UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549

FORM 10-QSB



        Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2006



        Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____

Commission File Number: 000-51256



POWER AIR CORPORATION

(Name of small business issuer in its charter)







|NEVADA                                                         |  | N/A                                 
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|                                                               |  |                                     
|4777 Bennett Drive, Suite E, Livermore, CA                     |  | 94551                               
|(Address of principal executive offices)                       |  | (Zip Code)                          
|                                                               |  |                                     
|                                                               |  |                                     
|(925) 960-8777                                                 |  |                                     
|(Issuer's telephone number)                                    |  |                                     
|                                                               |  |                                     



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 * No

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

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 February 14, 2007.

Transitional Small Business Disclosure Format (check one):  Yes       No   *

__________



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POWER AIR CORPORATION



Quarterly Report On Form 10-QSB
For The Quarterly Period Ended December 31, 2006

FORWARD-LOOKING STATEMENTS

This Form 10-QSB for the quarterly period ended December 31, 2006 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", "will", "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.

__________



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PART I - FINANCIAL INFORMATION

Item 1.               Financial Statements



Power Air Corporation





|                                                                                                                                              | December 31,
2006
$ |  | September 30,
2006
$
|--------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- |  | --------------------
|                                                                                                                                              | (unaudited)         |  |                     
|                                                                                                                                              |                     |  |                     
|ASSETS                                                                                                                                        |                     |  |                     
|                                                                                                                                              |                     |  |                     
|Current Assets                                                                                                                                |                     |  |                     
|                                                                                                                                              |                     |  |                     
|Cash                                                                                                                                          | 142,864             |  | 924,928             
|Other current assets                                                                                                                          | 74,434              |  | 109,739             
|                                                                                                                                              |                     |  |                     
|Total current assets                                                                                                                          | 217,298             |  | 1,034,667           
|                                                                                                                                              |                     |  |                     
|Deferred financing costs                                                                                                                      | -                   |  | 28,047              
|                                                                                                                                              |                     |  |                     
|Property and Equipment (Note 3)                                                                                                               | 176,887             |  | 167,085             
|                                                                                                                                              |                     |  |                     
|Total Assets                                                                                                                                  | 394,185             |  | 1,229,799           
|                                                                                                                                              |                     |  |                     
|                                                                                                                                              |                     |  |                     
|LIABILITIES AND STOCKHOLDERS'EQUITY                                                                                                           |                     |  |                     
|                                                                                                                                              |                     |  |                     
|Current Liabilities                                                                                                                           |                     |  |                     
|                                                                                                                                              |                     |  |                     
|Accounts payable                                                                                                                              | 123,089             |  | 38,930              
|Accrued liabilities                                                                                                                           | -                   |  | 78,560              
|                                                                                                                                              |                     |  |                     
|Total current liabilities                                                                                                                     | 123,089             |  | 117,490             
|                                                                                                                                              |                     |  |                     
|                                                                                                                                              |                     |  |                     
|Commitments and Contingencies (Note 6)                                                                                                        |                     |  |                     
|                                                                                                                                              |                     |  |                     
|                                                                                                                                              |                     |  |                     
|Stockholders'Equity                                                                                                                           |                     |  |                     
|                                                                                                                                              |                     |  |                     
|Common Stock (Note 5), 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                                                                                                                    | 12,506,725          |  | 12,305,669          
|                                                                                                                                              |                     |  |                     
|Deficit Accumulated During the Development Stage                                                                                              | (12,281,239)        |  | (11,238,708)        
|                                                                                                                                              |                     |  |                     
|Total Stockholders'Equity                                                                                                                     | 271,096             |  | 1,112,309           
|                                                                                                                                              |                     |  |                     
|Total Liabilities and Stockholders'Equity                                                                                                     | 394,185             |  | 1,229,799           
|                                                                                                                                              |                     |  |                     





---

Power Air Corporation





|                                                      | Three Months EndedDecember 31, |  | Cumulative results fromOctober 15, 1997(date of inception)to December 31,
|----------------------------------------------------- | ------------------------------ |  | -------------------------------------------------------------------------
|                                                      | 2006
$                         |  | 2005
$                                                                   
|                                                      |                                |  |                                                                          
|Expenses                                              |                                |  |                                                                          
|                                                      |                                |  |                                                                          
|Depreciation                                          | 9,429                          |  | -                                                                        
|Development and engineering                           | 348,400                        |  | -                                                                        
|General and administration                            | 522,170                        |  | 432,166                                                                  
|License fees                                          | 25,000                         |  | 18,750                                                                   
|Marketing and selling                                 | 137,532                        |  | -                                                                        
|Interest                                              | -                              |  | -                                                                        
|                                                      |                                |  |                                                                          
|Total Expenses                                        | 1,042,531                      |  | 450,916                                                                  
|                                                      |                                |  |                                                                          
|Net Loss                                              | (1,042,531)                    |  | (450,916)                                                                
|                                                      |                                |  |                                                                          
|                                                      |                                |  |                                                                          
|Net Loss Per Share-Basic and Diluted                  | (0.02)                         |  | (0.01)                                                                   
|                                                      |                                |  |                                                                          
|                                                      |                                |  |                                                                          
|Weighted Average Shares Outstanding-Basic and Diluted | 45,523,000                     |  | 42,622,000                                                               
|                                                      |                                |  |                                                                          



---

Power Air Corporation





|                                                                        | Three Months EndedDecember 31,
|----------------------------------------------------------------------- | ------------------------------
|                                                                        | 2006$                         
|                                                                        |                               
|Operating Activities                                                    |                               
|                                                                        |                               
|Net loss                                                                | (1,042,531)                   
|                                                                        |                               
|Adjustments to reconcile net loss to cash used in operating activities: |                               
|Depreciation                                                            | 9,429                         
|Deferred financing costs written-off                                    | 28,047                        
|Stock-based compensation                                                | 201,318                       
|                                                                        |                               
|Changes in operating assets and liabilities:                            |                               
|                                                                        |                               
|Other current assets                                                    | 35,305                        
|Accounts payable                                                        | 5,599                         
|                                                                        |                               
|Net Cash Used in Operating Activities                                   | (762,833)                     
|                                                                        |                               
|Investing Activities                                                    |                               
|                                                                        |                               
|Purchase of property and equipment                                      | (19,231)                      
|                                                                        |                               
|Net Cash Used in Investing Activities                                   | (19,231)                      
|                                                                        |                               
|Financing Activities                                                    |                               
|                                                                        |                               
|Proceeds from issuance of common stock                                  | -                             
|Share issuance costs                                                    | -                             
|                                                                        |                               
|Net Cash Provided by Financing Activities                               | -                             
|                                                                        |                               
|Increase (Decrease) in Cash                                             | (782,064)                     
|                                                                        |                               
|Cash-Beginning of Period                                                | 924,928                       
|                                                                        |                               
|Cash-End of Period                                                      | 142,864                       
|                                                                        |                               
|                                                                        |                               
|Supplemental Disclosures                                                |                               
|                                                                        |                               
|Interest paid                                                           | -                             
|Income taxes paid                                                       | -                             
|                                                                        |                               
|                                                                        |                               
|Non-cash Investing and Financing Activities                             | -                             
|                                                                        |                               





---

Power Air Corporation





|                                                                                        | Common Stock |         | Accumulated |             
|--------------------------------------------------------------------------------------- | ------------ | ------- | ----------- | ------------
|                                                                                        |              | Deficit |            
|                                                                                        | Number       |         | Additional  |             
|                                                                                        | of           |         | Paid-In     | Subscription
|                                                                                        | Shares       | Amount  | Capital     | 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 5(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 5(a))                                              | 1,105,917    | 1,106   | 717,740     | -           
|                                                                                        |              |         |             |             
|Unit private placement - $1.10 (Note 5(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     | -           
|                                                                                        |              |         |             |             
|Fair value of vested stock options                                                      | -            | -       | 100,693     | -           
|                                                                                        |              |         |             |             
|Net loss                                                                                | -            | -       | -           | -           
|                                                                                        |              |         |             |             
|Balance, December 31, 2006                                                              | 45,610,818   | 45,610  | 12,506,725  | -           
|                                                                                        |              |         |             |             



---

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.

Upon completion of the PAT Acquisition on September 30, 2005, the Company:

a)       issued 14,693,423 restricted common shares to the shareholder of PAT to acquire 100% of the issued and outstanding shares of PAT. Included as a condition precedent to the Share Exchange Agreement was that the shareholder of PAT forgive $2,173,045 of indebtedness from PAT. This forgiveness was treated as additional paid in capital due to the shareholder of PAT being considered a principal shareholder of the Company as a consequence of the completion of the PAT Acquisition;

b)       issued 4,545,456 restricted common shares, at an estimated fair value of $0.5525 per share (after a 15% discount to the established fair market price of $0.65) to PAT

c)       issued 2,836,121 restricted common shares, at an estimated fair value of $0.5525 per share (after a 15% discount to the established fair market price of $0.65), to PAT

d)       issued 542,275 restricted common shares, at an estimated fair value of $0.5525 per share (after a 15% discount to the established fair market price of $0.65), to a substantial majority of the creditors of PAT in consideration of such creditors agreeing to accept the shares in complete satisfaction of all previous debts and/or services provided by such creditors to PAT totalling $299,607. The Company also assumed an obligation to pay a creditor $25,995 which was paid during the quarter ended December 31, 2005; and



---

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

e)       caused 1,550,000 common shares, previously owned by two founders of PAC, to be returned to treasury and cancelled for no consideration as part of the terms of the Share Exchange Agreement.

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

These interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company





2.       Summary of Significant Accounting Policies

a)       Basis of Presentation

These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and are presented in US dollars. The Company resolved to keep the fiscal year end of PAC, the legal parent, being September 30. PAT

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 stock based compensation expense, revenues and expenses during the reporting period. Actual results could differ from those estimates.



---

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

SFAS No. 130,"Reporting Comprehensive Income,"establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. For all periods presented the Company has no items that represent a comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.

f)       Research and Development Expenditures

Due to the Company's lack of revenues and forecast of significant capital required to develop a market for its products, the net realizable value of prototype material and intangible assets is not reasonably determinable. Accordingly, all research and development expenditures under Cooperative Research and Development Agreement (CRADA) contracts, including the costs of prototype material and the cost of obtaining intangible assets such as patents, have been charged to operations.

g)       Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.

h)       Financial Instruments

Financial instruments, which include cash, other current assets, accounts payable and accrued liabilities were estimated to approximate their carrying values due to the immediate or short-term maturity of these financial instruments. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk.

i)       Revenue Recognition

The Company will recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements."Revenue will be recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is provided and collection is reasonably assured.

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

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.



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2.       Summary of Significant Accounting Policies (continued)

k)       Deferred Finance Costs

Deferred finance costs are recorded at cost and include costs relating to undertaking financing activities. Upon successful completion of the related financing, these costs will be recorded as a reduction of share capital. 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

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

On April 1, 2006 the Board of Directors passed a resolution to grant 2,550,000 stock options to certain officers, directors, employees and consultants. On June 15, 2006 an additional 200,000 stock options were granted to the Company

The fair value of the stock options granted was measured at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



|                         |  | 2006 
|------------------------ |  | -----
|                         |  |      
|Expected dividend yield  |  | 0%   
|Risk free interest rate  |  | 4.49%
|Expected volatility      |  | 67%  
|Expected life (in years) |  | 1.3  

``



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2.       Summary of Significant Accounting Policies (continued)

m)      Stock-Based Compensation (continued)

The weighted average grant date fair value of stock options granted was $0.52 per option.

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 December 31, 2006 | 3,735,000         |  | 0.62                             

The weighted average contractual life of the exercisable and outstanding stock options is 1.37 years.

Additional information regarding stock options as at September 30, 2006 is as follows:

``



|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        | 1.10                                                | 0.61                              
|                 |                                                     |                                   
|                 |                                                     |                                   
|                 |                                                     |                                   
|                 |                                                     |                                   

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.



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2.       Summary of Significant Accounting Policies (continued)

p)       Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,

In September 2006, the FASB issued SFAS No. 158,

In September 2006, the SEC issued Staff Accounting Bulletin (





3.       Property and Equipment



|                        | Cost
$  |  | Accumulated
Depreciation
$ |  | Net Carrying
Value
December 31,
2006
$ |  | Net Carrying
Value
September 30,
2006
$
|----------------------- | ------- |  | -------------------------- |  | -------------------------------------- |  | ---------------------------------------
|                        |         |  |                            |  |                                        |  |                                        
|Computer hardware       | 47,482  |  | 5,549                      |  | 41,933                                 |  | 27,252                                 
|Computer software       | 7,684   |  | 1,186                      |  | 6,498                                  |  | 6,882                                  
|Furniture and equipment | 127,712 |  | 17,764                     |  | 109,948                                |  | 113,361                                
|Leasehold improvements  | 21,637  |  | 3,129                      |  | 18,508                                 |  | 19,590                                 
|                        |         |  |                            |  |                                        |  |                                        
|                        | 204,515 |  | 27,628                     |  | 176,887                                |  | 167,085                                
|                        |         |  |                            |  |                                        |  |                                        





4.       Related Party Transactions

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



5.       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)       Warrants outstanding



|# 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     |                |                                     
|              |                |                                     



There are 4,079,657 warrants outstanding having a weighted average remaining life of .75 years and a weighted average exercise price of $1.11.



6.       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 is for nine months expiring March 31, 2007 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.



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6.       Commitments and Contingencies (continued)

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

e)       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.

f)       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.





7.       Income Taxes

Potential benefits of United States and Canadian Federal income tax losses are not recognized in the accounts until realization is more likely than not. The Company has combined United States and Canadian tax losses carried forward totalling $2,265,000 for tax purposes. Pursuant to SFAS No. 109, the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit 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.

United States Federal income tax losses of $2,328,908 are no longer available to the Company pursuant to the change of control rules of Section 382 of the Internal Revenue Code.

The components of the net deferred tax asset at September 30, 2006, the statutory tax rate, the effective tax rate and the amount of the valuation allowance are indicated below:



|                                         | September 30, 2006
$
|---------------------------------------- | --------------------
|                                         |                     
|Combined Cumulative Net Operating Losses | 2,265,000           
|                                         |                     
|Statutory Tax Rate                       | 34%                 
|                                         |                     
|Effective Tax Rate                       | -                   
|                                         |                     
|Deferred Tax Asset                       | 770,000             
|                                         |                     
|Valuation Allowance                      | (770,000)           
|                                         |                     

``



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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



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9.       Subsequent Event

Subsequent to December 31, 2006 the Company received an unsecured loan of $100,000 from related parties. These loans are due on demand, bear interest at 10% per annum, and a 10% bonus will be paid



Item 2.               Management ' s Discussion and Analysis

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) "PAT" means our wholly-owned subsidiary Power Air Tech, Inc.; (iii) "SEC" refers to the Securities and Exchange Commission; (iv) "Securities Act" refers to the Securities Act of 1933 , as amended; (v) "Exchange Act" refers to the Securities Exchange Act of 1934 , as amended; and (vi) 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 three months ended December 31, 2006 should be read in conjunction with our unaudited consolidated interim financial statements and related notes for the three months ended December 31, 2006 included in this quarterly report, as well as our annual report on Form 10-KSB for the year ended September 30, 2006

Overview

Name and Incorporation

Our company was formed under the laws of the State of Nevada on August 26, 2004 under the name

Our principal business offices are located at 4777 Bennett Drive, Suite E, Livermore, California, U.S.A, 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. (

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 PAT have become the continuing operations of the Company.

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



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Our Business

We hold the exclusive world-wide license for the development and commercialization of the zinc air fuel cell (

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 December 31, 2006 together with a planned equity financing in early 2007 of a minimum of $5 million will be sufficient to enable us to complete the product and program concept phases, the design, manufacture and testing of engineering prototypes and begin the design of a manufacturing prototype.  Our ability to complete the manufacture and testing of manufacturing prototypes and the pilot product of commercial products will require that we obtain additional financing of a further $10 million before September 30, 2007.

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.

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.



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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:

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 (









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 (





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
- 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



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

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 28th of each year of the License Agreement.

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) converted 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



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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
- containers and filters

The current, self-feeding design incorporates a hopper from which the zinc pellets, less than 1mm 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 3mm 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.



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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.

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 Lawrence Livermore National Laboratory 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



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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.

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 PAT                                                                         | 1998                
|3     | Completion of multi-cell ZAFC unit for demonstration                   | LLNL and PAT                                                                         | 2000                
|4     | Proof of Power Curve - successful testing of ZAFC                      | LLNL, PAT 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 working capital of $94,000 at December 31, 2006. In addition, 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 Don Prest, our Chief Financial Officer, and Paul Brock, a director. These loans are 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. We anticipate that our current working capital will not  be sufficient to enable us to complete phase 6 of our 12 phase product development plan. We will require additional funds to complete phases 6 through 12 and commercialize our product and there is no assurance that we will obtain the funding necessary. If we do not continue to obtain additional financing going forward, we will be forced to abandon our plan of operations. We are currently raising between $2 million and $2.5 million by way of a debt or equity financing.

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:



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- 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 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                   | First 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           | First and second quarters of 2007               
|8     | Engineering Verification          | This phase will consist of further construction and field testing of engineering prototypes                                                                     | Second and third quarters of 2007               
|9     | Manufacturing Prototype           | With input from a manufacturing partner, we plan to design a commercial product with product design freeze and quality plan                                     | Third and fourth quarters of 2007               
|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 | Fourth quarter of 2007 and first 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           | Second 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.  As such, while we are completing Phase 6, the product and technical teams are also undertaking tasks that fall into Phases 7 and 8.

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;
- Uninterruptable 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.



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We plan to work with OEM

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.

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

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.



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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 & 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 OEM

- leverage the OEM









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



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 the 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.



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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

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:                           $1000 - $1200 per kW
- Market Penetration:               $800 - $1000 per kW
- Mass Market:                         $600 - $800 per kW

Employees

We currently have 12 full-time employees and 3 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



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Results of Operations

Three Months Ended December 31, 2006 Compared to the Three Months Ended December 31, 2005

The following table sets out our consolidated loss during the three months ended December 31, 2006 and 2005, respectively:







|                            | Three Months
Ended
December 31, 2006 |  | Three Months
Ended
December 31, 2005
|--------------------------- | ------------------------------------ |  | ------------------------------------
|                            | (Unaudited)                          |  | (Unaudited)                         
|                            | $                                    |  | $                                   
|Expenses                    |                                      |  |                                     
|Depreciation                | 9,429                                |  | --                                  
|Development and engineering | 348,400                              |  | --                                  
|General and administration  | 522,170                              |  | 432,166                             
|License fees                | 25,000                               |  | 18,750                              
|Marketing and selling       | 137,532                              |  | --                                  
|Total Expenses              | (1,042,531)                          |  | (450,916)                           
|                            |                                      |  |                                     
|Net Loss                    | $   (1,042,531)                      |  | $     (450,916)                     



The Company recorded a net loss of $1,042,531 for the three months ended December 31, 2006 as compared to a net loss of $450,916 for the prior period of 2005. The increase in net loss was partially due to stock option-based compensation of $100,693 (2005 - $nil) which was charged to operating expenses as follows: $64,758 for general and administration, $12,500 for marketing and selling and $23,435 for development and engineering. Also included in net loss for current period was stock-based compensation of $100,625 (2005 - $nil) being the fair value of 262,500 common shares issued pursuant to a financial consulting contract. The increase in net loss for the three months ended December 31, 2006, not included stock-option based and stock-based compensation of $201,318, as compared to the prior period, was $390,297; mainly due to the increase in employees period over period and the increase in development and engineering activity and marketing and selling activity including costs associated with maintaining relationships with Schrader Bridgeport and H-Plus.

General and administrative expenses totaled $522,170 for the three months ended December 31, 2006 as compared to $432,166 for the prior period of 2005, an increase of $90,004. The increase in general and administration expenses of $90,004 was partially due to stock option-based compensation of $64,758 (2005 - $nil) and also stock-based compensation of $100,625 (2005 - $nil) being the fair value of 262,500 common shares issued pursuant to a financial consulting contract. Included in general and administrative expenses for current period are fees and salaries relating to the Company's financial consultants, directors and administrative and management employees totaling $141,490, not including stock-option based and stock-based compensation of $165,383 discussed above, as compared to approximately $210,000 in the prior period of 2005. Also included in general and administrative expenses in 2006 was a non-cash charge of $28,047 relating to writing off deferred finance costs. Travel related expense was $27,011 for 2006 compared to approximately $61,000 in 2005. Audit, accounting (including our CFO), legal and patent and trademark costs totaled $71,156 as compared to approximately $96,000 during 2005. The remaining $89,083 of general and administrative expenses for 2006 was for telephone, rent, office and regulatory fees, net of interest income, as compared to approximately $65,000 in 2005.

Development and engineering expenses totaled $348,400 for the three months ended December 31, 2006 as compared to $nil in 2005. Included in development and engineering expenses for 2006 are consultants fees and salaries and benefits of $187,988, stock-based compensation of $23,435, development, engineering and testing supplies $102,904, travel costs of $19,395, and rent for lab space of $26,617.

Marketing and selling expenses totaled $137,532 for the three months ended December 31, 2006 as compared to $nil in 2005. Included in marketing and selling expenses for the three months ended December 31, 2006 are salaries and benefits of $87,475, stock-based compensation of $12,500, trade show costs of $5,978, advertising and promotion of $8,088, telephone costs of $4,250 and travel costs of $29,087.

Also included in net loss for the three months ended December 31, 2006 are license fees of $25,000 relating to the quarterly charge to operations for the prepaid annual license fee from LLNL as compared to $18,750 for the prior period of 2005. The 2007 fee of $100,000 is due on February 28, 2007.

Liquidity and Capital Resources

The following table sets forth our cash and working capital as of December 31, 2006:



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|                | As of
December 31, 2006
(Unaudited) | As of
September 30, 2006
(Unaudited)
|--------------- | ----------------------------------- | ------------------------------------
|Cash reserves   | $142,864                            | $924,928                            
|Working capital | $994,209                            | $917,177                            



We plan to spend approximately $3,000,000 over the next twelve months in carrying out our plan of operations, subject to the availability of additional financing. Our current working capital will not be sufficient to enable us to complete phase 6 of our product development plan Our ability to complete phases 6 through 12 of our product development plan and other operating expenses will be subject to us obtaining significant additional financing as these expenditures are expected to exceed our cash reserves.

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's ability to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As at December 31, 2006 the Company had accumulated losses of $12,281,239 since inception. The consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Operating Activities

Operating activities in the three months ended December 31, 2006 used cash of $762,833, which reflect our recurring operating losses.

Investing Activities

In the three months ended December 31, 2006 investing activities used cash of $19,231 to purchase property and equipment.

Financing Activities

As we have had no revenues since inception, we have financed our operations primarily by using working capital existing as at September 30, 2006. There were no financing activities during the three months ended December 31, 2005, however, the Company received $100,000 in loans from related parties on January 30, 2007.

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 revenues and expenses during the reporting period. Actual results could differ from those estimates.



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Variable Interest Entity

The Financial Accounting Standards Board (

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 OEM

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

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

Foreign Currency Transactions/Balances

The Company



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Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,

In September 2006, the FASB issued SFAS No. 158,

In September 2006, the SEC issued Staff Accounting Bulletin (

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.

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

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.

Item 2.          Unregistered Sales of Equity Securities

On October 1, 2006, November 1, 2006 and December 1, 2006 we issued 87,500 common shares, on each date, pursuant to a financial consulting agreement. These shares are restricted securities.

Item 3.          Defaults Upon Senior Securities

None.



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

No matters were submitted to our security holders for a vote during the nine months ended June 30, 2006.

Item 5.          Other Information

None

Item 6.          Exhibits

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



|ExhibitNumber | Description of Exhibit                                                                                                                                                                                  
|------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 February 14, 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 February 14, 2007. 





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: