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 October 31,
2008.


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.




x
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.
                  8Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                  11Item
      4. Controls and Procedures.
                  12Part
      II. OTHER INFORMATIONItem
      1. Legal Proceedings.
                  13Item
      1A. Risk Factors.
                  13Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                  13Item
      3. Defaults Upon Senior Securities.
                  13Item
      4. Submission of Matters to a Vote of Security Holders.
                  13Item
      5. Other Information.
                  13Item
      6. Exhibits.
                  13









Part I.FINANCIAL
INFORMATION




Item 1.Condensed Financial
Statements.




AirSharesTM EU
Carbon Allowances Fund


Condensed
Statements of Financial Condition


At
October 31, 2008 (Unaudited) and July 31, 2008





October 31, 2008
                
                
                July 31, 2008AssetsCash
                
                $
                1,000
                
                
                $
                1,000Shareholders'
      EquityLimited
      Shares
                
                $
                -
                
                
                $
                -Sponsored
      Shares
                
                
                -
                
                
                
                -Additional
      Paid in Capital
                
                
                1,000
                
                
                
                1,000Total
      Shareholders' Equity
                
                $
                1,000
                
                
                $
                1,000





See
accompanying notes to condensed statements of financial condition.




-1-




AirSharesTM
EU Carbon Allowances Fund


Notes
to Condensed Statements of Financial Condition


For
the period ended October 31, 2008 (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 will issue 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. 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
will accomplish 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. The Sponsor’s initial contribution of seed capital may be
redeemed 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.




The Fund
will issue two classes of Shares, “Sponsor’s Shares” and “Limited Shares”. The
Sponsor’s capital contributions shall be represented by “Sponsor’s Shares” and a
limited owner’s capital contributions shall be represented by “Limited
Shares”.




-2-




The Fund
will issue Limited Shares to authorized purchasers by offering creation baskets
consisting of 100,000 Limited Shares (“Creation Baskets”) through a marketing
agent. The Fund will commence trading following acceptance of a subscription for
an initial order for Creation Baskets from an authorized purchaser, at $25.00
per Limited Share ($2.5 million). After the initial order has been accepted
and trading has commenced, the Fund will issue Limited 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 will pay the Fund a transaction fee of $1,000 per Creation Basket for
each order. Subsequent to the sale of the initial Creation Basket, Limited
Shares can be purchased or sold on a nationally recognized securities exchange
in smaller increments. Limited Shares purchased or sold on a nationally
recognized securities exchange will not be made at the net asset value (“NAV”)
of the Fund but rather at the market prices quoted on such
exchange.




The
accompanying unaudited condensed statement of financial condition has been
prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) and, therefore, does 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 statement of financial condition for the
interim period.





At
October 31, 2008, the Fund had not generated any revenues since it had not yet
commenced operations.




NOTE
2.  ACCOUNTING POLICIES




Revenue
Recognition




Futures
contracts and forward currency contracts will be recorded on the trade date. All
such transactions will be recorded on the identified cost basis and marked to
market daily. Unrealized gains or losses on open contracts are reflected in the
statement 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 will be
reflected in the statement of operations. The Fund will earn interest on assets
on deposit with the Fund’s futures commission merchant and
custodian.




Income
Taxes




The Fund
will be taxable as a corporation for U.S. federal income tax purposes.
Accordingly, it will be 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 will affect
the computation of the Fund’s NAV.




Redemptions




Authorized
purchasers may redeem Limited Shares from the Fund only in blocks of 100,000
Limited Shares (“Redemption Baskets”). The amount of the redemption proceeds for
a Redemption Basket will be 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 will
pay the Fund a transaction fee of $1,000 per Redemption Basket for each order to
redeem one or more Redemption Baskets.




Calculation
of NAV




The Fund
will calculate 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 will use 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 will be based upon the settlement price for that
particular futures contract traded on the applicable exchange on the trading
date.




-3-




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.




Recently
Issued Accounting Pronouncements




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. However, on February 1, 2008,
the FASB issued FASB Staff Position (“FSP”) FIN 48-2 entitled “Effective
Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises” (“FSP
FIN 48-2”) which deferred the effective date of FIN 48, for nonpublic
enterprises included within the scope of FSP FIN 48-2, to the annual
financial statements for fiscal years beginning after December 15, 2007. As
of October 31, 2008, the implementation of FIN 48 did not have a material
impact on the Fund’s financial statements.




In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). This standard
clarifies the definition of fair value for financial reporting, establishes a
framework for measuring fair value and requires additional disclosures about the
use of fair value measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. As of October 31, 2008, the adoption
of SFAS No. 157 did not impact the amounts reported in the financial
statements. However, additional disclosures will be required about the inputs
used to develop the measurements of fair value and the effect of certain of the
measurements reported in the statement of operations for a fiscal
period.




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




Management
Fee




The Fund
will pay 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 will be 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 will pay 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 will be 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.




-4-




Brokerage
Commissions and Fees




The Fund
will pay 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
will pay 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 will not be 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.




For its
services as the CTA, ECM will receive an initial fee of $25,000 and 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




NewEdge
serves as the Commodity Broker to execute and clear the Fund’s futures
transactions and provide other brokerage-related services. New Edge 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 will serve as the Commodity Broker. On average, total charges
paid to the Commodity Broker are expected to be less than $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.




-5-




For its
services as both the Administrator and the Custodian to the Fund, the Sponsor
will pay 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 Limited 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.




For its
services as Distributor to the Fund, the Sponsor agrees to 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
will hold 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 are expected to greatly affect the
price of the Shares. The market risk to be associated with the Fund’s
commitments to purchase commodities will be the risk arising from changes in the
market value of the contracts. 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 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 will result in corresponding reductions or
increases in the NAV of the Fund.




The
Fund’s exposure to market risk will be 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.




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 clearinghouse will meet its obligations to the
Fund.




-6-




Currency
Risk




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




NOTE
6. SUBSEQUENT EVENTS




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 $5,002,000.00. 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”.




-7-


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 statements
of financial condition 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 will issue 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 will initially consist 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 will hold an
unleveraged long position in a portfolio of ECX CFI Futures
Contracts.




-8-




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”).




Calculation
of the NAV




The Fund
will calculate 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. The
Fund will use 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 will be
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.During the three months ended October 31, 2008,
the Fund had not yet commenced investment activities nor issued any Shares. In
addition, the Fund did not purchase or own any futures contracts during the
three months ended October 31, 2008, nor were there any receipts or
disbursements of cash from the Fund during this reporting period. Also, the Fund
did not receive any revenue or capital gains (losses), or incur any expenses
during the three months ended October 31, 2008.





Expenses
incurred during the three months ended October 31, 2008 in connection with
organizing the Fund and the initial offering costs of the Shares were borne by
the Sponsor, and are not subject to reimbursement by the
Fund.





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 $5,002,000.00. 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”.





Portfolio
Expenses.  The Fund’s expenses will consist of management fees,
brokerage commissions and fees, certain offering costs and extraordinary fees
and expenses, if any. The Fund will pay 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 will be 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 will pay 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.




The Fund
also will pay to NewEdge USA, LLC (“NewEdge”), which will serve as the
Fund’s futures commission merchant, 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.




Expenses
incurred in connection with organizing the Fund and the initial offering of the
Shares will be 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.




-9-




The Fund
will pay 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 will not be deemed extraordinary
expenses.




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




During
the three months ended October 31, 2008, the Fund had not begun trading
activities. Once the Fund begins trading activities, it is anticipated that all
of its total net assets will consist of EUA futures contracts and short-term
securities and cash, a portion of which will be used as margin for the Fund’s
trading in commodities. The Fund will be 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 will be represented by the
assets posted as margin will 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 net assets will be held in the Fund’s commodity
trading account or in a custodial account at Brown Brothers Harriman &
Co.




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 will trade futures contracts, its capital will be 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
will be denominated in euros, the Fund will also be 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 clearinghouse will meet its obligations to the
Fund.




Currency
Risk




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




-10-




Off-balance
Sheet Arrangements and Contractual Obligations




During
the three months ended October 31, 2008, 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 exposure
under such indemnification provisions cannot be estimated, these general
business indemnifications are not expected to have a material impact on the
Fund’s financial position.




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 are not 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
will hold 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 to be associated with the Fund’s commitments to purchase commodities
will be 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.




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 will buy EUA
futures contracts expiring in December each time a block of 100,000 Limited
Shares (a “Basket”) is created, and will liquidate futures contracts each time a
Basket is redeemed.




The
futures contracts held by the Fund will be “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 will result in corresponding reductions
or increases in the NAV of the Fund.




The
Fund’s exposure to market risk will be 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.




-11-


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.




-12-


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 Post-Effective
Amendment No. 1 to the Registration Statement on Form S-1
filed with the SEC on December 5, 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.





Not
applicable.





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 Document4.1*
              
              Amended
      and Restated Declaration of Trust and Trust Agreement of the
      Registrant.4.2*
              
              Form
      of Authorized Participant Agreement.10.1*
              
              Administration
      Agreement.10.2*
              
              Global
      Custody Agreement.10.3*
              
              Distribution
      and Services Agreement.31.1**
              
              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.





*
              Incorporated
      by reference to the Fund’s Pre-Effective Amendment No. 2 to the
      Registration Statement on Form S-1 (File No. 333-145448) filed on
      September 12, 2008.**
              Filed
      herewith***
              Furnished
      herewith




-13-


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 RegistrantBy:
                /s/ Joseph L. SchockenJoseph
      L. SchockenChief
      Executive OfficerDate:
                December
      22, 2008By:
                /s/ David W. JaffinDavid
      W. JaffinChief
      Financial OfficerDate:
                December
      22, 2008




-14-