UNITED STATES
SECURITIES AND EXCHANGE COMMISSION





FORM 10-QSB



``

T
         QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007



£
         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______ to _______

Commission File Number:     000-51256





|POWER AIR CORPORATION                                            
|-----------------------------------------------------------------
|(Exact name of small business issuer as specified in its charter)

``



|Nevada                                                         | Not applicable                   
|-------------------------------------------------------------- | ---------------------------------
|(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.)

``



|4777 Bennett Drive, Suite E, Livermore, California, 94551
|---------------------------------------------------------
|(Address of principal executive offices)                 





|(925) 960-8777                             
|-------------------------------------------
|(Issuer's telephone number)                
|Not applicable                             
|(Former name, if changed since last report)

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

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

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:   45,610,818 shares of Common Stock as of May 21, 2007.

Transitional Small Business Disclosure Format (Check one):   Yes  £
   No  T
..

__________





---

POWER AIR CORPORATION



Quarterly Report On Form 10-QSB
For The Quarterly Period Ended March 31, 2007

FORWARD-LOOKING STATEMENTS

This Form 10-QSB for the quarterly period ended March 31, 2007 contains forward-looking statements that involve risks and uncertainties. Forward-looking statements in this document include, among others, statements regarding our capital needs, business plans and expectations. Such forward-looking statements involve assumptions, risks and uncertainties regarding, among others, the success of our business plan, availability of funds, government regulations, operating costs, our ability to achieve significant revenues, our business model and products and other factors. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. In evaluating these statements, you should consider various factors, including the assumptions, risks and uncertainties set forth in reports and other documents we have filed with or furnished to the SEC, including, without limitation, our annual report on Form 10-KSB for the year ended September 30, 2006. These factors or any of them may cause our actual results to differ materially from any forward-looking statement made in this document. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding future events, our actual results will likely vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. The forward-looking statements in this document are made as of the date of this document and we do not intend or undertake to update any of the forward-looking statements to conform these statements to actual results, except as required by applicable law, including the securities laws of the United States.

__________

2



---

PART I - FINANCIAL INFORMATION

Item 1.            Financial Statements



Power Air Corporation
(A Development Stage Company)
Consolidated Balance Sheets





|                                                                                                                                              | March 31,
2007
$ |  | September 30,
2006
$
|--------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- |  | --------------------
|                                                                                                                                              | (Unaudited)      |  |                     
|ASSETS                                                                                                                                        |                  |  |                     
|                                                                                                                                              |                  |  |                     
|Current Assets                                                                                                                                |                  |  |                     
|                                                                                                                                              |                  |  |                     
|Cash                                                                                                                                          | 1,317,441        |  | 924,928             
|Other current assets                                                                                                                          | 186,984          |  | 109,739             
|                                                                                                                                              |                  |  |                     
|Total current assets                                                                                                                          | 1,504,425        |  | 1,034,667           
|                                                                                                                                              |                  |  |                     
|Property and Equipment (Note 3)                                                                                                               | 174,476          |  | 167,085             
|                                                                                                                                              |                  |  |                     
|Deferred financing costs (Note 5)                                                                                                             | 1,886,359        |  | 28,047              
|                                                                                                                                              |                  |  |                     
|Total Assets                                                                                                                                  | 3,565,260        |  | 1,229,799           
|                                                                                                                                              |                  |  |                     
|                                                                                                                                              |                  |  |                     
|LIABILITIES AND STOCKHOLDERS'EQUITY                                                                                                           |                  |  |                     
|                                                                                                                                              |                  |  |                     
|Current Liabilities                                                                                                                           |                  |  |                     
|                                                                                                                                              |                  |  |                     
|Accounts payable                                                                                                                              | 119,267          |  | 38,930              
|Accrued liabilities                                                                                                                           | 40,921           |  | 78,560              
|Director loan payable (Note 4(b))                                                                                                             | 59,473           |  | -                   
|Promissory Notes (Notes 5 and 9)                                                                                                              | 2,075,000        |  | -                   
|                                                                                                                                              |                  |  |                     
|Total current liabilities                                                                                                                     | 2,294,661        |  | 117,490             
|                                                                                                                                              |                  |  |                     
|                                                                                                                                              |                  |  |                     
|Commitments and Contingencies (Note 7)                                                                                                        |                  |  |                     
|                                                                                                                                              |                  |  |                     
|                                                                                                                                              |                  |  |                     
|Stockholders'Equity                                                                                                                           |                  |  |                     
|                                                                                                                                              |                  |  |                     
|Common Stock (Note 6), 375,000,000 shares authorized, $0.001 par value; 45,610,818 and 45,348,318 shares issued and outstanding, respectively | 45,610           |  | 45,348              
|                                                                                                                                              |                  |  |                     
|Additional Paid-In Capital                                                                                                                    | 12,517,847       |  | 12,305,669          
|Equity Certificates (Note 5)                                                                                                                  | 1,996,866        |  | -                   
|                                                                                                                                              |                  |  |                     
|Deficit Accumulated During the Development Stage                                                                                              | (13,289,724)     |  | (11,238,708)        
|                                                                                                                                              |                  |  |                     
|Total Stockholders'Equity                                                                                                                     | 1,270,599        |  | 1,112,309           
|                                                                                                                                              |                  |  |                     
|Total Liabilities and Stockholders'Equity                                                                                                     | 3,565,260        |  | 1,229,799           
|                                                                                                                                              |                  |  |                     



3



---

Power Air Corporation
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)





|                                                      | Three
Months
Ended
March 31,
2007
$ |  | Three
Months
Ended
March 31,
2006
$ |  | Six Months
Ended
March 31,
2007
$ |  | Six Months
Ended
March 31,
2006
$ |  | From
October 15, 1997
(Date of Inception)
to March 31,
2007
$
|----------------------------------------------------- | ----------------------------------- |  | ----------------------------------- |  | --------------------------------- |  | --------------------------------- |  | -------------------------------------------------------------
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|Expenses                                              |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|Amortization of property and 
      equipment         | 10,225                              |  | 4,223                               |  | 19,654                            |  | 5,697                             |  | 37,853                                                       
|Development and engineering                           | 206,409                             |  | 98,936                              |  | 554,809                           |  | 115,936                           |  | 3,265,803                                                    
|General and administration                            | 297,306                             |  | 319,418                             |  | 819,476                           |  | 668,785                           |  | 8,196,268                                                    
|License fees                                          | 27,830                              |  | 27,240                              |  | 52,830                            |  | 45,990                            |  | 386,363                                                      
|Marketing and selling                                 | 170,567                             |  | 62,313                              |  | 308,099                           |  | 127,237                           |  | 995,188                                                      
|Interest and finance fees                             | 296,148                             |  | -                                   |  | 296,148                           |  | -                                 |  | 408,249                                                      
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|Total Expenses                                        | 1,008,485                           |  | 512,130                             |  | 2,051,016                         |  | 963,045                           |  | 13,289,724                                                   
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|Net Loss                                              | (1,008,485)                         |  | (512,130)                           |  | (2,051,016)                       |  | (963,045)                         |  | (13,289,724)                                                 
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|Net Loss Per Share-Basic and Diluted                  | (.02)                               |  | (.01)                               |  | (.05)                             |  | (.02)                             |  |                                                              
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              
|Weighted Average Shares Outstanding-Basic and Diluted | 45,611,818                          |  | 42,988,000                          |  | 45,563,000                        |  | 42,623,000                        |  |                                                              
|                                                      |                                     |  |                                     |  |                                   |  |                                   |  |                                                              

4



---

Power Air Corporation
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)





|                                                                              | Six Months Ended
March 31,
|----------------------------------------------------------------------------- | --------------------------
|                                                                              | 2007
$                    
|                                                                              |                           
|Operating Activities                                                          |                           
|                                                                              |                           
|Net loss                                                                      | (2,051,016)               
|                                                                              |                           
|Adjustments to reconcile net loss to cash used in operating
      activities: |                           
|Amortization of deferred financing costs                                      | 268,007                   
|Amortization of property and equipment                                        | 19,654                    
|Shares issued for consulting services                                         | 100,625                   
|Stock-based compensation                                                      | 111,815                   
|                                                                              |                           
|Changes in operating assets and liabilities:                                  |                           
|                                                                              |                           
|Other current assets                                                          | (77,245)                  
|Accounts payable and accrued liabilities                                      | 90,218                    
|                                                                              |                           
|Net Cash Used in Operating Activities                                         | (1,537,942)               
|                                                                              |                           
|Investing Activities                                                          |                           
|                                                                              |                           
|Purchases of property and equipment                                           | (27,045)                  
|                                                                              |                           
|Net Cash Used in Investing Activities                                         | (27,045)                  
|                                                                              |                           
|Financing Activities                                                          |                           
|                                                                              |                           
|Proceeds from related party loans                                             | 107,094                   
|Repayment of related party loans                                              | (67,094)                  
|Proceeds from debt financing                                                  | 2,075,000                 
|Proceeds from issuance of common stock                                        | -                         
|Debt issuance costs                                                           | (157,500)                 
|                                                                              |                           
|Net Cash Provided by Financing Activities                                     | 1,957,500                 
|                                                                              |                           
|Increase (Decrease) in Cash                                                   | 392,513                   
|                                                                              |                           
|Cash, Beginning of Period                                                     | 924,928                   
|                                                                              |                           
|Cash, End of Period                                                           | 1,317,441                 
|                                                                              |                           
|                                                                              |                           
|Supplemental Disclosures                                                      |                           
|                                                                              |                           
|Interest paid                                                                 | 13,873                    
|Income taxes paid                                                             | -                         
|                                                                              |                           
|                                                                              |                           
|Non-cash Investing and Financing Activities                                   | -                         
|                                                                              |                           
|Equity certificates issued for debt financing                                 | 1,996,866                 
|                                                                              |                           



5



---

Power Air Corporation
(A Development Stage Company)
Consolidated Statement of Stockholder





|                                                                                                    | Common Stock |         |            | Accumulated  |             
|--------------------------------------------------------------------------------------------------- | ------------ | ------- | ---------- | ------------ | ------------
|                                                                                                    |              |         | Deficit    |             
|                                                                                                    | Number       |         | Additional |              |             
|                                                                                                    | of           |         | Paid-In    | Equity       | Subscription
|                                                                                                    | Shares       | Amount  | Capital    | Certificates | Receivable  
|                                                                                                    |              | $       | $          | $            | $           
|                                                                                                    |              |         |            |              |             
|Balance from October 15, 1997 (date of inception) to June 30, 2005                                  | 10,000       | 1,000   | -          | -            | -           
|                                                                                                    |              |         |            |              |             
|Adjustment for change in par value                                                                  | -            | (990)   | 990        | -            | -           
|                                                                                                    |              |         |            |              |             
|Re-capitalization transactions (Note 1)                                                             |              |         |            |              |             
|Shares of Power Air Corporation                                                                     | 18,750,000   | 18,750  | -          | -            | -           
|Cancellation of founders stock                                                                      | (1,550,000)  | (1,550) | 1,550      | -            | -           
|Shares issued to shareholders of Power
      Air Tech, Inc. to effect the reverse
      merger      | 14,693,423   | 14,693  | (14,693)   | -            | -           
|Shares issued for compensation                                                                      | 4,545,456    | 4,545   | 2,506,819  | -            | -           
|Shares acquired by legal parent                                                                     | (10,000)     | (10)    | -          | -            | -           
|Shares issued to settle debt                                                                        | 3,378,396    | 3,378   | 1,864,180  | -            | -           
|Forgiveness of related party debt of PAT
      as a condition precedent to the reverse
      merger | -            | -       | 2,173,045  | -            | -           
|Net liabilities assumed in recapitalization                                                         | -            | -       | (89,482)   | -            | -           
|                                                                                                    |              |         |            |              |             
|Unit private placement - $0.65 (Note 6(a))                                                          | 2,077,454    | 2,078   | 1,348,267  | -            | -           
|                                                                                                    |              |         |            |              |             
|Share subscription                                                                                  | -            | -       | -          | -            | (161,850)   
|                                                                                                    |              |         |            |              |             
|Share issuance costs                                                                                | -            | -       | (155,035)  | -            | -           
|                                                                                                    |              |         |            |              |             
|Net loss                                                                                            | -            | -       | -          | -            | -           
|                                                                                                    |              |         |            |              |             
|Balance, September 30, 2005                                                                         | 41,894,729   | 41,894  | 7,635,641  | -            | (161,850)   
|                                                                                                    |              |         |            |              |             
|Subscription received                                                                               | -            | -       | -          | -            | 161,850     
|                                                                                                    |              |         |            |              |             
|Unit private placement - $0.65 (Note 6(a))                                                          | 1,105,917    | 1,106   | 717,740    | -            | -           
|                                                                                                    |              |         |            |              |             
|Unit private placement - $1.10 (Note 6(b))                                                          | 1,792,572    | 1,793   | 1,970,036  | -            | -           
|                                                                                                    |              |         |            |              |             
|Shares issued for share issuance costs                                                              | 17,600       | 18      | (18)       | -            | -           
|                                                                                                    |              |         |            |              |             
|Shares issued for employee bonuses                                                                  | 300,000      | 300     | 254,700    | -            | -           
|                                                                                                    |              |         |            |              |             
|Shares issued for consulting services                                                               | 87,500       | 87      | 61,163     | -            | -           
|                                                                                                    |              |         |            |              |             
|Shares issued for options exercised                                                                 | 150,000      | 150     | 97,350     | -            | -           
|                                                                                                    |              |         |            |              |             
|Share issuance costs                                                                                | -            | -       | (250,629)  | -            | -           
|                                                                                                    |              |         |            |              |             
|Fair value of vested stock options                                                                  | -            | -       | 1,819,686  | -            | -           
|                                                                                                    |              |         |            |              |             
|Net loss                                                                                            | -            | -       | -          | -            | -           
|                                                                                                    |              |         |            |              |             
|Balance, September 30, 2006                                                                         | 45,348,318   | 45,348  | 12,305,669 | -            | -           
|                                                                                                    |              |         |            |              |             
|Shares issued for consulting services                                                               | 262,500      | 262     | 100,363    | -            | -           
|                                                                                                    |              |         |            |              |             
|Equity certificate issued for legal services                                                        | -            | -       | -          | 14,418       | -           
|                                                                                                    |              |         |            |              |             
|Equity certificates issued for debt financing                                                       | -            | -       | -          | 1,982,448    | -           
|                                                                                                    |              |         |            |              |             
|Fair value of vested stock options                                                                  | -            | -       | 111,815    | -            | -           
|                                                                                                    |              |         |            |              |             
|Net loss                                                                                            | -            | -       | -          | -            | -           
|                                                                                                    |              |         |            |              |             
|Balance, March 31, 2007                                                                             | 45,610,818   | 45,610  | 12,517,847 | 1,996,866    | -           
|                                                                                                    |              |         |            |              |             

6



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

1.     Nature of Operations and Continuance of Business

Power Air Corporation (the

PAT was incorporated in the State of Delaware on October 15, 1997 and operated its business in the State of California. PAC, through its acquisition of PAT, is in the business of developing, manufacturing and marketing fuel cell based commercial products. PAT has the exclusive worldwide license to the Zinc-Air Fuel Cell (

The ZAFC uses a combination of oxygen and zinc pellets in a liquid alkaline mixture that generates electricity and at the same time creates residual zinc oxide that can be recycled back into reusable zinc, via electrolysis, so that it can again be fed into the ZAFC stack.

7



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

1.     Nature of Operations and Continuance of Business (continued)

The Company is a development stage company as defined by Statement of Financial Accounting Standards (



2.     Summary of Significant Accounting Policies

a)   Basis of Presentation

The consolidated interim financial statements are unaudited, and certain information and footnote disclosure related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position and cash flows of the Company. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These consolidated financial statements should be read in conjunction with the Company

The consolidated financial statements include the accounts of the Company and its wholly-owned Delaware subsidiary, PAT, and its 50% owned Canadian subsidiary, Power Air (Canada) Corp., which is considered a variable interest entity due to mind and management and funding criteria, thus is 100% consolidated. All inter-company transactions and balances have been eliminated upon consolidation.

b)   Variable Interest Entity

The Financial Accounting Standards Board (

c)   Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of fair value of stock based compensation and other stock based payments, revenues and expenses during the reporting period. Actual results could differ from those estimates.

8



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

2.     Summary of Significant Accounting Policies (continued)

d)   Basic and Diluted Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share". SFAS No. 128 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

e)   Comprehensive Loss



f)   Research and Development Expenditures



g)   Cash and Cash Equivalents



h)   Financial Instruments



i)   Revenue Recognition

The Company will recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104,

The Company has not generated any revenue since inception on October 15, 1997. The Company plans to receive funding from OEM

j)   Income Taxes

Potential benefits of income tax losses are not recognized in the accounts until it is estimated that realization is more likely than not. The Company has adopted SFAS No. 109 as of its inception. Pursuant to SFAS No. 109 the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.

9



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

2.     Summary of Significant Accounting Policies (continued)

k)   Deferred Finance Costs

Deferred finance costs are recorded at cost and include costs relating to undertaking debt financing activities. Upon successful completion of the related financing, these costs will be recorded as a reduction of share capital if an equity financing or, as interest expense if a debt financing over the life to maturity of the debt.  If related financing is not successfully completed, these costs will be charged to the statement of operations.

l)   Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist principally of cash. Cash was deposited with a high quality credit institution.

m)   Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for stock-based awards under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25,

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R

The Company had no outstanding stock options or unvested share based payments as of this date and prior to March 31, 2006. Accordingly, there was no effect on the Company

n)   Foreign Currency Translation

The Company

o)   Property and Equipment

Depreciation is provided on all property and equipment utilizing the straight-line method over their estimated useful lives of five years, except leasehold improvements, which are amortized over the term of the lease.

10



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

2.     Summary of Significant Accounting Policies (continued)

p)   Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159,





3.     Property and Equipment



|                        | Cost
$  |  | Accumulated
Depreciation
$ |  | Net Carrying
Value
March 31,
2007
$ |  | Net Carrying
Value
September 30,
2006
$
|----------------------- | ------- |  | -------------------------- |  | ----------------------------------- |  | ---------------------------------------
|                        |         |  |                            |  |                                     |  |                                        
|Computer hardware       | 47,482  |  | 7,924                      |  | 39,558                              |  | 27,252                                 
|Computer software       | 7,684   |  | 1,570                      |  | 6,114                               |  | 6,882                                  
|Furniture and equipment | 135,527 |  | 24,150                     |  | 111,377                             |  | 113,361                                
|Leasehold improvements  | 21,637  |  | 4,210                      |  | 17,427                              |  | 19,590                                 
|                        |         |  |                            |  |                                     |  |                                        
|                        | 212,330 |  | 37,854                     |  | 174,476                             |  | 167,085                                
|                        |         |  |                            |  |                                     |  |                                        





4.     Related Party Transactions

(a)   See Note 6(c) regarding commitments with related parties.

(b)   Certain directors, officers and companies related to directors and officers loaned $107,094 to the Company of which $67,094 was repaid leaving $40,000 owing at March 31, 2007. This loan was repaid in April, 2007. These loans are interest bearing at the rate of 10% per annum and, upon repayment, a 10% bonus is payable.





11



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

5.     Promissory Notes





|                                  | March 31,
2007
$ |  | September 30,
2006
$
|--------------------------------- | ---------------- |  | --------------------
|                                  |                  |  |                     
|Promissory notes-tranche one      | 1,375,000        |  | -                   
|Additional subscriptions received | 700,000          |  | -                   
|                                  |                  |  |                     
|Carrying value                    | 2,075,000        |  | -                   



On March 5, 2007, the Company completed a debt and equity financing (the



(a)   Promissory notes totaling $1,375,000, bearing interest at 10% per annum payable quarterly in arrears, secured against the Company



(b)   As additional consideration for the loan the Company agreed to issue Equity Consideration Certificates with an estimated fair value of $1,982,448, which allow the holder, at the holder



(i)   Primary equity consideration consisting of the number of shares of common stock of the Company computed by dividing the face amount of the equity consideration certificate by the price of the identical securities issued under a planned Qualified Offering; or



(ii)  Alternate equity consideration consisting of the number of shares of common stock of the Company computed by dividing the face amount of the equity consideration certificate by $0.40 and the equivalent number of warrants, exercisable at a price of $0.50 for a term of 7 years from the date of issuance.



These Equity Consideration Certificates were considered a separate and direct finance fee and the estimated fair values were based on the estimated number of shares to be issued, 3,437,500 common shares valued at $0.40 per share for $1,375,000 and the estimated value of the warrants to be issued, 3437,500 warrants of $607,448 based on a fair value price of $0.1767 per warrant using the Black Scholes Option pricing Model using the following input variables: fair value of stock price on grant date - $0.40; exercise price - $0.50; expected life



(c)   Subsequent to March 31, 2007, the Company closed a second tranche of the Financing for gross proceeds of $815,000, including $700,000 of subscriptions received as at March 31, 2007 and $115,000 received subsequently.  The Company paid a cash commission of $81,500 pursuant to the second closing. The Company will recognize additional deferred finance fees based on the fair value of the Equity Consideration Certificates issued on the same basis as tranche one.

12



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

(d)   The Company also issued equity certificates valued at $14,418, which was added to deferred financing costs for reimbursement of expenses incurred by the placement agent.



(e)   Should a Qualifying Offering not be completed prior to the Maturity Date, the holders have the right to convert 1/18th of the principal of the promissory notes per month for 18 months at a price equal to 70% of the closing bid price of the Company



6.     Common Stock

a)   Unit Private Placement - $0.65

Between August 22, 2005 and September 30, 2005, the Company received common stock subscriptions for 2,077,454 units at a price of $0.65 per unit for total proceeds and subscriptions receivable of $1,350,345. The subscriptions receivable were received in October 2005. These units were issued on September 30, 2005.

During the quarter ended December 31, 2005, the Company received common stock subscriptions for an additional 1,090,532 units at a price of $0.65 per unit for total additional proceeds of $708,846. These units were issued on November 30, 2005. On March 15, 2006, the Company received a common stock subscription for an additional 15,385 units at a price of $0.65 per unit for total additional proceeds of $10,000. These units were issued on March 15, 2006. Total units issued were 3,183,371 and total gross proceeds received were $2,069,191. A total of $278,081 of share issuance costs were incurred including $75,495 of legal costs and $202,586 of finders

b)   Unit Private Placement - $1.10

On June 28, 2006 the Company issued 1,792,572 units at $1.10 per unit for gross proceeds of $1,971,829. Each unit consisted of one common share and one-half share purchase warrant. Each whole warrant (896,286 warrants in total) is exercisable into one common share at a price of $1.50 per share expiring June 28, 2008. The Company paid $127,583 for share issuance costs including $102,583 for finders

c)   Pursuant to a Consulting Agreement dated August 1, 2006 the Company issued 87,500 restricted common shares at a fair market value of $61,250, which was charged to operations during the month of September 2006. The Company issued an additional 262,500 restricted common shares having a value of $100,625, which was charged to operations during the three months ended December 31, 2006.

d)   Stock Options

On April 1, 2006 the Board of Directors adopted a comprehensive

13



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

6.     Common Stock (continued)

(d)   Stock Options (continued)

A summary of the Company



|                                               | Number of Options |  | Weighted
Average
Exercise
Price
$
|---------------------------------------------- | ----------------- |  | ---------------------------------
|                                               |                   |  |                                  
|Balance, September 30, 2005                    | -                 |  | -                                
|Granted                                        | 3,885,000         |  | 0.62                             
|Exercised                                      | (150,000)         |  | -                                
|                                               |                   |  |                                  
|Balance, September 30, 2006 and March 31, 2007 | 3,735,000         |  | 0.62                             

The weighted average contractual life of the exercisable and outstanding stock options is 1.12 years.

The following table summarizes warrants outstanding at March 31, 2007:



|Outstanding      |                                                     | Exercisable                       
|---------------- | --------------------------------------------------- | ----------------------------------
|Number of Shares | Weighted
Average
Remaining
Contractual
Life (years) | Weighted
Average 
Exercise Price
$
|                 |                                                     |                                   
|2,600,000        | 1.25                                                | 0.65                              
|10,000           | 1.58                                                | 0.70                              
|1,000,000        | 0.62                                                | 0.50                              
|125,000          | 1.63                                                | 1.00                              
|                 |                                                     |                                   
|3,735,000        | 1.12                                                | 0.62                              
|                 |                                                     |                                   

e)   Warrants

The following table summarizes warrants outstanding at March 31, 2007:



|Number of Warrants | Exercise Price
$ |  | Expiry Date                         
|------------------ | ---------------- |  | ------------------------------------
|                   |                  |  |                                     
|3,183,371          | 1.00             |  | September 30, 2007 to March 15, 2008
|896,286            | 1.50             |  | June 28, 2008                       
|4,079,657          |                  |  |                                     
|                   |                  |  |                                     

Warrants outstanding having a weighted average remaining life of 0.75 years and a weighted average exercise price of $1.11.





14



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

7.     Commitments and Contingencies

a)   PAT entered into a Limited Exclusive Patent License Agreement with the Regents of the University of California in March, 2001 (the

b)   On October 17, 2005, the Company entered into a long-term office and laboratory/warehouse premises lease in Livermore, California. The term is for 30 months expiring October 31, 2008. The monthly base rent is $6,066 and the estimated monthly operating charge is $1,800 per month. On January 20, 2006 the Company entered into a long-term housing lease in Pleasanton, California. The term is for 24 months expiring January 31, 2008. The monthly rent is $2,595. On May 24, 2006 the Company entered into a short-term premises lease at the National Research Council in Vancouver, Canada. The term was renewed for one additional year expiring March 31, 2008 at a monthly rate of CND$2,152.

c)   As at September 30, 2006 the Company is committed pursuant to four employment contracts including three officers and one employee of the Company. In total the annual commitment is $470,000, each having a 90-day termination clause. All of these contracts also contain commitments to grant stock options, see Note 2(m) for details on stock options granted.

d)   On September 27, 2006 the Company entered into a four phase Development and Pre-Manufacturing Agreement (the

e)   The Company signed a Letter of Intent on December 15, 2006 with H-Plus Eco Ltd., a Korean based company focused on environment and alternative energy. This Letter of Intent defines the structure and scope of the Asian Joint Venture between the companies. This Joint Venture will develop, manufacture and commercialize back-up power systems for Korean and Asian markets. H-Plus Eco Ltd. will contribute up to KRW 5 billion (US$5 million) to the Joint Venture and the Company will license its technology to the Joint Venture. The Joint Venture will include a shareholder agreement, a license agreement, a territory agreement and a supply agreement.





15



---

Power Air Corporation
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)

8.     Segment Disclosures

The Company operates as one operating segment which is in the business of developing, manufacturing and marketing fuel cell based commercial products. The exploration of mineral properties is inactive upon the recapitalization of PAT. The Chief Executive Officer is the Company





9.     Subsequent Events

Subsequent to March 31, 2007, the Company closed a second tranche of the Financing for gross proceeds of $815,000, including $700,000 of subscriptions received as at March 31, 2007 and $115,000 received subsequently. The Company paid a cash commission of $81,500 pursuant to the second closing. The Company will recognize additional deferred finance fees based on the fair value of the Equity Consideration Certificates issued on the same basis as tranche one.

On May 1, 2007 a total of 20,000 stock options were granted to two technical advisory board members to purchase common shares exercisable at $0.415 per share for a period of one year. These options are fully vested. One technical advisory board member was appointed as a director of the Company.

The Company received $80,000 and will issue 200,000 common shares pursuant to a private placement of common shares at $0.40 per share.

The Company has received subscriptions for a private placement of 5,714,286 units at $0.35 per unit for gross proceeds of $2,000,000.  The plan is to issue a grand total of 14,285,714 units at $0.35 per unit for gross proceeds of $5,000,000. Each unit will contain one common share and one non-transferable purchase warrant to acquire one additional common share at $0.50 per share expiring two years from date of issuance.

16



---

Item 2.            Management

As used in this quarterly report: (i) the terms "we","us","our"and the"Company"mean Power Air Corporation and its wholly-owned subsidiaries, Power Air Tech, Inc. and Power Air (Canada) Corporation, unless the context otherwise requires; (ii)"SEC"refers to the Securities and Exchange Commission; (iii)"Securities Act"refers to the United States Securities Act of 1933, as amended; (iv)"Exchange Act"refers to the Unites States Securities Exchange Act of 1934, as amended; and (v) all dollar amounts refer to United States dollars unless otherwise indicated.

The following discussion of our plan of operations, results of operations and financial condition as at and for the six months ended March 31, 2007 should be read in conjunction with our unaudited consolidated interim financial statements and related notes for the six months ended March 31, 2006 included in this quarterly report, as well as our annual report on Form 10-KSB for the year ended September 30, 2006 and Form 10-QSB for the quarterly period ended December 31, 2006.

Overview

Name and Incorporation

Our company was formed under the laws of the State of Nevada on August 26, 2004 under the name "Fortune Partners, Inc."By an amendment to our Articles of Incorporation we changed our name to"Power Air Corporation"effective on December 22, 2005.

Our principal business offices are located at 4777 Bennett Drive, Suite E, Livermore, California, 94551, our telephone number is (925) 960-8777 and our facsimile number is (925) 960-9197.

We own 100% of the issued and outstanding share capital of Power Air Tech, Inc., which was formed under the laws of the State of Delaware in October of 1997, together with 50% of the issued and outstanding shares of Power Air (Canada) Corp. ("Power Air Canada"), which was formed under the laws of the Province of British Columbia, Canada, on December 12, 2005. Power Air (Canada) Corp. is considered a variable interest entity due to the Company's control over the operations and 100% funding of costs to date, thus, is considered a 100% consolidated subsidiary.

Our Corporate History

On September 30, 2005, we acquired all of the issued and outstanding shares of Power Air Tech, Inc.  As a result of such acquisition, we are a development stage company engaged in the business of developing, manufacturing and marketing of fuel cell based commercial products.

This acquisition represented a change in control of our Company.  The change in control, for accounting purposes, constitutes a re-capitalization of our Company and, therefore, the transaction has been accounted for as a reverse merger whereby Power Air Corporation is considered the acquired entity and the operations of Power Air Tech, Inc. have become the continuing operations of the Company.

Prior to the completion of the acquisition, the operations of Power Air Tech, Inc. focused on raising funds through a reverse merger with a public company, settling outstanding debt and maintaining its license with Lawrence Livermore National Laboratory ("LLNL") in Livermore, California.  Accordingly, we did not have any significant operating results in the year ended September 30, 2005.

Our Business

We hold the exclusive world-wide license for the development and commercialization of the zinc air fuel cell ("ZAFC") technology developed through an extensive joint collaboration effort with LLNL and the United States Department of Energy ("DOE").  We also have exclusive world-wide rights to a second LLNL patent pertaining to a low-cost process for recovering zinc and converting it to pellet form for reuse in the ZAFC system.  LLNL is a leading United States Government research and development facility located in Livermore, California.

17



---



Our ZAFC technology is a metal oxide fuel cell using simple physical chemistry.  It uses a combination of atmospheric oxygen and zinc pellets in a liquid alkaline electrolyte mixture referred to as an

Our objective is to commercialize the ZAFC technology to the stage where the technology can be incorporated into ZAFC products that can be manufactured and sold for use in power supply commercial applications.  We have completed initial development work on a prototype zinc air fuel cells incorporating our technology.  We plan to continue this development work in order to develop products incorporating our ZAFC technology that can be commercially marketed to consumers and businesses.  In pursing this objective, we plan to undertake strategic relationships with original equipment manufacturers (

We have determined to focus our initial development efforts on the design and development of one ZAFC product that we envision would be manufactured and marketed by an OEM.  This initial ZAFC product will be a ZAFC based portable emergency generator designed for back-up or emergency use in homes and small businesses.  We have developed prototype fuel cells using our ZAFC technology.  In order to complete development of a commercial ZAFC product, we will have to complete the following phases of development:

- completion of product and program concepts;
- completing of the design, manufacture and testing of engineering prototypes;
- completion of the design, manufacture and testing of manufacturing prototypes; and
- pilot production of commercial products.

We anticipate that our working capital at March 31, 2007, together with the bridge loan financing completed in April of 2007 of approximately $2.2 million, will be sufficient to enable us to complete the product and program concept phase and begin the design, manufacture and testing of engineering prototypes.  Our ability to complete the engineering prototypes and to design, manufacture and test the manufacturing prototypes and the pilot product of commercial products will require that we obtain additional financing of a further and approximate $12 to 15 million; at least $5 million of which is expected to be needed before August 31, 2007 in order to meet such schedule. The Company received $80,000 and will issue 200,000 common shares pursuant to a private placement of common shares at $0.40 per share. The Company has also received subscriptions for a private placement of 14,285,714 units at $0.35 per unit for gross proceeds of $5,000,000 of which $2,000,000 has been received. Each unit will contain one common share and one non-transferable purchase warrant to acquire one additional common share at $0.50 per share expiring two years from date of issuance.

Our long-term goal is to be a commercially viable fuel cell company, powering low cost, silent, zero emission fuel cell based products developed with OEM partners for portable, stationary, light mobility and transportation markets.  However, we have not yet completed the development of any products incorporating our ZAFC fuel cell technology that can be commercially marketed and sold.  Further, we have not achieved any revenues to date and we do not anticipate achieving any revenues over the next twelve months.  As a result, we are considered a development stage company.  We will require substantial additional financing for us to achieve our business objectives.

18



---



Industry Background

Generic Fuel Cells

A fuel cell is an electrochemical device, which cleanly converts chemical energy of a fuel and oxidant directly into low voltage direct current (DC) electricity. A fuel cell produces electricity and heat using a

The principal components of a fuel cell are catalytically activated electrodes for the fuel (anode) and the oxidant (cathode) plus an electrolyte to conduct between the two electrodes.  In its operation the fuel cell creates DC power, which can be converted to AC power through an inverter.  The fuel cell offers an alternative to existing power plants as a source of electrical power.

Commercialization of Fuel Cells

While generic fuel cells have been in existence for over a century, a recent expansion in demand for more efficient, stable and continuous supply of power, which can operate cleanly and quietly, has led to attempts to commercialize fuel cells as a source of power.  Currently, batteries and engines provide reasonable power solutions in a broad number of markets and applications.  However, each of these power solutions has its own inherent disadvantages.  Engines are not suitable for many applications as they are noisy, polluting and unreliable as a power source.  Batteries are not suitable for many applications as they are heavy, have to be recharged, have a variable life span and gradually lose power.

Fuel cells have been presented as an alternative technology for power solutions as they do not possess some of the limitations of batteries and engines.  Fuel cells offer an alternative solution as they can operate without the noise and emissions associated with hydrocarbon combustion and can provide a continuous source of electrical power.

Initial commercialization efforts have focused on polymer electrolyte membrane (

Our ZAFC Technology Solution

We believe that fuel cells incorporating our ZAFC technology offer the opportunity to deliver a fuel cell solution without the limitations of commercial products powered by conventional PEM fuel cells.  We believe that our ZAFC technology offers the ability to develop and manufacture a fuel cell that has lower manufacturing and operating costs than conventional PEM fuel cells and that uses inexpensive, abundant and non-volatile zinc as its fuel, rather than hydrogen which is volatile and is difficult to distribute and store.  Accordingly, our business objective is to develop ZAFC fuel cells that we will target for those segments of the power generation market that we believe will be most ready to accept a ZAFC fuel cell as an acceptable alternative to conventional sources of power.  Based on our initial mapping of market opportunities, we expect that portable backup and emergency power products for home and small businesses should be the first priority.

Anticipated Markets for Fuel Cells

Fuel cells have not yet reached the stage where they have achieved widespread commercial adoption.  As such, we believe that the market for fuel cells is in its early stages and is still developing.  Based on industry experience to date, we believe that the markets for fuel cell based products will evolve as follows:

19



---



1.     First-to-Market

We believe that the initial commercial applications of fuel cells will be for occasional use products, such as generator and battery substitutes for industrial, residential, and personal back-up power solutions, with low operating lifetime requirements.  These anticipated applications include:

| | portable generators;
emergency and portable power packs;
uninterruptible power supply ("UPS") back-up (PC's, servers, data centers);
telecom, utility and cable TV back-up;
residential back-up for power outages;
apartment back-up for power outages; and
commercial building back-up.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.      Next-to-Market

We believe that intermittent use products requiring operating life to 10,000 hours, on-board fuel storage and re-fuelling logistics will be next in the market, including:

| | alternate power units ("APU's") that provide non-drive train power for trucks, boats, RV's, and military vehicles;
seasonal (i.e.: cabins, cottages) and special events power supply units; and
light mobility fleet units such as forklifts, golf carts, scooters, airport ground support vehicles, military vehicles, small hybrid vehicles.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.     Last-to-Market

We believe that continuous use products requiring operating lifetimes to 40,000 hours and fuel infrastructure support in place will be last in the market, including:

| | co-generation products such as residential or commercial heating and electricity supply products using the existing natural gas (or other) infrastructure and reformers;
grid replacement products;
grid peaker products;
automobiles; and
large and heavy vehicles such as buses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Technology License Agreement

We hold our rights to the ZAFC technology pursuant to a limited exclusive patent license agreement between Power Air Tech and the Regents of the University of California (the "Regents") dated March, 2001 (the"License Agreement").  Under the terms of the License Agreement, the Regents granted to Power Air Tech an exclusive, non-transferable, royalty-bearing license to make, use, sell, offer for sale and import products that incorporate the licensed patents in the United States and worldwide where the patent rights to the technology exist.  The license rights are limited to a"field of use"described as the zinc air fuel technology for stationary and mobile applications.  The Regents also granted to Power Air Tech the right to issue royalty-bearing sublicenses to third parties to the zinc air fuel technology for stationary and mobile applications.

The licensed patents are those inventions with respect to the ZAFC technology that are summarized as follows:

20



---

United States Patents Granted



|Invention Disclosure Number | US Patent Number | Title                                                                       | Inventors      | Issue Date
|--------------------------- | ---------------- | --------------------------------------------------------------------------- | -------------- | ----------
|8776                        | 5,434,020        | Continuous-feed Electrochemical Cell with Non-Packing Particulate Electrode | John F. Cooper | 7/18/95   
|9407                        | 5,578,183        | Production of Zinc Pellets                                                  | John F. Cooper | 11/26/96  

Foreign Patents Granted



|Invention Disclosure Number | AU Patent Number | Title                      | Inventors      | Issue Date
|--------------------------- | ---------------- | -------------------------- | -------------- | ----------
|9407                        | 714879           | Production of Zinc Pellets | John F. Cooper | 5/4/00    

Foreign Patent Applications



|Invention Disclosure Number | International Serial Number         | Title                      | Inventors      | Issue Date
|--------------------------- | ----------------------------------- | -------------------------- | -------------- | ----------
|9407                        | Europe-96916453.2
Japan-534285/1996 | Production of Zinc Pellets | John F. Cooper | 5/10/96   

The United States government retained the rights to practice the licensed patents for its own purposes.  The Regents retained the right to use the licensed patents for educational and research purposes.

In order to maintain our license rights, we are required to:

- pay royalty payments on net sales of end-use, stand-alone products that incorporate the licensed technology equal to 0.8% in 2006 and 1.2% in any year after;
- pay royalty payments on net sales of individual zinc air fuel cells equal to 2.3% for any sales made in 2006 and 3.3% in any year thereafter; and
- pay royalty payments on net sales by any sub-licensees equal to the earned royalty that would be payable by us had the sales been made by us, provided that we will also pay an additional 0.25% royalty on net sales to foreign entities by any sub-licensees.

We have also agreed to pay a minimum royalty to the Regents which will equal $100,000 for each remaining year of the license.  This minimum royalty amount is payable on February 28 of each year of the License Agreement.

21



---



Power Air Tech is obligated to diligently proceed with the development, manufacture and sale of products incorporating the licensed technology.  The Regents have also maintained mandatory sublicensing rights that may require us to grant sublicenses to third parties if: (i) we fail to meet market demand for prospective licensed products not included in our business plan projections, or (ii) we fail to introduce into the marketplace licensed products listed in our business plan within two years of an agreed upon schedule of product introduction dates.  The License Agreement also specifies performance obligations that must be met by us.  These performance obligations are measured in terms of gross sales revenues from sales of licensed products.  If we fail to meet these performance obligations, the Regents may, at their sole option: (i) convert the limited exclusive license to a non-exclusive license, (ii) negotiate a new schedule of performance obligations and conditions for continuation of the limited exclusive license, or (iii) terminate the License Agreement.  We are in the process of renegotiating certain provisions of the License Agreement with the Regents and, at present, the Regents have not claimed that Power Air Tech is in default of the License Agreement or taken any action to enforce its rights under the License Agreement.

The term of the License Agreement commenced March 13, 2001 and will remain in effect until the expiration or abandonment of the last of the licensed patents, unless terminated earlier in accordance with the terms of the License Agreement.

Our Fuel Cell Technology

The Zinc Air Fuel Cell

Our fuel cell technology is a metal oxide fuel cell using simple physical chemistry.  It uses a combination of atmospheric oxygen and zinc pellets in a liquid alkaline electrolyte mixture referred to as an

The ZAFC Stack

The zinc-air fuel cell is constructed in a modular form of unit cells known as a ZAFC stack.  The ZAFC stack forms the base platform component of our planned products.  The ZAFC stack incorporates individual unit cells into a stack of fuel cells in a configuration that will enable us to specifically design, engineer, package and brand a range of products that can be targeted at a range of applications suitable for the customers

The ZAFC stack is constructed in a modular form of unit cells, each of which is made up of a hopper, a self-feeding galvanic cell with air and refuelling ports.  The hoppers in each cell act as buffers to protect the air electrodes during refuelling and handling.  The cells are joined or moulded together in a fuel stack module that is connected to an electrolyte storage tank that contains the electrolyte and discharge products.  Each cell contains a lightweight plastic frame, a current collector/mesh, and a paper-thin air electrode.  The plastic frame extends upwards to create a hopper which can hold additional zinc pellets that are fed into the cell as the zinc is used up in the cell.  The lightweight cells generate the power from the ZAFC stock.  The size of the lightweight fuel cell stack determines power (measured in kilowatts); and the electrolyte reserve tank (together with the amount of zinc in the hopper) determines, the total energy capacity (measured in kilowatt-hours) and operational cycle of the device.

The ZAFC system components are divided into five categories:

- air cathodes;
- cell frames and stand-offs;
- current collector, metal plates and discs;
- controllers, pumps and blowers; and
- containers and filters.



22



---

The current, self-feeding design incorporates a hopper from which the zinc pellets, less than 1 mm in size, feed through a restricted opening into a wedge shaped cell to react with the flowing electrolyte during operation.  The stack module is connected to an electrolyte storage tank containing electrolyte and discharge products, a blower to circulate air, a pump to circulate the electrolyte through the cells and over the zinc, and several other ancillary components depending on the specific application.  A diagram presenting a cross-section view of a ZAFC fuel cell within a ZAFC stack is presented below:



In operation zinc pellets, less than 1 mm in diameter, are pushed along the base of horizontal fill tubes by the flowing electrolyte.  The zinc pellets flow through slots to load each individual cell situated above the reaction cell.

The very narrow (less than 3 mm wide) cell openings allow the particles to feed informally into the cell to form an open, loosely packed structure, which permits the oxidation of the zinc and easy flow of electrolyte.  The electrolyte flows upward through the cell and hopper to remove heat and reaction by products.

The ZAFC based devices are self-contained and the electric power required to drive the ancillary air and electrolyte pumps is negligible, consuming less than four percent of the fuel cell stacks gross output.

The ZAFC has refuelling capability in that the invariant materials (zinc and electrolyte) can be replaced during the discharge cycle.  Topping up of ZAFC

Recycling and Recovery of Fuel

During operation, zinc is converted into zinc oxides that are retained in the electrolyte.  At any period during discharge zinc can be recovered from the electrolyte and recycled for later re-use.  The zinc is not consumed, in the sense of gasoline or diesel; rather, it operates as a carrier of electrical energy.  Residual zinc oxide created during this process can be recycled back into reusable zinc (via electrolysis) so that it can again be fed into the ZAFC stack.

Zinc oxides can be recycled to form new zinc by electrolysis using a simple process, which may be incorporated in the overall system or sited at a central or service station location.

23



---



Our license rights include exclusive world-wide rights to the second LLNL patent pertaining to a low-cost process for recovering zinc and converting it to pellet form for reuse in the ZAFC system.  We may pursue the development of a zinc recovery and recycling unit in conjunction with a zinc partner; however, there are zinc recovery systems using other processes that may be adaptable to our purposes with less development.

Advantages of our Zinc Air Fuel Cell Technology

We believe that our ZAFC technology offers a unique combination of advantages over alternative competing technologies and power solutions.  These advantages include:

- Economical Energy Source.  We currently estimate that fuel cell products based on our ZAFC technology offer can be manufactured and marketed at lower costs than can be achieved for conventional PEM fuel cell power solutions.  We believe that lower manufacturing and marketing costs will result in products based on our ZAFC technology being able to be competitively priced against incumbent technologies.  The low capital cost of the ZAFC is as a result of its simple design and low operating temperature which allow the majority of components to be conventionally sourced and combined with low-cost fabrication techniques.  In addition, the consumables used comprise zinc and potassium hydroxide, both of which are inexpensive and easily sourced.
- High Specific Energy.  The ZAFC has an energy output of approximately five to six times that of lead acid batteries of the same weight.
- Rapid Refuelling and Continuous Use.  Products incorporating our ZAFC technology can be designed to be rapidly refuelable through an exchange of electrolyte and addition of zinc pellets, rather than being slowly recharged using electricity.  This will allow products incorporating our ZAFC technology to be used for applications requiring near continuous use.
- Environmental.  Zero Airborne Emissions.  Products incorporating our ZAFC technology will not produce any significant airborne emissions.  The reaction by-product, zinc-oxide, is retained in the electrolyte and can be recycled via electrolysis.
- Technology Safety Issues.  Products incorporating our ZAFC technology will not face the safety, storage and siting issues inherent in competing technologies, such as PEM fuel cells and generators that rely on explosive fuel types such as hydrogen or gasoline.

Development of our Zinc Air Fuel Cell Technology

Historical Development

Our ZAFC technology was developed through a joint collaboration effort between LLNL and the United States Department of Energy.  LLNL is a leading United States Government research and development facility located in Livermore, California.  LLNL created the ZAFC using internal support and additional support from the International Lead Zinc Research Organization and the U.S. Department of Energy.  Prior to September 30, 2005, over $6.0 million had been invested in the technology.  From 1992 to 1997 LLNL and the DOE spent over $1 million on the original research concept and development of the ZAFC. Between 1998 and 2005, the Company

LLNL scientists and engineers achieved significant breakthroughs in the design of the ZAFC which were subsequently patented by LLNL and exclusively licensed to Power Air Tech.  LLNL developed prototypes of the ZAFC stack that were designed to prove power and energy assumptions.  Power Air Tech continued this development by updating the ZAFC stack in order to reduce weight and design costs, improve robustness and simplify the assembly process.

24



---



Current State of Development

The following development of the ZAFC fuel cell has been completed to date.

|Phase | Description                                                            | Development Work
Completed by                                                        | Dates Work Completed
|----- | ---------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------
|0     | Initial Development of Zinc Air unit                                   | LLNL, the Department of Energy and the International Lead Zinc Research Organization | 1995                
|1     | Patenting of cell design                                               | LLNL                                                                                 | 1995 and 1996       
|2     | Experimentation with various air cathodes and sealants                 | LLNL and Power Air Tech, Inc.                                                        | 1998                
|3     | Completion of multi-cell ZAFC unit for demonstration                   | LLNL and Power Air Tech, Inc.                                                        | 2000                
|4     | Proof of Power Curve - successful testing of ZAFC                      | LLNL, Power Air Tech, Inc. and Argonne National Laboratories                         | 2001                
|5     | Product Concept-identification of engineering requirements and costing | Power Air Corporation                                                                | 2006                

As a result of the completion of this development work, we have developed and configured initial prototypes based on combining cell stacks with an electrolyte storage tank to form a six-cell or twelve-cell basic unit.  We have established in principal that stacks of six or twelve full-size cells can be linked together (or scaled) to provide the desired power and energy capacity for a particular application.  We have not experienced any adverse chemical or electrical side-effects as a result of combining fuel cells into stacks, however we plan to continue testing and monitoring of these issues as we proceed with further development

Our Financial Condition

During the next 12 months we anticipate that we will not generate any revenue.  We had a working capital deficiency of $790,236 at March 31, 2007. Included in this deficiency is a promissory note and related subscriptions totaling $2,075,000 that is due on September 30, 2007.

On January 30, 2006, we received a loan of $50,000 from Dean Haley, our Chairman of the Board and Chief Operating Officer and significant shareholder.  Also, on January 30, 2006 we received a loan of $50,000 from a Company related to Donald M. Prest, our Chief Financial Officer. We also received a Cnd$20,000 loan directly from Donald M. Prest and $40,000 from Stephen Harrison, a director.   These loans were unsecured, due on demand and bear interest at 10% per annum.  Upon retirement of these loans a bonus of 10% of the principal amount will also be made. All of the loans plus interest and bonus were repaid by March 31, 2007 except Stephen Harrison

On March 5, 2007, the Company completed a debt and equity financing (the

25



---





(a)   Promissory notes totaling $1,375,000, bearing interest at 10% per annum payable quarterly in arrears, secured against the Company



(b)   As additional consideration for the loan the Company agreed to issue Equity Consideration Certificates with an estimated fair value of $1,982,448, which allow the holder, at the holder

(i)   Primary equity consideration consisting of the number of shares of common stock of the Company computed by dividing the face amount of the equity consideration certificate by the price of the identical securities issued under a planned Qualified Offering; or



(ii)  Alternate equity consideration consisting of the number of shares of common stock of the Company computed by dividing the face amount of the equity consideration certificate by $0.40 and the equivalent number of warrants, exercisable at a price of $0.50 for a term of 7 years from the date of issuance.



These Equity Consideration Certificates were considered a separate and direct finance fee and the estimated fair values were based on the estimated number of shares to be issued, 3,437,500 common shares valued at $0.40 per share for $1,375,000 and the estimated value of the warrants to be issued, 3,437,500 warrants of $607,448 based on a fair value price of $0.1767 per warrant using the Black Scholes Option pricing Model using the following input variables: fair value of stock price on grant date - $0.40; exercise price - $0.50; expected life



(c)   Subsequent to March 31, 2007, the Company closed a second tranche of the Financing for gross proceeds of $815,000, including $700,000 of subscriptions received as at March 31, 2007 and $115,000 received subsequently.  The Company paid a cash commission of $81,500 pursuant to the second closing and will recognize additional deferred finance fees based on the fair value of the Equity Consideration Certificates issued on the same basis as tranche one.



(d)   The Company also issued equity certificates valued at $14,418, which was added to deferred financing costs for reimbursement of expenses incurred by the placement agent.



(e)   Should a Qualifying Offering not be completed prior to the Maturity Date, the holders have the right to convert 1/18th of the principal of the promissory notes per month for 18 months at a price equal to 70% of the closing bid price of the Company

The Company received $80,000 and will issue 200,000 common shares pursuant to a private placement of common shares at $0.40 per share. The Company has also received subscriptions for a private placement of 5,714,286 units at $0.35 per unit for gross proceeds of $2,000,000.  The plan is to issue a grand total of 14,285,714 units at $0.35 per unit for gross proceeds of $5,000,000. Each unit will contain one common share and one non-transferable purchase warrant to acquire one additional common share at $0.50 per share expiring two years from date of issuance. We anticipate that the above financings together with our cash on hand at March 31, 2007 of $1,347,000 will be sufficient to enable us to complete the product and program concept phase and begin the design, manufacture and testing of engineering prototypes. Our cash needs for the next twelve months is $4.3 million.  Our ability to complete the engineering prototypes and to design, manufacture and test the manufacturing prototypes and the pilot product of commercial products will require that we obtain additional financing of a further and approximate $7 to 10 million.

26



---



Plan of Operations

We have determined to focus resources on the development of one ZAFC product that we envision would be manufactured and marketed by an original equipment manufacturer under agreement with us.  Our initial ZAFC product will initially be targeted to OEMs delivering power solutions to the business and residential backup and emergency power segment.

We will design our initial prototype for OEM integration into a ZAFC based portable emergency generator designed for back-up or emergency use in homes and small businesses.  This generator will be designed to be suitable for use both indoor use, as it will not generate emissions, and outdoor use.  The generator will be designed to generate AC power at a rated power output of 1.25 or 2.5 Kilowatts, and to run for four to six hours continuously at fully rated power when fully fuelled.  Following the four to six hour operating period, the fuel will be replaced by:

- Replacing the power cartridge on top of the unit, which should take less than one minute and releasing the fuel (zinc) into the hopper and which may be completed while the unit is still operating; and
- Replacing one or more of the electrolyte tanks on the bottom or side of the unit which should take no longer than two minutes, and will be accomplished without any exposure of the end-user to any electrolyte.

We plan to complete the following development work in order to achieve this objective:

|Phase | Description of 
Development Phase | Description of Development Work                                                                                                                        | Planned Timing        
|----- | --------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------
|6     | Program Concept                   | We plan to complete the identification of engineering requirements, the design concept for the prototype and further refine our business plan.         | Second quarter of 2007
|7     | Engineering Prototype             | With input of an OEM, we plan to complete the design, manufacture and testing of an engineering prototype incorporating our ZAFC fuel cell technology. | Fourth quarter of 2007
|8     | Engineering Verification          | This phase will consist of further construction and field testing of engineering prototypes.                                                           | First quarter of 2008 
|9     | Manufacturing Prototype           | With input from a manufacturing partner, we plan to design a commercial product with product design freeze and quality plan.                           | Second quarter of 2008

27



---



|Phase | Description of 
Development Phase | Description of Development Work                                                                                                                                  | Planned Timing        
|----- | --------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------
|10    | Manufacturing Verification        | This phase will consist of the construction and beta testing of manufacturing prototypes and completion of plan for launching the product into the market-place. | Third quarter of 2008 
|11    | Pilot Production                  | This phase will consist of manufacturing pilot units of the product and confirmation that our initial required cost and quality targets have been met            | Fourth quarter of 2008

The above timetable is an estimate prepared by company management based on our plans and objectives as they presently exist, and there are a number of contingencies that could cause our timetable not to be met.  While each phase is unique and time limited, specific tasks in multiple phases can overlap.

It should be noted that certain core technology development projects will be conducted in parallel with the core ZAFC stack commercialization to ensure the ongoing development of intellectual property, reduce the reliance on third party suppliers for key components, and extend the potential applications for ZAFC technology.  One such project that has been identified is an

If we are successful in completing the core ZAFC stack commercialization work, then we plan to undertake additional development work in order to expand our range of products incorporating the ZAFC technology.  We plan to undertake work on a parallel path to develop the additional ZAFC stack configurations further to OEM specifications and requirements, for products which may include the following:

- a portable generator;
- stationary generators of multiple sizes;
- uninterruptible power supply back-up systems for computer systems and data centres;
- building, television communications and cable television back-up systems of multiple sizes; and
- auxiliary power units of multiple sizes.

We plan to work with OEMs to identify those segments where products incorporating our ZAFC technology will achieve the most commercial success.  This process will be integral in our determinations as to what product development we plan to pursue after we complete our additional product development work.

Our ability to undertake our current development work and this future development work will be subject to our ability to obtain the necessary financing to fund this development work.  Further, our success in developing our initial product will be critical in enabling us to proceed to future development work.  We may be forced to abandon plans for future development work if our initial product is not successful or we do not achieve the required financing.

In undertaking our development work, it will be our intention to continuously enhance our product range and to develop new generations of products.  However, we do not plan to divert resources from the initial OEM module development unless significant investment in an alternative application is provided by an OEM. We plan to retain a strategic role in the assembly and distribution of products, which will ensure continuity of product service and quality for customers.

28



---



In undertaking our development work, we plan to outsource materials handling and manufacturing of components to existing component manufacturers.  The aim of this strategy is to alleviate capital costs in the setting up of manufacturing plants, and this will provide flexibility in sourcing of components and compliance of design specification rules in each country.

Prototyping and Testing

As we update the ZAFC design and complete our development work, we anticipate that many of the core components and materials will change.  Each variation will require extensive single-cell and unit testing as well as forensic work.  While it is reasonable to acquire some test and lab apparatus (load banks, etc.), we believe that many of the environmental tests may be more cost effectively undertaken in conjunctions with a third party.  This is one of the reasons why we have established a presence at the National Research Council

Manufacturing

We anticipate that manufacturing of any commercial products incorporating our core ZAFC stack technology will be undertaken by an OEM under agreement with us.  At the same time, design of the products, especially design of the core ZAFC stack for the manufacturing prototype, will require extensive input from not only experienced designers and engineers, but also from experienced production staff.  On September 27, 2006 the Company entered into a four phase Development and Pre

Development, Engineering and Testing Facilities

Our primary facility is located in Livermore, California within close proximity of the LLNL laboratories.  This facility accommodates personnel required to implement the application designs, developments, and commercialization phases of the ZAFC system.  We plan to carry out the majority of our development and engineering work at our Livermore facility.

Canada National Research Council

Power Air Tech has also established a Canadian subsidiary, Power Air (Canada) Corporation.  On July 1, 2006 our Canadian subsidiary entered into a premises lease to lease office space at the National Research Council of Canada

29



---



The NRC-IFCI is home to the NRC Fuel Cell Program which, in collaboration with industry, universities, and other government agencies, provides research and innovation support in areas critical to the growth of the sector, such as fuels research, system integration and manufacturing, and component development.

The NRC has funded major capital projects to expand the number of labs and to provide testing facilities specialized for different fuel-cell sizes and different fuel-cell types.  Infrastructure includes demonstration facilities to showcase new technology, incubation space for start-ups, and access to specialized information resources.  As such, the NRC IFCI provides us with access to critical product development systems and provides an ideal setting for presenting to prospective OEM and fuel cell partners

Marketing and Sales

We plan to focus on delivering ZAFC technology based products and systems to the market in collaboration with OEMs.  Our plan is to identify and enter into strategic relationships with OEMs that are interested in pursuing the commercialization of products incorporating our ZAFC technology.  Partnering with OEMs is expected to reduce the time required to commercialize our technology as it offers the ability to:

- leverage the OEMs market intelligence, specifications requirements, systems integration, and product development expertise;
- leverage the OEMs customer base for field trial activities and feedback;
- leverage the OEMs product design, certification, and regulatory approval expertise; and
- leverage the OEMs marketing, sales, distribution, installation, and service capabilities.

By partnering with OEMs, our objective will be to avoid duplicating costly, already existing OEM manufacturing, distribution, service and support infrastructures, thus enabling us to focus on cost reduction and improvement of our core technology offering.

We plan to support the OEM systems integration, product development, codes and standards, testing, and siting activities and participate with OEMs in end-user field trials.  ZAFC hopper and cell size and configuration can be customized to meet OEM end-user product requirements.

We also plan to attempt to develop a strategic relationship with a fuel solution business partner, and to collaborate with this partner to implement a fuel supply, distribution, siting, re-fueling logistics, and re-cycling business model.

Commercialization of our zinc based product may be an important development for the zinc industry.  Our product may represent a substantial new fuel market for zinc that zinc companies could supply to.  The process of recycling the zinc, through electrolysis, could also offer a major sustainable revenue producing opportunity to companies in the zinc industry.

We also plan to develop market awareness for the ZAFC through identifiable brand imaging by introducing our logo (with or without text) on all systems, similar to



30



---

We plan to focus our marketing efforts on establishing relationships with major organizations and we will target trade shows and trade press in order to promote these relationships.  We also plan to promote our technology via press releases and editorial write-ups in trade publications.  We plan to undertake limited media advertising.  We plan to retain the services of an advertising agency to assist in public relations and marketing communications.  This will be subject to review during the product launch phase.  We anticipate that the primary promotional and marketing effort will be performed in conjunction with our OEM and zinc strategic partners.

Patents and Licences

As described above, we hold the exclusive world-wide license from LLNL for the development and commercialization of the ZAFC technology.  We also have exclusive worldwide rights to a second LLNL patent pertaining to a low-cost process for recovering zinc and converting it to pellet form for reuse in the ZAFC system.

We have identified several additional patentable designs in the course of developing our core ZAFC stack, and are in the process of filing additional patent applications, but there can be no assurance that any of these patents will be issued or that patents will not be challenged.

Government Approvals

One of our objectives will be to establish relationships with relevant regulators, government and industry agencies in regard to the endorsement of our technology and products.  We plan to seek approvals or recognition for the ZAFC product as a complying zero-emission quality power source.  In particular, we plan to seek to align our technology and products in order to qualify for grants and assistance programs directed at end-users wishing to adopt clean power alternatives.

Government Regulation

If we are to introduce products incorporating our ZAFC technology into the marketplace, we will have to have obtain Underwriters Laboratory and CSA International certifications for North America, and CE certifications for Europe prior to being able ship or install any product.  Most OEMs will not put anything into their end user product that does not have these certifications.  Accordingly, we plan to design all products that we develop so that they will be able to pass all major certifications (North America, Europe, Asia) with the same design.  The expense associated with this government regulatory compliance will be incorporated into the costs for the design and development of our products.

At this time, we do not know what additional requirements, if any, each jurisdiction will impose on our product or its installation.  We also do not know the extent to which any new regulations may impact our ability to distribute, install and service our product.  Once our product reaches the commercialization stage and we begin distributing our systems to our early target markets, the federal, state or local government entities may seek to impose regulations.

Competition

The Company faces competition from a number of companies some of which are larger and have greater resources than it.  The Company

31



---

Incumbent portable generators from McCullough, Briggs & Stratton, Coleman and Honda are well priced at between $120 and $600 per kW for the end-user product.  However, the higher end, quieter models such as the Honda EU3000 are premium priced and in greatest demand for home use.  In addition to virtually silent operation, Power Air

To compete against higher end fossil fuel portable generators, at an average of about $700 per kW, we believe a

- Introduction:  $1,000 to $1,200 per kW;
- Market Penetration:  $800 to $1,000 per kW; and
- Mass Market:  $600 to $800 per kW.

Employees

We currently have 14 full-time employees and five part-time employees.

Subsidiaries

We own 100% of the issued and outstanding share capital of Power Air Tech, Inc., which was formed under the laws of the State of Delaware in October of 1997.  We also own 50% of the issued and outstanding shares of Power Air (Canada) Corp., which was formed under the laws of the Province of British Columbia, Canada, on December 12, 2005. Power Air (Canada) Corp. is considered a variable interest entity due to the Company

Results of Operations

Six Months Ended March 31, 2007 Compared to the Six Months Ended March 31, 2006

The following table sets out our consolidated loss during the six months ended March 31, 2007 and 2006, respectively:



|                                       | Six Months
Ended
March 31, 2007 |  | Six Months
Ended
March 31, 2006
|-------------------------------------- | ------------------------------- |  | -------------------------------
|                                       | (Unaudited)                     |  | (Unaudited)                    
|                                       | $                               |  | $                              
|Expenses                               |                                 |  |                                
|Amortization of property and equipment | 19,654                          |  | 5,697                          
|Development and engineering            | 554,809                         |  | 115,936                        
|General and administration             | 819,476                         |  | 668,785                        
|License fees                           | 52,830                          |  | 45,990                         
|Marketing and selling                  | 308,099                         |  | 127,237                        
|Interest and finance fees              | 296,148                         |  | --                             
|Total Expenses                         | 1,900,504                       |  | 963,045                        
|                                       |                                 |  |                                
|Net Loss                               | (2,051,016)                     |  | (963,045)                      



32



---

The Company recorded a net loss of $2,051,016 for the six months ended March 31, 2007 as compared to a net loss of $963,045 for the prior period.  The increase in net loss was partially due to non-cash based charges to operations including stock-based compensation of $212,440 (2006 - $nil) being the fair value of stock option based compensation of $111,815 and the value of 262,500 common shares issued pursuant to a financial consulting contract valued at $100,625. The net loss was also due to a non-cash financing cost of $268,007 being the amortization of deferred financing costs associated with receiving $2,075,000 and issuing secured promissory notes as the security. The increase in net loss for the six months ended March 31, 2007, not including amortization of deferred financing costs, stock-option based compensation and stock-based compensation all totaling $480,447, as compared to nil in the prior period, was $607,524; mainly due to: an increase in development, engineering and testing of $406,851; a decrease in general and administrative of $12,837; an increase in marketing and selling of $166,058; an increase in interest expense of $28,141; an increase in license fees of $6,840 and an increase in depreciation and amortization of $13,957.

General and administrative expenses totaled $819,476 for the six months ended March 31, 2007 as compared to $668,785 for the prior period, an increase of $150,691.  The increase in general and administration expenses of $150,691 was mainly due to non-cash charges of $212,440 as compared to $nil in the prior period.  Included in general and administrative expenses for current period are fees and salaries relating to the Company

Development and engineering expenses totaled $554,809 for the six months ended March 31, 2007 as compared to $115,936 in the prior period.  Included in development and engineering expenses for 2007 are consultants fees and salaries and benefits of $313,703 as compared to $86,536 in the prior period due to the addition of many new technical employees including the director of engineering, stock-based compensation of $32,022 as compared to nil in the prior period, development, engineering and testing supplies $126,458 as compared to $18,589 due to the this activity starting in January of 2006, travel costs of $26,796 as compared to $9,811, and rent for lab space in Vancouver and Livermore of $52,897 as compared to $nil in the prior period.

Marketing and selling expenses totaled $308,099 for the six months ended March 31, 2007 as compared to $127,237 in the prior period.  Included in marketing and selling expenses for the six months ended March 31, 2007 are salaries and benefits of $207,679 as compared to $111,000 in the prior period due to one additional project manager and a bonus of $30,000 to the director of marketing and sales, stock-based compensation of $14,804 as compared to $nil in the prior period, trade show costs of $22,956 as compared to $nil in the prior period, advertising and promotion of $12,027 as compared to $nil in the prior period, telephone costs of $6,082 as compared to $1,185 in the prior period and travel costs of $39,155 as compared to $5,813 in the prior period.

Also included in net loss for the six months ended March 31, 2007 are license fees of $52,830 relating to the monthly charge to operations for the prepaid annual license fee from LLNL as compared to $45,990 for the prior period.

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

The following table sets out our consolidated loss during the three months ended March 31, 2007 and 2006, respectively:

33



---





|                                       | Three Months
Ended
March 31, 2007 |  | Three Months
Ended
March 31, 2006
|-------------------------------------- | --------------------------------- |  | ---------------------------------
|                                       | (Unaudited)                       |  | (Unaudited)                      
|                                       | $                                 |  | $                                
|Expenses                               |                                   |  |                                  
|Amortization of property and equipment | 10,225                            |  | 4,223                            
|Development and engineering            | 206,409                           |  | 98,936                           
|General and administration             | 297,306                           |  | 319,418                          
|License fees                           | 27,830                            |  | 27,240                           
|Marketing and selling                  | 170,567                           |  | 62,313                           
|Interest and finance fees              | 296,148                           |  | --                               
|Total Expenses                         | 857,973                           |  | 512,130                          
|                                       |                                   |  |                                  
|Net Loss                               | (1,008,485)                       |  | (512,130)                        

The Company recorded a net loss of $1,008,485 for the three months ended March 31, 2007 as compared to a net loss of $512,130 for the prior period.  The increase in net loss was partially due to non-cash based charges to operations including stock-based compensation of $11,122 (2006 - $nil) being the fair value of stock option based compensation. The net loss was also due to a non-cash financing cost of $268,007 being the amortization of deferred financing costs associated with receiving $2,075,000 and issuing secured promissory notes as the security. The increase in net loss for the three months ended March 31, 2007, not including amortization of deferred financing costs and stock-option based compensation all totaling $279,129, as compared to nil in the prior period, was $217,226; mainly due to: an increase in development, engineering and testing of $98, 886; a decrease in general and administrative of $22,343; an increase in marketing and selling of $105,950; an increase in interest expense of $28,141; an increase in license fees of $590 and an increase in depreciation and amortization of $6,003.

General and administrative expenses totaled $297,306 for the three months ended March 31, 2007 as compared to $319,418 for the prior period, a decrease of $16,109.  Included in general and administrative expenses for current period are fees and salaries relating to the Company

Development and engineering expenses totaled $206,409 for the three months ended March 31, 2007 as compared to $98,936 in the prior period.  Included in development and engineering expenses are consultants fees and salaries and benefits of $125,715 as compared to $62,750 due to the addition of many new technical employees including the director of engineering, stock-based compensation of $8,587 as compared to $nil in the prior period, development, engineering and testing supplies $55,554 as compared to $18,589 in the prior period due to the this activity starting in January of 2006, travel costs of $7,401 as compared to $9,811, and rent for lab space in Vancouver and Livermore of $26,280 as compared to $nil in the prior period.

Marketing and selling expenses totaled $160,567 for the three months ended March 31, 2007 as compared to $62,313 in the prior period.  Included in marketing and selling expenses for the three months ended March 31, 2007 are salaries and benefits of $120,204 as compared to $55,500 in the prior period due to one additional project manager, stock-based compensation of $231 as compared to $nil in the prior period, trade show costs of $16,978 as compared to $nil in the prior period, advertising and promotion of $3,939 as compared to $nil in the prior period, telephone costs of $2,607 as compared to $165 in the prior period and travel costs of $12,746 as compared to $5,108 in the prior period.

34



---



Also included in net loss for the six months ended March 31, 2007 are license fees of $27,830 relating to the monthly charge to operations for the prepaid annual license fee from LLNL as compared to $27,240 for the prior period.

Liquidity and Capital Resources

The following table sets forth our cash and working capital as of March 31, 2007.





|                             | As of
March 31, 2007
(Unaudited) | As of
September 30, 2006
(Audited)
|---------------------------- | -------------------------------- | ----------------------------------
|Cash reserves                | $1,317,441                       | $924,928                          
|Working capital (deficiency) | $(790,236)                       | $917,177                          

We plan to spend approximately $4.3 million over the next twelve months in carrying out our plan of operations.  Subsequent to March 31, 2007, we completed the Private Placement for additional gross proceeds of approximately $815,000 of which $700,000 was received as at March 31, 2007. A commission of $81,500 was paid on this second closing of the Private Placement. The Company received $80,000 and will issue 200,000 common shares pursuant to a private placement of common shares at $0.40 per share. The Company has also received subscriptions for a private placement of 14,285,714 units at $0.35 per unit for gross proceeds of $5,000,000 of which $2,000,000 has been received. Each unit will contain one common share and one non-transferable purchase warrant to acquire one additional common share at $0.50 per share expiring two years from date of issuance. After closing these financings our cash reserves will be sufficient to enable us to complete phase 6 of our product development plan and operate for a period in excess of 12 months.  Our ability to complete phases 6 through 12 of our product development plan and other operating expenses will be subject to us obtaining an additional $7 million to $10 million in additional financing.

The Company currently has no sources of revenue to provide incoming cash flows to sustain future operations.  The ability of the Company to emerge from the development stage with respect to any planned principal business activity is dependent upon its successful efforts to enter into OEM joint venture agreements, to raise additional equity financing and generate revenue, cash flow and attain profitable operations.  There can be no assurance that the Company will be able to complete any of the above objectives.  These factors raise substantial doubt regarding the Company

Operating Activities

Operating activities in the six months ended March 31, 2007 used cash of $1,537,942, which reflect our recurring operating losses.

35



---



Investing Activities

In the six months ended March 31, 2007 investing activities used cash of $27,045 to purchase property and equipment.

Financing Activities

A portion of the Private Placement was completed at the end of March 2007 for proceeds of $1,375,000.  By the end of March 2007, the Company also received subscriptions for $700,000 under the Private Placement.  The total cash provided by financing activities in the six months ended March 31, 2007 was $1,957,500.

Subsequently the Company received $80,000 and will issue 200,000 common shares pursuant to a private placement of common shares at $0.40 per share. The Company has also received subscriptions for a private placement of 14,285,714 units at $0.35 per unit for gross proceeds of $5,000,000 of which $2,000,000 has been received. Each unit will contain one common share and one non-transferable purchase warrant to acquire one additional common share at $0.50 per share expiring two years after date of issuance.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis.  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements.  In general, management

We believe that our critical accounting policies and estimates include the accounting for accounts receivable, marketable securities and long-lived assets reclamation costs, and accounting for legal contingencies.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of fair value of stock based compensation and other stock based payments and revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Variable Interest Entity

The Financial Accounting Standards Board (

36



---



Research and Development Expenditures

Due to the Company

Revenue Recognition

The Company will recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 (

The Company has not generated any revenue since inception on October 15, 1997.  The Company plans to receive funding from OEMs to engineer products to OEM specifications.  The Company then plans to receive license and product fees under OEM contracts.  Revenue recognition will be specific to the terms of the contracts and will thus be determined in a later period.

Stock-Based Compensation

Prior to January 1, 2006 the Company accounted for stock-based awards under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25,

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R

37



---



The Company had no outstanding stock options or unvested share based payments as of this date and prior to March 31, 2006.  Accordingly, there was no effect on the Company

On April 1, 2006 the Board of Directors adopted a comprehensive

Foreign Currency Transactions/Balances

The Company

Recent Accounting Pronouncements



In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159,



Item 3. Controls And Procedures

As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer.  Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective as at the end of the period covered by this quarterly report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

38



---



There have been no changes in our internal controls over financial reporting that occurred during our most recent quarterly period that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Risk Factors

Risks Related to Our Operating Results

Because we are currently a development stage company, we have no products available for sale or use and may lack the financial resources needed to bring products to market.

We are in the development stage and we have not completed the development of any products incorporating our ZAFC technology that can be commercially sold.  We will not achieve commercialization of our products until such time, if ever, that we complete further development of our technology and design of products that may be commercially marketed and sold.  Our long-term viability growth and profitability will depend upon successful testing, approval and commercialization of products incorporating our technology resulting from our research and development activities.  Adverse or inconclusive results in the development and testing of these products could significantly delay or ultimately preclude commercialization of our technology.

If we are unable to develop any commercially viable ZAFC fuel cell based products that can be marketed and sold, then we may not be able to achieve revenues and our business may fail.

We cannot guarantee that we will be able to develop commercially viable fuel cell based products on the timetable we anticipate, or at all.  The commercialization of our fuel cell products requires substantial technological advances to improve the efficiency, functionality, reliability, cost and performance of these systems and products and to develop commercial volume manufacturing processes for these systems and products.  We cannot guarantee that we will be able to internally develop the technology necessary for commercialization of our fuel cell products, or that we will be able to acquire or license the required technology from third parties.  Developing the technology for high-volume commercialization requires substantial capital, and we cannot assure you that we will be able to generate or secure sufficient funding on terms acceptable to us to pursue our high-volume commercialization plans.  In addition, before we release any product to market, we subject it to numerous field tests.  These field tests may encounter problems and delays for a number of reasons, many of which are beyond our control.  If these field tests reveal technical defects or reveal that our products do not meet performance goals, including useful life and reliability, our commercialization schedule could be delayed, and potential purchasers may decline to purchase our systems and products.  Our inability to develop commercially viable fuel cell based products that can be marketed and sold will result in our inability to earn revenues and achieve profitability, with the result that our business may fail.

Because we have not earned any revenues from operations, all our capital requirements have been met through financing and it is not certain we will be able to continue to find financing to meet our operating requirements.

Our business plan calls for significant expenses in connection with the development of our ZAFC business.  Our capital requirements have been and will continue to be significant.  We will be dependant on future financing to fund our research and development as well as other working capital requirements.  We estimate that our current working capital will support our activities for no more than four months.  After that time we will need additional financing.  There can be no assurance that such additional financing will be forthcoming or that it will result in sufficient capital for us to meet our expected working capital needs.  It is not anticipated that any of our officers, directors or current shareholders will provide any significant portion of our future financing requirements.  Furthermore, in the event that our plans change, our assumptions change or prove inaccurate, or our capital resources prove to be insufficient to fund operations, we could be required to seek additional financing sooner than currently anticipated, or in greater amounts than is currently anticipated.  Any inability to obtain additional financing when needed would have a material adverse effect on us, including possibly requiring us to significantly curtail or possibly cease our operations.  In addition, any future equity financing may involve substantial dilution to our existing shareholders.

39



---



Our auditors have expressed substantial doubt about our ability to continue as a going concern.

Our audited financial statements for the period from inception to September 30, 2006 have been prepared assuming that we will continue as a going concern.  We have incurred operating losses totalling $13,139,212 since inception and, as a result, our auditors have expressed substantial doubt about our ability to continue as a going concern.  Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Because we have only recently commenced business operations, we face a high risk of business failure and this could result in a total loss of your investment.

We have not earned any revenues and we have not achieved profitability as of the date of this annual report.  Potential investors should be aware of the difficulties normally encountered by development stage companies and the high rate of failure of such enterprises.  The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the further commercialization of our ZAFC technology.  These potential problems include, but are not limited to, unanticipated problems relating to costs and expenses that may exceed current estimates.  We have no history upon which to base any assumption as to the likelihood that our business will prove successful, and we can provide no assurance to investors that we will generate any operating revenues or ever achieve profitable operations.  If we are unsuccessful in addressing these risks, our business will likely fail and you will lose your entire investment.

Because we have only recently commenced business operations, we expect to incur operating losses for the foreseeable future.

We have never earned revenues and we have never been profitable.  Prior to completing the commercialization of our ZAFC technology, we anticipate that we will incur increased operating expenses without realizing any revenues.  We therefore expect to incur significant losses into the foreseeable future.  If we are unable to generate significant revenues from the commercialization of our technology, our business will likely fail and investors will lose their entire investment.

We have no commercialization or strategic partnership  agreements in place.

A key component of our business plan is to enter into strategic relationships with OEMs with whom we would work to design and develop products incorporating our ZAFC technology that would be manufactured, marketed and sold by the OEMs.  Although we have collaboration and tooling agreements in place we currently have no commercialization or strategic partnership agreements in place to assist in the development and funding of additional prototypes.  These agreements need to be completed as soon as reasonably possible.  Our growth will depend, in large part, on such partnerships.  If we are unable to develop and maintain these relationships, our ability to penetrate and compete successfully in the fuel cell market would be materially adversely affected, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.

We could lose or fail to attract the personnel necessary to run our business.

Our success depends in large part on our ability to attract and retain key management, engineering, scientific, manufacturing and operating personnel.  As we develop additional manufacturing capabilities and expand the scope of our operations, we will require more skilled personnel.  Recruiting personnel for the fuel cell product industry is highly competitive.  We cannot guarantee that we will be able to continue to attract and retain qualified executive, managerial and technical personnel needed for our business.  Our failure to attract or retain qualified personnel could delay or result in our inability to complete our business plan for the commercialization of our ZAFC fuel cell technology.

40



---



Our directors may experience conflicts of interest which may detrimentally affect our profitability.

Certain directors and officers may be engaged in, or may in the future be engaged in, other business activities on their own behalf and on behalf of other companies and, as a result of these and other activities, such directors and officers may become subject to conflicts of interest, which could have a material adverse effect on our business.

Because our business operations are only one year old, we may not be able to effectively manage the demands required of a new business in our industry.

We have never earned revenues and we have never been profitable.  There can be no assurance that we will effectively execute our business plan or manage any growth of our business, or that our future operating and financial forecast will be met.  Future development and operating results will depend on many factors, including access to adequate capital, the completion and regulatory approval of marketable products, the demand for our products, the level of product and price competition, our success in setting up and expanding distribution channels and whether we can control costs.  Many of these factors are beyond our control.  In addition, our future prospects must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a new business in its industry, which is characterized by intense competition, rapid technological change, highly litigious competitors, potential product liability and significant regulation.  If we are unable to address these matters, or any of them, then we may not be able to successfully implement our business plan for the commercialization of our ZAFC fuel cell technology or achieve revenues or profitability.

Because we have a history of losses and anticipate continued losses through our development stage, we may lack the financial stability required to continue operations.

Since inception we have suffered recurring losses.  We have funded our operations through the issuance of common stock in order to meet our strategic objectives.  We anticipate that our losses will continue until such time, if ever, as we are able to generate sufficient revenues to support our operations.  Our ability to generate revenue primarily depends on our success in completing development and obtaining regulatory approvals for the commercial sale of the products under development.  There can be no assurance that any such events will occur, that we will attain revenues from commercialization of our products or that we will ever achieve profitable operations.

Even if we are able to successfully develop products incorporating our ZAFC fuel cell technology, our inability to successfully manufacture these products, either ourselves or through OEMs with whom we may enter into strategic relationships, would result in our inability to commercialize our technology and achieve revenues.

To successfully commercialize our ZAFC fuel cell technology, we must develop, either ourselves or through OEMs with whom we may enter into strategic relationships, the ability to manufacture our products in quantities in compliance with regulatory requirements and at an acceptable cost.  We have no long-term experience in manufacturing products and could experience difficulties in development or manufacturing that could impair our ability to successfully commercialize products incorporating our ZAFC fuel cell technology.  Moreover, there can be no assurance that we or OEMs with whom we enter into strategic relationships will be successful in scaling up manufacturing operations sufficient to produce our products in sufficient volume and at acceptable manufacturing costs to generate market acceptance.

A mass market for our products may never develop or may take longer to develop than we anticipate.

Our fuel cell products represent emerging markets, and we do not know whether end-users will want to use them.  The development of a mass market for our fuel cell products may be affected by many factors, some of which are beyond our control, including the emergence of newer, more competitive technologies and products, the future cost of fuels used by our systems, regulatory requirements, consumer perceptions of the safety of our products and related fuels, and consumer reluctance to buy a new product, any of which could have a material adverse effect on our business, results of operations, financial condition and cash flows.  In the event that consumers do not demand our products or if the market for our products develops slower than we anticipate, then our ability to achieve significant revenues and profitability will be impaired or delayed.

41



---



We currently face and will continue to face significant competition.

As fuel cell products have the potential to replace existing power products, competition for our products will come from current power technologies, from improvements to current power technologies and from new alternative power technologies, including other types of fuel cells.  Each of our target markets is currently serviced by existing manufacturers with existing customers and suppliers.  Additionally, there are competitors working on developing technologies such as other types of fuel cells, advanced batteries and hybrid battery/internal combustion engines in each of our targeted markets.  The fuel cell product market is becoming more competitive with products from many companies, many of which are larger with greater financial resources.  Many large competitors may also eventually dominate the marketplace with access to significantly more financing than our Company.  Across the United States, Canada, Europe and Japan, corporations, national laboratories and universities are actively engaged in the development and manufacture of fuel cell products and components.  Each of these competitors has the potential to capture market share in each of our target markets.  If competitors are able to introduce competing products that are more readily accepted by consumers or cost less than the products incorporating our technology, then a significant consumer demand for our products may not develop and we may not be able to achieve significant revenues or profitability.

Because we are significantly smaller than the majority of our national competitors we may lack the financial resources needed to capture market share.

The market in which we intend to operate is dominated by several large firms with established products, and our success will be dependant upon acceptance of our products by the market as reliable, safe and cost-effective power solutions.  It may be difficult or impossible for us to achieve such acceptance of our products in view of competitive market conditions.  Many of our competitors have substantial financial resources, customer bases, manufacturing, marketing and sales capabilities, and businesses or other resources, which give them significant competitive advantages over us.  Thus it is likely that they will be quicker to market than we will, with products that will compete with our products, should our products be successfully approved and commercialized.  Moreover, even if we successfully brings our products to market ahead of our projected competitors, established competitors may be able to quickly bring products to market that would compete.  In addition, the market is subject to constant introduction of new products and designs.  Market acceptance of our products may be influenced by new products or technologies that come to market, which could render our products obsolete or prohibitively expensive.  If we are unable to address these matters, or any of them, then our products may not be able to compete in the marketplace with products offered by competitors and we may not be able to achieve significant revenues or profitability.

Because we may not be able to obtain all of the  patents for the products and processes we are currently developing and testing, we may not be able to protect our intellectual property rights.

Our success will depend in part on whether we can obtain additional patent protection for our products and processes, preserve trade secrets and proprietary technology and operate without infringing upon patent or other proprietary rights of third parties.  We cannot provide any assurance that any of our existing licensed patents will not be challenged or that we will be able to achieve any future patent protection for our technology.  Established companies in our industry generally are aggressive in attempts to block new entrants to their markets, and may allege that our products, if successfully developed, interfere with the intellectual property rights of these companies.  Our success will depend on our products not infringing patents that belong to others.  Furthermore, the validity and breadth of claims in our licensed technology patents involve complex legal and factual questions and, therefore, are highly uncertain.  Even if we are successful in obtaining additional patents for our technology there can be no assurance that we will be able to successfully assert our patents against competing products.  Moreover, our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent.  Particularly, we cannot assure you that any of our pending or future patent applications will be issued with the breadth of claim coverage sought by us, if issued at all.  In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries.

42



---



We may be involved in intellectual property litigation that causes us to incur significant expenses or prevents us from selling our products.

We may become subject to lawsuits in which it is alleged that we have infringed the intellectual property rights of others or commence lawsuits against others who we believe are infringing upon our rights.  Our involvement in intellectual property litigation could result in significant expense to us, adversely affecting the development of sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favour.  In the event of an adverse outcome as a defendant in any such litigation, we may, among other things, be required to: pay substantial damages; cease the development, manufacture, use, sale or importation of products that infringe upon other patented intellectual property; expend significant resources to develop or acquire non-infringing intellectual property; discontinue processes incorporating infringing technology; or obtain licenses to the infringing intellectual property, any of which could have a material adverse effect on our business and financial results.

We are dependent on third party suppliers for the supply of key materials and components for our products.

We have established relationships with third party suppliers, upon whom we rely to provide materials and components for our products.  A supplier's failure to supply materials or components in a timely manner, or to supply materials and components that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources for these materials and components in a timely manner or on terms acceptable to us, could harm our ability to manufacture our products.  To the extent that the processes which our suppliers use to manufacture the materials and components are proprietary, we may be unable to obtain comparable materials or components from alternative suppliers, and that could adversely affect our ability to produce viable fuel cell products at a reasonable price or significantly raise our cost of producing such products.  In addition, zinc is a key component of our fuel cells.  While we do not anticipate significant near or long term shortages in the supply of zinc, increases in the price of zinc could adversely affect our ability to produce commercially viable fuel cell products, or significantly raise our cost of producing such products.

We anticipate that we will be dependent upon OEMs to purchase certain of our products.

To be commercially useful, most of our fuel cell products must be integrated into products manufactured by OEMs.  We can offer no guarantee that OEMs will manufacture appropriate products or, if they do manufacture such products, that they will choose to use our fuel cell products.  Any integration, design, manufacturing or marketing problems encountered by OEMs could materially adversely affect our ability to achieve commercialization of products incorporating our ZAFC fuel cell technology.

Because product liability is inherent in the Company's industry and insurance is expensive and difficult to obtain, the Company may be exposed to large lawsuits.

Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, marketing and sale of its proposed products.  While we will take precautions that we deem to be appropriate to avoid product liability suits against us, there can be no assurance that we will be able to avoid significant product liability exposure.  Product liability insurance for our industry is generally expensive, to the extent it is available at all.  We have not yet sought to obtain product liability coverage.  We intend to obtain such coverage when it is apparent that our products will be marketable.  There can be no assurance that we will be able to obtain such coverage on acceptable terms, or that any insurance policy will provide adequate protection against potential claims.  A successful product liability claim brought against us may exceed any insurance coverage secured by us and could require us to pay a judgement or settlement amount that is substantial in terms of our available financial and capital resources.

43



---



Regulatory changes could hurt the market for products incorporating our ZAFC fuel cell technology.

Changes in existing government regulations and the emergence of new regulations with respect to fuel cell products may hurt the market for our products.  Environmental laws and regulations in the U.S. (particularly in California) and other countries have driven interest in fuel cell systems; and the deregulation of the electric utility industry in the U.S. and elsewhere has created market opportunities for fuel cell products in the portable, stationary, light mobility and transportation markets.  We cannot guarantee that these laws and policies will not change.  Changes in these laws and other laws and policies or the failure of these laws and policies to become more widespread could result in manufacturers abandoning their interest in fuel cell products or favouring alternative technologies.  In addition, as fuel cell products are introduced into our target markets, the U.S. and other governments may impose burdensome requirements and restrictions on the use of fuel cells that could reduce or eliminate demand for some or all of our products.  Accordingly, changes in government regulation could reduce demand for products incorporating our ZAFC fuel cell technology.

Risks Related to Our Common Stock

The trading price of our common stock can be volatile.

The price of our common shares may increase or decrease in response to a number of events and factors, including: trends in the fuel cell markets in which we operate; changes in the market price of the commodities we use in our products; current events affecting the economic situation in North America; changes in financial estimates; our acquisitions and financings; quarterly variations in our operating results; the operating and share price performance of other companies that investors may deem comparable; and purchase or sale of blocks of our common shares.  These factors, or any of them, may materially adversely affect the prices of our common shares regardless of our operating performance.

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.

A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise additional capital for our operations.  Because our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations.  A reduction in our ability to raise equity capital in the future would have a material adverse effect upon our business plan and operations, including our ability to continue our current operations.  If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

Because our stock is traded on the OTCBB and not a larger or more recognized exchange, investors may find it difficult to sell their shares or obtain accurate quotations for share prices.

Our common stock is traded on the NASD Over-the-Counter Bulletin Board (the "OTCBB").  Investors may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of our common stock than would otherwise be the case if our common stock was listed on a more recognized stock exchange or quotation service.  In addition, trading in our common stock is currently subject to certain rules under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a "penny stock."  Penny stocks are generally non-NASD equity securities with a market price less than $5.00 per share.  The penny stock rules require broker-dealers selling penny stocks to make certain disclosures about such stocks to purchasers thereof, and impose sales practice restrictions on broker-dealers in certain penny stock transactions.  The additional burdens imposed upon broker-dealers by these rules may discourage them from effecting transactions in our common stock, which could limit the liquidity of the common stock and the ability of our stockholders to sell their stock in the secondary market.

44



---



Two of our five directors and two of our three senior officers are outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers.

Two of our five directors and two of our three senior officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons' assets are located outside the United States.  As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.  Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them.  In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States.  The foregoing risks also apply to those experts identified in this annual report that are not residents of the United States.

Our stock is a penny stock.  Trading of our stock may be restricted by the SEC's penny stock regulations and the NASD's sales practice requirements, which may limit a stockholder's ability to buy and sell our stock.

Our stock is a penny stock.  The Securities and Exchange Commission (the "SEC") has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors".  The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with their spouse.  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account.  The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation.  In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser's written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules.  Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.  We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.  In addition to the "penny stock" rules promulgated by the SEC, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer.  Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information.  Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers.  The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Item 1.            Legal Proceedings

We currently are not a party to any material legal proceedings and, to our knowledge, no such proceedings are threatened or contemplated.

45



---



Item 2.            Unregistered Sales of Equity Securities

In March and April of 2007 we completed a private placement (the "Private Placement") by the Company of promissory notes for approximately $2.2 million (the "Notes") and securities ("Equity Consideration Certificates").  The Notes have a interest rate of 10% per annum payable quarterly commencing May 31, 2007 and due on the earlier of: (i) September 30, 2007 or (ii) the third business day following the completion of an underwritten public offering or a private placement by the Company resulting in gross proceeds of $5 million or more (the "Qualified Offering").  Repayment of the Notes will be secured by a lien on all tangible and intangible assets of the Company and each of its subsidiaries to be evidenced by a security agreement and a security and pledge agreement from the Company for 100% of the stock in each of its subsidiaries.  Each Purchaser also received an Equity Consideration Certificate in an amount equal to such purchaser's Note.  The Equity Consideration Certificate will entitle the purchaser to receive either "Primary Equity Consideration" or "Alternate Equity Consideration".  The "Primary Equity Consideration" consists of the identical securities that the Company will sell in its next Qualified Offering.  The number of such securities to be received by each purchaser shall be the result obtained by dividing 100% of the original principal amount of the Note purchased by such purchaser in this offering by the price of the security, or package of securities, sold by the Company in the Qualified Offering.  The Equity Consideration shall be delivered to the purchaser (or its transferee or assignee) within three business days following the closing of the Qualified Offering.  The "Alternate Equity Consideration" consist of that number of shares of common stock of the Company that equal the principal amount of the Notes divided by $0.40 plus an equal number of non-callable warrants exercisable at $0.50 per share for a period of seven years from such issuance, which will have a cashless exercise feature if, at any time after one year from the first closing of the Private Placement, the underlying shares of common stock are not covered by an effective registration statement with a current prospectus available.  The Alternate Equity Consideration will be issued to the Purchasers on the first business day following the later of September 30, 2007 or an extended maturity date, if a Qualified Offering shall not have occurred by such date.  The Notes were sold to the purchasers who purchased as "accredited investors" as that term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended.  Pursuant to an agreement (the "Financing Agreement") dated for reference March 5, 2007 among the Company and Paulson Investment Company, Inc. and High Capital Funding, LLC (together, the "Placement Agents"), as amended, the Placement Agents acted as agents of the Company for the Private Placement.

Item 3.            Defaults Upon Senior Securities

None.

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

No matters were submitted to our security holders for a vote during the six months ended March 31, 2007.

Item 5.            Other Information

None.

Item 6.            Exhibits

The following exhibits are included with this Quarterly Report on Form 10-QSB:



|Exhibit
Number | Description of Exhibit      
|-------------- | ----------------------------
|3.1            | Articles of Incorporation(1)
|3.2            | Bylaws(1)                   

46



---



|10.1 | Share Exchange Agreement among the Company, the Vendor, Power Air, the HDH Group and Dean Haley, dated for reference effective on August 22, 2005.(2)                                                                                                                                                                    
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2 | Stephen Williams Services Contract between the Company and Stephen Williams, dated for reference effective on October 1, 2005, as amended.(2)(3)                                                                                                                                                                         
|10.3 | Sales and Marketing Employment Agreement among the Company, Power Air and Donald Ceci, dated for reference effective on October 3, 2005.(2)                                                                                                                                                                              
|10.4 | Corporate Development Employment Agreement among the Company, Power Air and Remy Kozak, dated for reference effective on October 3, 2005, as amended.(2)(3)                                                                                                                                                              
|10.5 | Development and Pre-Manufacturing Agreement dated September 27, 2006 between the Company and Mid States Tool and Machine Inc.(5)                                                                                                                                                                                         
|10.6 | 2006 Stock Incentive Plan(4)                                                                                                                                                                                                                                                                                             
|10.7 | Financing Agreement dated March 4, 2007 among the Company, Paulson Investment Company, Inc. and High Capital Funding, LLC (including the form of the Secured Promissory Note, the form of the Equity Consideration Certificate, the form of the Security Agreement and the form of the Security and Pledge Agreement).(6)
|10.8 | Form of the Subscription Agreement between the Company and each of the purchasers for the Note and the Equity Consideration Certificates.(6)                                                                                                                                                                             
|21.1 | Subsidiaries of the Company:
Power Air Tech, Inc. (Delaware) (100%)
Power Air (Canada) Corp. (British Columbia) (50%)                                                                                                                                                                                                    
|31.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 21, 2007.                                                                                                                      
|32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 21, 2007.                                                                                                                       

(1)   Previously filed with the SEC as an exhibit to our Registration Statement on Form SB-2 as originally filed with the SEC on December 2, 2004.

(2)   Previously filed with the SEC as an exhibit to our Current Report on  Form 8-K as originally filed with the SEC on October 7, 2005.

(3)   Previously filed with the SEC as an exhibit to our Form SB-2 as originally filed with the SEC on June 12, 2006.

(4)   Previously filed with the SEC as an exhibit to our Form S-8 as originally filed with the SEC on July 3, 2006.

(5)   Previously filed with the SEC as an exhibit to our Form 10-QSB as originally filed with the SEC on February 14, 2007.

(6)   Previously filed with the SEC as an exhibit to our Form 8-K as originally filed with the SEC on April 16, 2007.

__________

47



---



SIGNATURES

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

POWER AIR CORPORATION

Per:

/s/ "Remy Kozak"

Remy KozakPresident and Chief Executive Officer

Date:  May 21, 2007.

__________