the risk arising from changes in the market value of the contracts. The Fund
is not designed to be leveraged. The Fund is managed such that the NAV of the
Fund corresponds generally to the value of the Fund’s long position in futures
contracts.




The
futures contracts held by the Fund are “marked to market” on each day that the
ECE is open for trading. Reductions or increases in the aggregate value of the
futures contracts held by the Fund result in corresponding reductions or
increases in the NAV of the Fund.




The
Fund’s exposure to market risk is influenced by a number of factors, including
the volatility of interest rates and foreign currency exchange rates, the
liquidity of the markets in which the contracts are traded and the relationships
among the contracts held. The inherent uncertainty of the Fund’s trading as well
as the development of drastic market occurrences could ultimately lead to a loss
of all or substantially all of investors’ capital.




All of
the contracts currently traded by the Fund are exchange-traded. The risks
associated with exchange-traded contracts are generally perceived to be less
than those associated with over-the-counter transactions since, in
over-the-counter transactions, the Fund must rely solely on the credit of its
respective individual counterparties. However, in the future, if the Fund
were to enter into non-exchange traded contracts, it would be subject to the
credit risk associated with counterparty non-performance. The credit risk from
counterparty non-performance associated with such instruments is the net
unrealized gain, if any. The Fund also has credit risk since the sole
counterparty to all domestic and foreign futures contracts is the exchange
on which the relevant contracts are traded. In addition, the Fund bears the risk
of financial failure by the clearing broker.





Fair Value of Derivative InstrumentsAsset DerivativesAs of April 30, 2009
                                                    
                                                    As of July 31, 2008Derivatives not
                                                    
                                                    Condensed
                                                    
                                                    
                                                    
                                                    CondensedAccounted for as
                                                    
                                                    Statement of
                                                    
                                                    
                                                    
                                                    Statement offor as Hedging
                                                    
                                                    Financial
                                                    
                                                    Unrealized
                                                    
                                                    Financial
                                                    
                                                    UnrealizedInstruments under
                                                    
                                                    Condition
                                                    
                                                    Appreciation/
                                                    
                                                    Condition
                                                    
                                                    Appreciation/Statement No. 133
                                                    
                                                    Location
                                                    
                                                    (Depreciation)
                                                    
                                                    Location
                                                    
                                                    (Depreciation)Commodity
      Contracts
                                                    
                                                    Assets
                                                    
                                                    $
                                                    (405,838
                                                    )*
                                                    Assets
                                                    
                                                    $
                                                    -





*
Includes cumulative appreciation (depreciation) of futures contracts as reported
on the Condensed Schedule of Investments.


12




The
Effect of Derivative Instruments on the Condensed Statements of
Operations


for
the three months ended April 30, 2009 and 2008





Change in
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Change inRealized
                                                      
                                                      
                                                      Unrealized
                                                      
                                                      
                                                      Realized
                                                      
                                                      
                                                      UnrealizedDerivatives not
                                                      
                                                      Location of
                                                      
                                                      
                                                      Gain or (Loss)
                                                      
                                                      
                                                      Appreciation or
                                                      
                                                      
                                                      Gain or (Loss)
                                                      
                                                      
                                                      Appreciation orAccounted for as
                                                      
                                                      Gain or (Loss)
                                                      
                                                      
                                                      on Derivatives
                                                      
                                                      
                                                      (Depreciation)
                                                      
                                                      
                                                      on Derivatives
                                                      
                                                      
                                                      (Depreciation)for as Hedging
                                                      
                                                      on Derivatives
                                                      
                                                      
                                                      Recognized
                                                      
                                                      
                                                      Recognized
                                                      
                                                      
                                                      Recognized
                                                      
                                                      
                                                      RecognizedInstruments under
                                                      
                                                      Recognized
                                                      
                                                      
                                                      in Income
                                                      
                                                      
                                                      in Income
                                                      
                                                      
                                                      in Income
                                                      
                                                      
                                                      in IncomeStatement No. 133
                                                      
                                                      in Income
                                                      
                                                      
                                                      2009
                                                      
                                                      
                                                      2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2008Commodity
      Contracts
                                                      
                                                      Change
      in unrealized gains (losses) on open positions
                                                      
                                                      $
                                                      -
                                                      
                                                      $
                                                      793,838
                                                      
                                                      $
                                                      -
                                                      
                                                      $
                                                      -




Credit
Risk




When the
Fund enters into futures contracts, it is exposed to credit risk that the
counterparty to the contract will not meet its obligations. The counterparty for
futures contracts is the clearing house associated with the particular exchange.
In general, clearing houses are backed by their corporate members who may be
required to share in the financial burden resulting from the nonperformance by
one of their members and, as such, should significantly reduce this credit risk.
In cases where the clearing house is not backed by the clearing members (i.e., some foreign
exchanges), it may be backed by a consortium of banks or other financial
institutions. There can be no assurance that any counterparty, clearing member
or clearing house will meet its obligations to the Fund.




Currency
Risk




The Fund
enters into futures contracts that are denominated in euros while the Shares are
priced in dollars. As a result, the Fund is exposed to currency risk. While the
Fund may use forward currency contracts or options to hedge against this risk,
there can be no assurance that such hedging transactions will be available in
the future or, even if undertaken, effective. In addition, changes in the value
of the Fund’s euro-denominated investments, such as its ECX CFI Futures
Contracts, during a particular month are not hedged. Thus, the Fund is subject
to foreign exchange risk on such changes in value. While hedging may provide
protection against an adverse movement in currency exchange rates, it can also
preclude the Fund from benefiting from a favorable movement in such exchange
rates.




Interest
Rate Risk




The Fund
is subject to interest rate risk. Substantially all funds received are invested
in interest bearing instruments and, therefore, a decrease in interest rates
could have a negative impact on the Fund’s NAV.





NOTE 6.  FINANCIAL
HIGHLIGHTS





The
following table presents per Share performance data and other supplemental
financial data for the three months ended April 30, 2009 for the shareholders of
the Fund. This information has been derived from information presented in the
condensed financial statements.


13





For the three
                            months ended
                            April 30, 2009
                            (Unaudited)Per Share Operating
      Performance:Net
      asset value, beginning of period
                          
                          $
                          18.97Total
      income
                          
                          
                          3.97Total
      expenses
                          
                          
                          (0.07)Net
      increase in net asset value
                          
                          
                          3.90Net
      asset value, end of period
                          
                          $
                          22.87Total
      Return
                          
                          
                          20.56
                          %Ratios
      to Average Net AssetsTotal
      income
                          
                          
                          21.39
                          %Expenses
      excluding management fees*
                          
                          
                          0.80
                          %Management
      fees*
                          
                          
                          0.85
                          %Net
      income
                          
                          
                          20.99
                          %*Annualized





Total
returns are calculated based on the change in value during the period. An
individual shareholder’s total return and ratio may vary from the above total
returns and ratios based on the timing of purchases and sales of Shares of the
Fund.





NOTE 7.  RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS





In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”).
SFAS 161 is effective for fiscal years and interim periods beginning after
November 15, 2008 and requires enhanced disclosures to provide information about
the reasons the Fund invests in derivative instruments, the accounting treatment
of derivative transactions and the effect derivatives have on the Fund’s
financial performance. SFAS 161 disclosures can be found in Note 5 of these
Notes to Condensed Financial Statements.





In
September 2008, the FASB issued Staff Position No. 133-1 and FIN 45-4
“Disclosures about Credit Derivatives and Certain Guarantees: An amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161” (the “Amendment”).  The
Amendment is effective for annual and interim reporting periods ending after
November 15, 2008. The Amendment requires enhanced disclosures regarding a
fund’s credit derivatives holdings, including credit default swaps, credit
spread options, and hybrid financial instruments containing embedded credit
derivatives. The Sponsor has evaluated the Amendment and determined that it will
have no impact on the Fund’s financial statements.


14


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




The
following discussion should be read in conjunction with the condensed financial
statements and the notes thereto of AirSharesTM EU Carbon Allowances Fund (the
“Fund”) included in Item 1 of this quarterly report on Form 10-Q.





Forward-Looking
Information




This
quarterly report on Form 10-Q, including this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements regarding the plans and objectives of management for
future operations. This information may involve known and unknown risks,
uncertainties and other factors that may cause the Fund’s actual results,
performance or achievements to be materially different from future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
the Fund’s future plans, strategies and expectations, are generally identifiable
by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project,” the negative of these words, other
variations on these words or comparable terminology. These forward-looking
statements are based on assumptions that may be incorrect, and the Fund cannot
assure investors that the projections included in these forward-looking
statements will come to pass. The Fund’s actual results could differ materially
from those expressed or implied by the forward-looking statements as a result of
various factors.




The Fund
has based the forward-looking statements included in this quarterly report on
Form 10-Q on information available to it on the date of this quarterly report on
Form 10-Q, and the Fund assumes no obligation to update any such forward-looking
statements. Although the Fund undertakes no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, investors are advised to consult any additional disclosures
that the Fund may make directly to them or through reports that the Fund in the
future files with the U.S. Securities and Exchange Commission (the “SEC”),
including annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K.




Introduction





The Fund
was organized as a statutory trust under the laws of the state of Delaware on
August 13, 2007. The Fund is a commodity pool that issues units of
beneficial interest (“Shares”) that may be purchased and sold on the NYSE Arca,
Inc. (the “NYSE Arca”). The investment objective of the Fund is to provide
investors with investment results which correspond generally, before payment of
the Fund’s expenses and liabilities, to the performance of a basket of several
years of exchange-traded futures contracts for carbon equivalent emissions
allowances (“EUAs”), each expiring in December. An EUA is an entitlement to emit
one metric tonne, or ton, of carbon dioxide equivalent that is transferable
under the European Union Emissions Trading Scheme (the “EU ETS”). The EU ETS is
a “cap and trade” emissions trading program established by the European Union in
furtherance of the joint commitment of its member states under the Kyoto
Protocol to reduce their greenhouse gas emissions. The Kyoto Protocol, which was
adopted pursuant to the United Nations Framework Convention on Climate Change,
seeks to achieve the stabilization of greenhouse gas concentrations in the
atmosphere at a level that would prevent adverse effects on the world’s climate
system resulting from human activities. The developed countries that have
ratified and are parties to the Kyoto Protocol have committed to adopt national
policies and measures intended to return greenhouse gases generally to their
1990 levels. Each such party must meet its commitment over the 5-year period
commencing January 1, 2008 and ending December 31, 2012.




The
Fund’s portfolio of futures contracts consists of long positions in ICE Futures
ECX Carbon Financial Instrument Futures Contracts (“ECX CFI Futures Contracts”),
each expiring in December. ECX CFI Futures Contracts have been developed by the
European Climate Exchange (the “ECE”) and are listed and admitted to trading on
the London-based ICE Platform operated by ICE Futures. These contracts are
standardized contractual instruments for futures on deliverable EUAs issued
under the EU ETS. Each contract provides for delivery of 1,000 EUAs on a
specified date at a specified price. The Fund holds an unleveraged long position
in a portfolio of ECX CFI Futures Contracts.




15




The Fund
may also invest in other EUA futures contracts expiring in December, including
those that trade on other exchanges. If the EU ETS is extended beyond 2012,
XShares Advisors LLC (the “Sponsor”) will determine and publicly disclose
by no later than September 30, 2012 whether it will extend the operation of
the Fund beyond December 2012. The Fund is not actively managed in the sense
that it does not engage in activities designed to obtain a profit from, or to
ameliorate losses caused by, changes in the value of its portfolio of EUA
futures contracts.




XShares
Advisors LLC, a Delaware limited liability company, serves as the Sponsor
of the Fund. The Sponsor was formed on March 15, 2006. The Sponsor also
serves as the commodity pool operator of the Fund. The Sponsor is registered as
a commodity pool operator with the Commodity Futures Trading Commission, and is
a member of the National Futures Association (the “NFA”).




Calculation
of the NAV




The Fund
calculates its net asset value (“NAV”) on each trading day by taking the current
market value of its total assets, subtracting any liabilities and dividing the
amount by the total number of Shares issued and outstanding. In determining the
market value of the Fund’s assets, the Fund uses the ICE Futures settlement
price on that day to determine the value of contracts held on the ICE Futures
exchange. The market value of all open futures contracts traded on any exchange
other than ICE Futures is based upon the settlement price for that particular
futures contract traded on the applicable exchange on the trading
date.




Management’s
Discussion of Results of Operations





Results of
Operations.On December 10, 2008, the Fund established its
initial NAV by setting the price at $25.00 per Share and issued 200,000 Shares
in exchange for $5,000,000. The Fund also commenced investment activities on
December 11, 2008 by purchasing ECX CFI Futures Contracts on the ICE Futures
exchange. On December 15, the Fund listed its Shares on the NYSE Arca under the
ticker symbol “ASO”.





During
the three months ended April 30, 2009, the total realized gain/(loss) on
ECX CFI Futures Contracts and other EUA futures contracts was $0 and the change
in total unrealized gain on ECX CFI Futures Contracts and other EUA futures
contracts was $793,838. The Fund’s total unrealized loss on ECX CFI Futures
Contracts and other EUA futures contracts as of April 30, 2009 was $405,838. The
Fund’s NAV per Share increased over this period from $18.97 to $22.87, primarily
due to gains from investment activities.





Allocation Methodology.The
Fund purchases futures contracts with proceeds each time a block of 100,000
Shares (a “Basket”) is created by applying the following allocation methodology.
Futures contracts are liquidated applying an analogous allocation methodology in
connection with the redemption of Baskets. As a general matter, the Fund
purchases ECX CFI Futures Contracts of the then-current year and each of the
next subsequent four consecutive years. However, if on the applicable date of
determination, annual contracts for each of the five applicable years are not
available for trading because the EU ETS has not been extended beyond 2012 and
such contracts are otherwise not listed on the ICE Futures exchange, the
allocation methodology is applied using only the then-current year and each of
the remaining years thereafter through 2012 which are available for
trading.





The
Basket allocation is determined as follows:





●
            An
      equal value of each of the included contracts will be purchased by the
      Fund upon creation of a Basket if either of the following two (2)
      conditions are met:


●
            Each
      of the included annual contracts has a 60-day average daily value (“ADV”)
      traded that exceeds $100,000,000;
or


●
            At
      the time the order to create a Basket is received, the amount that the
      Fund would need to invest in each annual contract in order to equally
      weight the basket does not exceed 5% of that contract’s 60-day
      ADV.


●
            If
      neither of the above conditions is met, the allocation will be made among
      the included annual contracts pro rata in accordance with their respective
      60-day ADV.





If the
Fund had created one Basket on April 30, 2009, the proceeds would have been
allocated among the ECX CFI Futures Contracts expiring in December 2009 through
2012, pro rata in accordance with their respective 60-day ADV, which would have
resulted in the following allocations:


16


Allocations
Applicable to a Hypothetical Basket Creation on April 30, 2009





Contract
      Expiration Date
                  
                  AllocationDecember
      2009
                  
                  
                  75.83
                  %December
      2010
                  
                  
                  9.41
                  %December
      2011
                  
                  
                  4.36
                  %December
      2012
                  
                  
                  10.40
                  %





The Fund
intends to include contracts expiring in December of years 2013 and thereafter
to the extent they are listed on the ICE Futures exchange and are actively
traded according to the criteria described above, even if the EU ETS has not
been extended beyond 2012.





Regardless
of whether the value of its portfolio is rising, falling or flat over any
particular period, the Sponsor will cause the Fund’s existing long positions to
be closed when appropriate before expiration and reinvest the proceeds from the
close into futures contracts expiring in December of the next five subsequent
years by applying the same allocation methodology described above. However, if,
on the date of reinvestment of such proceeds, EUA futures contracts for December
expiration in any year after 2012 are otherwise not listed for trading, the
proceeds will be so allocated among the futures contracts expiring in December
of the next following year and each of the years thereafter for which annual
contracts are available for trading.





The Fund
may also invest in other EUA futures contracts, including those that trade on
other exchanges, provided that the Fund's allocation to such contracts is
consistent with the investment methodology described above. If the EU ETS is
extended beyond 2012, the Sponsor will determine and publicly disclose by no
later than September 30, 2012, whether it will extend the operation of the
Fund beyond December 2012. If the EU ETS is not extended beyond December
2012, then the operation of the Fund will be terminated.





Interest
Income.  The Fund also earns interest on assets on deposit with
the Fund’s futures commission merchant and custodian. During the three months
ended April 30, 2009, the Fund earned $814 in interest income. Based on the
Fund’s average daily total net assets, this is equivalent to an annualized
interest rate of 0.09%.





Portfolio
Expenses.  The Fund’s expenses consist of management fees,
brokerage commissions and fees, certain offering costs and extraordinary fees
and expenses, if any. The Fund pays the Sponsor a management fee, monthly in
arrears, in an amount equal to 0.85% per annum of the NAV of the Fund as of the
last business day of such month. The management fee is paid in consideration of
the Sponsor’s acting as commodity pool operator and for its management of the
business and affairs of the Fund. From the management fee, the Sponsor pays the
fees and expenses of the trustee of the Fund (the “Trustee”), the administrator
of the Fund (the “Administrator”), the distributor of the Fund (the
“Distributor”) and the Fund’s commodity trading advisor, and certain ordinary
expenses of the Fund, including computer services, legal and accounting fees and
expenses, and printing, mailing and duplication costs. During the three months
ended April 30, 2009, the Fund paid the Sponsor a management fee of
$7,698.





The Fund
also pays to NewEdge USA, LLC (“NewEdge”), which serves as the Fund’s
futures commission merchant, all brokerage commissions, including applicable
exchange fees, interest on its margin deficit, NFA fees, give-up fees, pit
brokerage fees and other transaction related fees and expenses charged in
connection with trading activities. During the three months ended April 30,
2009, the Fund paid $0 to NewEdge in brokerage fees and expenses and $7,268 to
NewEdge in interest on its margin deficit.





Expenses
incurred in connection with organizing the Fund and the initial offering of the
Shares were paid by the Sponsor. Expenses incurred in connection with the
continuous offering of Shares after the commencement of the Fund’s trading
operations will be paid by the Fund.


17


The Fund
also pays all of its extraordinary fees and expenses, if any, as determined by
the Sponsor. Extraordinary fees and expenses are fees and expenses which are
non-recurring and unusual in nature, such as legal claims and liabilities and
litigation costs and any permitted indemnification payments related thereto.
Extraordinary fees and expenses shall also include material expenses which are
not currently anticipated obligations of the Fund. Routine operational,
administrative and other ordinary expenses are not deemed extraordinary
expenses. During the three months ended April 30, 2009, the Fund did not incur
any extraordinary fees and expenses.




EUA Market. During the three
months ended April 30, 2009, the EUA market was impacted by several factors.
Most significantly, signs of a slowdown in the deterioration of the global
economy increased the prospect for a recovery in economic activity in late 2009
or 2010 for EU member companies, implying greater carbon emissions going
forward.  This led to a reversal of a six month downtrend in prices in
the EUA market. Further, prices were positively impacted by an increase in the
price of crude oil versus that of higher-polluting coal.




Critical
Accounting Policies




Preparation
of the financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. The Fund’s application of these policies involves
judgments and actual results may differ from the estimates used.




Liquidity
and Capital Resources




As of
April 30, 2009, the Fund’s total net assets consisted of EUA futures contracts
and short-term securities and cash, a portion of which is used as margin for the
Fund’s trading in commodities. The Fund is required to post margin in order to
establish a futures position as well as to maintain such a position once it is
established. The percentage of the Fund’s NAV that is represented by the assets
posted as margin may vary from period to period as the market value of the
underlying EUA futures contracts changes. If the market value of the contracts
decreases, the percentage of the Fund’s net assets posted as margin will
increase, both because the reduction in market value will reduce the NAV of the
Fund and because the margin requirement applicable will increase by the same
amount. The balance of the Fund’s net assets is held in the Fund’s commodity
trading account or in a custodial account at Brown Brothers Harriman & Co.
During the three months ended April 30, 2009, the Fund earned $504 in interest
income on its short-term securities.




The
Fund’s commodity contracts may be subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons, including,
without limitation, the failure of the member states to adhere to their
obligations under the Kyoto Protocol, the withdrawal of countries from the Kyoto
Protocol, and the failure of the national registries of a sufficient number of
countries to become and to remain linked with an “international transaction log”
that tracks and verifies transactions between countries and is administered by
the United Nations Framework Convention on Climate Change secretariat. During
such periods of illiquidity, the Fund may be unable to promptly liquidate its
commodity futures positions.




Since the
Fund trades futures contracts, its capital is at risk due to changes in the
value of these contracts (market risk) or the inability of counterparties to
perform under the terms of the contracts (credit risk). Since these contracts
are denominated in euros, the Fund is also subject to currency exchange
risk.




Credit
Risk




When the
Fund enters into futures contracts, it is exposed to credit risk that the
counterparty to the contract will not meet its obligations. The counterparty for
futures contracts is the clearing house associated with the particular exchange.
In general, clearing houses are backed by their corporate members who may be
required to share in the financial burden resulting from the nonperformance by
one of their members and, as such, should significantly reduce this credit risk.
In cases where the clearing house is not backed by the clearing members (i.e., some foreign
exchanges), it may be backed by a consortium of banks or other financial
institutions. There can be no assurance that any counterparty, clearing member
or clearing house will meet its obligations to the Fund.


18




Currency
Risk




The Fund
enters into futures contracts that are denominated in euros while the Shares are
priced in dollars. As a result, the Fund is exposed to currency risk. While the
Fund may use forward currency contracts or options to hedge against this risk,
there can be no assurance that such hedging transactions will be available in
the future or, even if undertaken, effective.




In
addition, changes in the value of the Fund’s euro-dominated investments, such as
its ECX CFI Futures Contracts, during a particular month are not hedged. Thus,
the Fund is subject to foreign exchange risk on such changes in value. During
the three months ended April 30, 2009, foreign currency translations resulted in
a realized gain of $0 to the Fund and an unrealized loss of $213 to the Fund and
did not materially affect the Fund’s NAV. While hedging may provide protection
against an adverse movement in currency exchange rates, it can also preclude the
Fund from benefiting from a favorable movement in such exchange rates. In
addition, prospective investors whose assets and liabilities are predominately
denominated in other currencies should take into account the potential risk of
loss arising from fluctuations in value between the U.S. dollar and such other
currencies.




Interest
Rate Risk




The Fund
is subject to interest rate risk.  Substantially all funds received
are invested in interest bearing instruments and, therefore, a decrease in
interest rates could have a negative impact on the Fund’s NAV.




Off-balance
Sheet Arrangements and Contractual Obligations




During
the three months ended April 30, 2009, the Fund did not utilize, nor does it
expect to utilize in the future, special purpose entities to facilitate
off-balance sheet financing arrangements. The Fund has no loan guarantee
arrangements or off-balance sheet arrangements of any kind other than agreements
entered into in the normal course of business, which may include indemnification
provisions related to certain risks service providers undertake in performing
services which are in the best interests of the Fund. While the Fund’s future
exposure under such indemnification provisions cannot be estimated, these
general business indemnifications did not have a material impact on the Fund’s
financial position during the three months ended April 30, 2009.




The
Fund’s contractual obligations are to the Sponsor and the Fund’s commodity
brokers. Management fee payments made to the Sponsor are calculated as a fixed
percentage of the Fund’s NAV. Commission payments to commodity brokers are on a
contract-by-contract, or round-turn, basis. As such, the Sponsor cannot
anticipate the amount of payments that will be required under these arrangements
for future periods, as net asset values and trading levels required to meet the
Fund’s investment objectives will not be known until a future date. These
agreements are effective for one year terms and renewable automatically for
additional one year terms unless terminated. Additionally, these agreements may
be terminated by either party for various reasons.




Item 3.
Quantitative and Qualitative Disclosures About Market Risk.




The Fund
holds EUA futures contracts expiring in December, as well as cash and short-term
fixed income debt securities as a result of the inherent leverage in a futures
position. Because of this limited diversification of the Fund’s assets,
fluctuations in the value of the underlying EUA futures contracts expiring in
December are expected to greatly affect the price of the Shares. The market risk
associated with the Fund’s commitments to purchase commodities is limited to the
gross or face amount of the contracts held. The Fund is not designed to be
leveraged. The NAV of the Fund is anticipated to correspond generally to the
value of the Fund’s long position in EUA futures contracts expiring in
December.




Futures
contracts are generally considered to be leveraged financial instruments. The
initial margin required to be deposited by the Fund in order to establish a
particular futures position is determined based on the projected overall risk of
the Fund’s portfolio. In any event, the initial margin required will be less
than the face amount of the contracts held by the Fund.


19




The Fund
intends to manage its operations in such a way that the aggregate value of its
futures positions approximates the NAV of the Fund. The Fund buys EUA futures
contracts expiring in December each time a Basket is created, and liquidates
futures contracts each time a Basket is redeemed.




The
futures contracts held by the Fund are “marked to market” on each day that the
ECE is open for trading. Reductions or increases in the aggregate value of the
futures contracts held by the Fund result in corresponding reductions or
increases in the NAV of the Fund.




The
futures contracts held by the Fund are denominated in euros while the Shares are
priced in dollars. As a result, the Fund is exposed to currency risk. While the
Fund may use forward currency contracts or options to hedge against this risk,
there can be no assurance that such hedging transactions will be available in
the future or, even if undertaken, effective. In addition, changes in the value
of the Fund’s euro-denominated investments, such as its ECX CFI Futures
Contracts, during a particular month are not hedged. Thus, the Fund is subject
to foreign exchange risk on such changes in value. While hedging may provide
protection against an adverse movement in currency exchange rates, it can also
preclude the Fund from benefiting from a favorable movement in such exchange
rates.




The Fund
is subject to interest rate risk.  Substantially all funds received
are invested in interest bearing instruments and, therefore, a decrease in
interest rates could have a negative impact on the Fund’s NAV.




The
Fund’s exposure to market risk is influenced by a number of factors, including
the volatility of interest rates and foreign currency exchange rates, the
liquidity of the markets in which the contracts are traded and the relationships
among the contracts held. The inherent uncertainty of the Fund’s trading as well
as the development of drastic market occurrences could ultimately lead to a loss
of all or substantially all of investors’ capital.




Item 4.
Controls and Procedures.




Disclosure
Controls and Procedures





The Fund
maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in the Fund’s periodic reports
filed or submitted under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported within the time
period specified in the SEC’s rules and forms.




The duly
appointed officers of the Sponsor, including its chief executive officer
and chief financial officer, who perform functions equivalent to those
of a principal executive officer and principal financial officer of the Fund if
the Fund had any officers, have evaluated the effectiveness of the Fund’s
disclosure controls and procedures and have concluded that the
disclosure controls and procedures of the Fund have been effective as of the end
of the period covered by this quarterly report on Form 10-Q.





Change
in Internal Control Over Financial Reporting





There
were no changes in the Fund’s internal control over financial reporting during
the Fund’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Fund’s internal control over financial
reporting.


20


Part
II. OTHER INFORMATION




Item
1.  Legal Proceedings.





Not
applicable.





Item
1A.  Risk Factors.





There has
not been a material change from the risk factors previously disclosed in the
Fund’s Registration Statement on Form S-1 filed with the SEC on November 6,
2008.





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





Not applicable.





Item
3.  Defaults Upon Senior Securities.





Not applicable.





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





Not
applicable.





Item 5. 
Other Information.





Monthly
Account Statements





Pursuant
to the requirement under Rule 4.22 under the Commodity Exchange Act, each month
the Fund publishes an account statement for its shareholders, which includes a
Statement of Income (Loss) and a Statement of Changes in NAV. The account
statement is filed with the SEC on a current report on Form 8-K pursuant to
Section 13 or 15(d) of the Exchange Act and posted each month on the Fund’s
website at www.xsharesadvisors.com/airshares.





Item 6.
Exhibits.




Listed
below are the exhibits which are filed or furnished as part of this quarterly
report on Form 10-Q (according to the number assigned to them in Item 601
of Regulation S-K):





ExhibitNumber
                
                Description of Document31.1*
                
                Certification
      by Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2*
                
                Certification
      by Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1**
                
                Certification
      by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2**
                
                Certification
      by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





*
            Filed
      herewith


**
            Furnished
      herewith


21


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




AIRSHARESTM EU
CARBON ALLOWANCES FUND




By:
                    XShares
      Advisors LLC,Sponsor
      of the
Registrant





By:
                /s/
      Jeffrey L. FeldmanJeffrey
      L. FeldmanChief
      Executive Officer





Date:
June 15, 2009





By:
                /s/
      David W. JaffinDavid
      W. JaffinChief
      Financial Officer





Date:
June 15, 2009


22