For Immediate Release 11 August, 2005

Third Quarter Highlights

• The delivery and start-up of two test systems (total value $2.2 million) to support the development program being undertaken with ExxonMobil Research and Engineering Company (“EMRE”).
• Revenues of $2.6 million for the quarter, and $5.1 million for the nine months ended June 30, 2005, in line with the Company's revenue guidance of $6 million for the fiscal year. QuestAir's sales order backlog at quarter end was $3.5 million, compared to $5.4 million at March 31, 2005, and $1.8 million at June 30, 2004.
• Cash used in operations and capital requirements of $1.7 million for the quarter and $6.4 million for the nine months ended June 30, 2005, in line with the Company's cash burn guidance of $8.5 million for the fiscal year.
• The signing of a non-exclusive distribution agreement with Mitsubishi Kakoki Kaisha Ltd. (“MKK”), a leading Japanese supplier of industrial hydrogen plants.
• The signing of a supply agreement, and the receipt of an initial US$263,000 order from HyRadix Inc., a developer of hydrogen generators for industrial and hydrogen fueling applications.
• An order for a second H-3200 hydrogen purifier for use in the AC Transit Hydrogen Energy station currently under construction by Chevron in Oakland, California.

Jonathan Wilkinson, President and CEO of QuestAir, said:

“We are very pleased with our revenue growth during the third quarter. Our revenues of $2.6 million for the third quarter represent a significant increase from the second quarter of fiscal 2005 and from the third quarter of fiscal 2004.”

“We also made significant progress in securing additional channels to penetrate the industrial hydrogen generation market with our commercial gas purification systems, including the distribution agreement signed with MKK, and the supply agreement and initial US$263,000 order from HyRadix.”

Operating Review

During the quarter, progress continued with the program being undertaken with EMRE to develop a large capacity hydrogen purification system for use in oil refineries and petrochemical plants. Two test systems to support the product development program, with a total value of $2.2 million, were delivered and successfully started up. These test systems will be used for performance and durability tests to assist in the final design of the prototype system to be tested at an ExxonMobil refinery in 2006.

QuestAir made significant progress during the quarter in expanding the customer base and distribution channels for its commercial PSA products in the industrial hydrogen market. During the quarter, the Company announced a non-exclusive agreement with Mitsubishi Kakoki Kaisha Ltd. to distribute its commercial hydrogen purification products in Japan, China and six other Asian countries. MKK is the largest supplier of industrial hydrogen plants in Japan, with over 90 plants installed to date. As part of the agreement, MKK will supply QuestAir's hydrogen purification systems as part of its hydrogen plants. QuestAir also signed an agreement to supply its H-3200 hydrogen purification systems to HyRadix Inc., a leading developer of hydrogen generators for industrial and hydrogen fueling markets. QuestAir's H-3200 will be integrated into HyRadix's range of branded hydrogen generators, replacing HyRadix's existing PSA design. Upon signing the agreement, QuestAir also received a US$263,000 order for an initial delivery of H-3200 units, to be completed in 2006.

In the emerging hydrogen infrastructure market, QuestAir received an order for a second H-3200 to be integrated into the AC Transit Hydrogen Energy Station currently being built by Chevron Hydrogen Company in Oakland, California. The second hydrogen purifier is required as part of a planned expansion of the plant capacity, and follows an initial order for an H-3200 announced in February 2005. Purified hydrogen from the station will be used to fuel AC Transit's fleet of three fuel cell powered buses, which are expected to enter passenger service beginning in the fall of 2005.

Outlook

Commenting on the outlook for the remainder on fiscal 2005, Jonathan Wilkinson said:

“We are pleased with our performance for the fiscal year to date, and we are confident of achieving our fiscal 2005 revenue guidance of $6 million, and our cash burn guidance of $8.5 million. We are also aiming to end the fiscal year with a healthy backlog of signed sales contracts, and we expect to enhance our current backlog through additional sales of gas purification systems and engineering service contracts during the fourth quarter.”

“For the remainder of the year we are also focused on concluding the negotiation of a purchase order for the prototype large capacity hydrogen purifier to be demonstrated at an ExxonMobil refinery site in 2006.”

Q3 2005 Financial Results

The net loss for the quarter ended June 30, 2005 was $2.6 million ($0.07 per share), compared to $2.1 million ($0.43 per share) for the same period in 2004. The increase in the net loss for the quarter compared to the same period in 2004 was attributed to increases in research and development, amortization and general and administrative expenses, partially offset by higher gross profits from the sale of gas purification systems and engineering service contracts.

The net loss for the nine months ended June 30, 2005 was $6.9 million ($0.25 per share), compared to $7.3 million ($1.48 per share) for the same period in 2004.

Operating Results

The following table provides a breakdown of the Company's revenues from gas purification systems and engineering service contracts for the reported periods:

The increase in revenue from gas purification systems for the quarter as well as for the nine months ended June 30, 2005 resulted from the delivery of two test systems, with a total value of $2.2 million, to ExxonMobil Research and Engineering (“EMRE”) in support of the program to develop a large capacity hydrogen purification system for use in oil refineries. The decrease in engineering service contract revenue for the quarter ended June 30, 2005 resulted from reduced work completed on engineering service contracts with EMRE, which are recognized on a percentage completion basis.

QuestAir's sales order backlog is defined as future revenue from signed gas purification system sales and engineering service contracts that has not yet been recognized by the Company. The following table provides a breakdown of the Company's sales order backlog at June 30, 2005, March 31, 2005, December 31, 2005, September 30, 2004 and June 30, 2004 :

The following table provides a breakdown of the changes in the Company's sales order backlog for the quarter and nine months ended June 30, 2005 :

† Adjustments include adjustments for fluctuations in foreign currency exchange rates as well as cancelled orders.

The total sales order backlog decreased by $1.9 million, or 35%, for the quarter ended June 30, 2005, primarily as a result of the recognition of the large test system order, with a total value of $2.2 million, and a moderate level of new bookings for gas purification systems during the quarter. Quarter-to-quarter fluctuations in recognized revenue and the receipt of new sales orders are to be expected in the industrial markets that the Company currently serves. Measures including the extension of QuestAir's commercial products into multiple markets, and the growth of revenue generating engineering service contracts have been implemented to reduce the quarterly fluctuations in new sales bookings.

The Company expects that the current backlog will be substantially recognized as revenue by the third quarter of fiscal 2006.

The following table provides a calculation of the Company's gross profit for the reported periods:

The decrease in percentage gross margin for the quarter ended June 30, 2005 compared to the same period in 2004 was due to the recognition of revenues from the two test systems sold to EMRE, which contributed lower margins than QuestAir's historical 30-40% margins for commercial PSA systems. The increase in gross margin for the nine months ended June 30, 2005 compared to the same period in 2004 was largely due to higher margins realized on revenue from engineering service contracts recognized during the nine months ended June 30, 2005. It is expected that margins will fluctuate somewhat from quarter to quarter depending on the revenue mix from engineering service contracts and gas purification systems recognized during the quarter.

Sales and marketing expenses were $0.5 million for the quarters ended June 30, 2005 and June 30, 2004. For the nine months ended June 30, 2005, sales and marketing expenses were $1.4 million, an increase of 18% compared to $1.2 million for the same period in 2004. The increase in sales and marketing expenses for the nine months ended June 30, 2005 was attributed to increased salary expenses resulting from growth in the sales personnel and to increased travel costs.

The gross research and development (“R&D”) expenditures, offsetting government and development partner funding and the resulting net R&D expenditures for the relevant periods, were as follows:

The increases in R&D spending for both the quarter and nine months ended June 30, 2005 compared to the same periods in 2004 were due to increased R&D expenditures related to the program undertaken with EMRE to develop a large capacity gas purification system for use in oil refineries.

General and Administrative (“G&A”) expenses were $0.9 million for the quarter ended June 30, 2005, compared to $0.6 million for same period in 2004. G&A expenses for the nine months ended June 30, 2005 were $2.5 million compared to $2.0 million for the same period in 2004. The increases in G&A expenses for both periods were related to incremental costs associated with the public listing of the Company's common shares, including regulatory filing fees, insurance costs and investor relations expenses.

Employee stock-based compensation expense was $0.1 million for the quarters ended June 30, 2005 and June 30, 2004. Stock-based compensation expense was $0.5 million for the nine months ended June 30, 2005 as compared to $0.3 million for same period in 2004.

Gross capital expenditures for the quarter ended June 30, 2005 were $0.6 million, compared to $nil for the same period of 2004. Capital expenditures for the nine months ended June 30, 2005 were $0.9 million, compared to $0.6 million for the same period in 2004. The increase in capital expenditures for the current fiscal year related mainly to the purchase of R&D equipment related to the development program undertaken with EMRE. It is expected that capital expenditures will fluctuate from quarter to quarter depending on the requirements of specific product development programs and administrative needs.

Liquidity and Capital Resources

Cash and short term investments at June 30, 2005 were $12.8 million, a decrease of $1.5 million from March 31, 2005.

Cash used by operations and capital requirements for the nine months ended June 30, 2005 was $6.4 million, compared to $5.1 million for the same period in 2004. The increase in operational cash burn for the nine month period resulted mainly from increased R&D and capital expenditures related to the development program with EMRE, as well as the collection of a $2.3 million government funding receivable which reduced the operational cash burn for the nine month period ended June 30, 2004. A credit facility from Comercia Bank was used to finance $0.7 million of the capital expenditures for the quarter and the nine months ended June 30, 2005, with the remainder being financed from the Company's existing cash resources.

During the quarter, the Company secured a US$3 million credit facility from Comerica Bank. The credit facility is comprised of a US$1 million accounts receivable credit line and a US$2 million term loan. As at June 30, 2005, the Company had drawn $0.7 million against the term loan. The Company is in compliance with all of its bank covenants. In June 2003, the Company was awarded a $9.6 million conditionally repayable loan from Technology Partnerships Canada, a funding program administered by Industry Canada. At June 30, 2005, the Company had claimed $5.4 million against this loan. At June 30, 2005, QuestAir's had 37,301,379 common shares issued and outstanding. In addition, the Company had 4,854,534 options to purchase common shares, and 622,308 warrants outstanding at that date.

Consolidated Balance Sheets

Consolidated Statements of Operations and Deficit

Consolidated Statements of Cash Flows

Notes to the financial statements

1. United States generally accepted accounting principles

The Company follows generally accepted accounting principles in Canada (Canadian GAAP), which are different in certain respects from those applicable in the United States (U.S. GAAP). The significant differences between Canadian GAAP and U.S. GAAP with respect to the Company's consolidated financial statements are described below. There are no reconciling items in the consolidated statements of cash flows for the nine months ended June 30, 2005 and 2004.

Consolidated Balance Sheet

Consolidated Statements of Operations and Deficit