##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 o
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-29185
 SAVE THE WORLD AIR, INC.
 (Exact name of registrant as specified in its charter)
 Nevada
    
    52-2088326(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5125 Lankershim Boulevard
North Hollywood, California 91601  (Address, including zip code, of principal executive offices)  (818) 487-8000  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Exchange Act: None.
 Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value.
 þ o
 o þ
 ,
 o þ




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##### 



SAVE THE WORLD AIR, INC.
 
 PagePART IITEM 1. Financial Statements
    
    
    1Condensed balance sheets
    
    
    1Condensed statements of operations (unaudited)
    
    
    3Condensed statements of changes in stockholders deficiency (unaudited)
    
    
    4Condensed statements of cash flows (unaudited)
    
    
    11Notes to condensed financial statements (unaudited)
    
    
    13ITEM 2. Managements Discussion and Analysis or Plan of Operations
    
    
    34ITEM 3. Controls and Procedures
    
    
    39PART IIITEM 1. Legal Proceedings
    
    
    41ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43ITEM 3. Defaults Upon Senior Securities
    
    
    43ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    44ITEM 5. Other Information
    
    
    44ITEM 6. Exhibits
    
    
    45SIGNATURES
    
    
    46EXHIBIT INDEX
    
    
    47EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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##### Table of Contents



PART I
 
 Item 1. Financial Statements
 SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30, 2006
    
    
    December 31,(unaudited)
    
    
    2005ASSETSCurrent assetsCash
    
    $
    1,628,517
    
    
    $
    279,821Inventory
    
    
    3,719
    
    
    
    Other current assets
    
    
    122,588
    
    
    
    9,009Total current assets
    
    
    1,754,824
    
    
    
    288,830Property and equipment, net of accumulated depreciation
    
    
    367,272
    
    
    
    295,374Other assets
    
    
    4,500
    
    
    
    4,500Total assets
    
    $
    2,126,596
    
    
    $
    588,704
  1




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONDENSED CONSOLIDATED BALANCE SHEETS  Continued
 June 30, 2006
    
    
    December 31,(unaudited)
    
    
    2005LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilitiesAccounts payable
    
    $
    117,942
    
    
    $
    155,456Accrued expenses
    
    
    178,582
    
    
    
    179,461Accrued research and development fees
    
    
    495,000
    
    
    
    680,000Accrued professional fees
    
    
    501,732
    
    
    
    450,555Payable to shareholder
    
    
    
    
    
    
    45,000Payable to related parties
    
    
    
    
    
    
    158,732Finders fees payable
    
    
    4,666
    
    
    
    8,916Convertible debentures, net
    
    
    983,863
    
    
    
    318,759Total current liabilities
    
    
    2,281,785
    
    
    
    1,996,879Commitments and contingenciesStockholders deficiencyCommon stock, $.001 par value: 200,000,000 shares
authorized, 37,360,368 and 31,387,418 shares issued
and outstanding at June 30, 2006 and December 31,
2005, respectively
    
    
    37,360
    
    
    
    31,387Common stock to be issued
    
    
    47,722
    
    
    
    612,521Additional paid-in capital
    
    
    25,996,133
    
    
    
    18,336,178Deferred compensation
    
    
    
    
    
    
    (142,187
    )Deficit accumulated during the development stage
    
    
    (26,236,404
    )
    
    
    (20,246,074
    )Total stockholders deficiency
    
    
    (155,189
    )
    
    
    (1,408,175
    )Total liabilities and stockholders deficiency
    
    $
    2,126,596
    
    
    $
    588,704
  2




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    Cumulativesince2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    inceptionNet sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses
    
    
    1,852,870
    
    
    
    583,310
    
    
    
    3,607,840
    
    
    
    1,244,905
    
    
    
    19,098,589Research and development expenses
    
    
    121,111
    
    
    
    190,637
    
    
    
    178,873
    
    
    
    592,122
    
    
    
    3,982,460Non-cash patent settlement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,610,066Loss before other income (expense)
    
    
    (1,973,981
    )
    
    
    (773,947
    )
    
    
    (3,786,713
    )
    
    
    (1,837,027
    )
    
    
    (24,691,115
    )Other income (expense)Other income
    
    
    125
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    125Interest income
    
    
    6,976
    
    
    
    
    
    
    
    6,976
    
    
    
    
    
    
    
    7,930Interest expense
    
    
    (1,025,345
    )
    
    
    (570
    )
    
    
    (2,209,918
    )
    
    
    (570
    )
    
    
    (2,564,583
    )Settlement of litigation debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,017,208Loss before provision for income taxes
    
    
    (2,992,225
    )
    
    
    (774,517
    )
    
    
    (5,989,530
    )
    
    
    (1,837,597
    )
    
    
    (26,230,435
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    800
    
    
    
    1,976
    
    
    
    5,969Net loss
    
    $
    (2,992,225
    )
    
    $
    (774,517
    )
    
    $
    (5,990,330
    )
    
    $
    (1,839,573
    )
    
    $
    (26,236,404
    )Net loss per share, basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.02
    )
    
    $
    (0.18
    )
    
    $
    (0.05
    )Weighted average shares outstanding, basic and diluted
    
    
    33,661,360
    
    
    
    38,528,563
    
    
    
    32,816,890
    
    
    
    38,283,771
  3




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY  (A DEVELOPMENT STAGE ENTERPRISE)
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED)
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    

development stage
    
    
    stage deficiencyBalance, February 18, 1998(date of inception)
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common stock on April 18, 1998
    
    
    .0015  .01
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270
    
    
    
    
    
    
    
    
    
    
    
    24,300Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,307
    )
    
    
    (21,307
    )Balance, December 31, 1998
    
    
    
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270
    
    
    
    
    
    
    
    (21,307
    )
    
    
    2,993Issuance of common stock on May 18, 1999
    
    
    1.00  6.40
    
    
    
    198,003
    
    
    
    198
    
    
    
    
    
    
    
    516,738
    
    
    
    
    
    
    
    
    
    
    
    516,936Issuance of common stock for ZEFS on September 14, 1999
    
    
    .001
    
    
    
    5,000,000
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Stock issued for professional services on May 18, 1999
    
    
    0.88
    
    
    
    69,122
    
    
    
    69
    
    
    
    
    
    
    
    49,444
    
    
    
    
    
    
    
    
    
    
    
    49,513Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,075,264
    )
    
    
    (1,075,264
    )Balance, December 31, 1999
    
    
    
    
    
    
    15,297,125
    
    
    
    15,297
    
    
    
    
    
    
    
    580,452
    
    
    
    
    
    
    
    (1,096,571
    )
    
    
    (500,822
    )Stock issued for employee compensation on February 8, 2000
    
    
    1.03
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    20,580
    
    
    
    
    
    
    
    
    
    
    
    20,600Stock issued for consulting services on February 8, 2000
    
    
    1.03
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    102,900
    
    
    
    
    
    
    
    
    
    
    
    103,000Stock issued for professional services on April 18, 2000
    
    
    3.38
    
    
    
    27,000
    
    
    
    27
    
    
    
    
    
    
    
    91,233
    
    
    
    
    
    
    
    
    
    
    
    91,260Stock issued for directors fees on April 18, 2000
    
    
    3.38
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    168,950
    
    
    
    
    
    
    
    
    
    
    
    169,000Stock issued for professional services on May 19, 2000
    
    
    4.06
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    20,295
    
    
    
    
    
    
    
    
    
    
    
    20,300Stock issued for directors fees on June 20, 2000
    
    
    4.44
    
    
    
    6,000
    
    
    
    6
    
    
    
    
    
    
    
    26,634
    
    
    
    
    
    
    
    
    
    
    
    26,640Stock issued for professional services on June 20, 2000
    
    
    4.44
    
    
    
    1,633
    
    
    
    2
    
    
    
    
    
    
    
    7,249
    
    
    
    
    
    
    
    
    
    
    
    7,251Stock issued for professional services on June 26, 2000
    
    
    5.31
    
    
    
    1,257
    
    
    
    1
    
    
    
    
    
    
    
    6,674
    
    
    
    
    
    
    
    
    
    
    
    6,675Stock issued for employee compensation on June 26, 2000
    
    
    5.31
    
    
    
    22,000
    
    
    
    22
    
    
    
    
    
    
    
    116,798
    
    
    
    
    
    
    
    
    
    
    
    116,820Stock issued for consulting services on June 26, 2000
    
    
    5.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    52,203
    
    
    
    
    
    
    
    
    
    
    
    52,213Stock issued for promotional services on July 28, 2000
    
    
    4.88
    
    
    
    9,675
    
    
    
    9
    
    
    
    
    
    
    
    47,205
    
    
    
    
    
    
    
    
    
    
    
    47,214Stock issued for consulting services on July 28, 2000
    
    
    4.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    47,975
    
    
    
    
    
    
    
    
    
    
    
    47,985Stock issued for consulting services on August 4, 2000
    
    
    2.13
    
    
    
    35,033
    
    
    
    35
    
    
    
    
    
    
    
    74,585
    
    
    
    
    
    
    
    
    
    
    
    74,620Stock issued for promotional services on August 16, 2000
    
    
    2.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    56,225
    
    
    
    
    
    
    
    
    
    
    
    56,250Stock issued for consulting services on September 5, 2000
    
    
    2.25
    
    
    
    12,833
    
    
    
    13
    
    
    
    
    
    
    
    28,861
    
    
    
    
    
    
    
    
    
    
    
    28,874Stock issued for consulting services on September 10, 2000
    
    
    1.50
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    14,740
    
    
    
    
    
    
    
    
    
    
    
    14,750Stock issued for consulting services on November 2, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653
 4




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY  (A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS DEFICIENCY - Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED)
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    

development stage
    
    
    stage deficiencyStock issued for consulting services on November 4, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on December 20, 2000
    
    
    0.50
    
    
    
    19,082
    
    
    
    19
    
    
    
    
    
    
    
    9,522
    
    
    
    
    
    
    
    
    
    
    
    9,541Stock issued for filing services on December 20, 2000
    
    
    0.50
    
    
    
    5,172
    
    
    
    5
    
    
    
    
    
    
    
    2,581
    
    
    
    
    
    
    
    
    
    
    
    2,586Stock issued for professional services on December 26, 2000
    
    
    0.38
    
    
    
    12,960
    
    
    
    13
    
    
    
    
    
    
    
    4,912
    
    
    
    
    
    
    
    
    
    
    
    4,925Other stock issuance on August 24, 2000
    
    
    2.13
    
    
    
    2,000
    
    
    
    2
    
    
    
    
    
    
    
    4,258
    
    
    
    
    
    
    
    
    
    
    
    4,260Common shares cancelled
    
    
    
    
    
    
    (55,000
    )
    
    
    (55
    )
    
    
    
    
    
    
    (64,245
    )
    
    
    
    
    
    
    
    
    
    
    (64,300
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,270,762
    )
    
    
    (1,270,762
    )Balance, December 31, 2000
    
    
    
    
    
    
    15,645,935
    
    
    
    15,646
    
    
    
    
    
    
    
    1,437,873
    
    
    
    
    
    
    
    (2,367,333
    )
    
    
    (913,814
    )Stock issued for consulting services on January 8, 2001
    
    
    0.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,038
    
    
    
    
    
    
    
    
    
    
    
    3,048Stock issued for consulting services on February 1, 2001
    
    
    0.33
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,235
    
    
    
    
    
    
    
    
    
    
    
    3,245Stock issued for consulting services on March 1, 2001
    
    
    0.28
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,743
    
    
    
    
    
    
    
    
    
    
    
    2,753Stock issued for legal services on March 13, 2001
    
    
    0.32
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    47,850
    
    
    
    
    
    
    
    
    
    
    
    48,000Stock issued for consulting services on April 3, 2001
    
    
    0.25
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,448
    
    
    
    
    
    
    
    
    
    
    
    2,458Stock issued for legal services on April 4, 2001
    
    
    0.25
    
    
    
    30,918
    
    
    
    31
    
    
    
    
    
    
    
    7,699
    
    
    
    
    
    
    
    
    
    
    
    7,730Stock issued for professional services on April 4, 2001
    
    
    0.25
    
    
    
    7,040
    
    
    
    7
    
    
    
    
    
    
    
    1,753
    
    
    
    
    
    
    
    
    
    
    
    1,760Stock issued for consulting services on April 5, 2001
    
    
    0.25
    
    
    
    132,600
    
    
    
    132
    
    
    
    
    
    
    
    33,018
    
    
    
    
    
    
    
    
    
    
    
    33,150Stock issued for filing fees on April 30, 2001
    
    
    1.65
    
    
    
    1,233
    
    
    
    1
    
    
    
    
    
    
    
    2,033
    
    
    
    
    
    
    
    
    
    
    
    2,034Stock issued for filing fees on September 19, 2001
    
    
    0.85
    
    
    
    2,678
    
    
    
    2
    
    
    
    
    
    
    
    2,274
    
    
    
    
    
    
    
    
    
    
    
    2,276Stock issued for professional services on September 28, 2001
    
    
    0.62
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    92,850
    
    
    
    
    
    
    
    
    
    
    
    93,000Stock issued for directors services on October 5, 2001
    
    
    0.60
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    59,900
    
    
    
    
    
    
    
    
    
    
    
    60,000Stock issued for legal services on October 17, 2001
    
    
    0.60
    
    
    
    11,111
    
    
    
    11
    
    
    
    
    
    
    
    6,655
    
    
    
    
    
    
    
    
    
    
    
    6,666Stock issued for consulting services on October 18, 2001
    
    
    0.95
    
    
    
    400,000
    
    
    
    400
    
    
    
    
    
    
    
    379,600
    
    
    
    
    
    
    
    
    
    
    
    380,000Stock issued for consulting services on October 19, 2001
    
    
    1.25
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    187,350
    
    
    
    
    
    
    
    
    
    
    
    187,500Stock issued for exhibit fees on October 22, 2001
    
    
    1.35
    
    
    
    5,000
    
    
    
    6
    
    
    
    
    
    
    
    6,745
    
    
    
    
    
    
    
    
    
    
    
    6,751Stock issued for directors services on November 2, 2001
    
    
    0.95
    
    
    
    1,000,000
    
    
    
    1,000
    
    
    
    
    
    
    
    949,000
    
    
    
    
    
    
    
    
    
    
    
    950,000Stock issued for consulting services on November 7, 2001
    
    
    0.85
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    16,980
    
    
    
    
    
    
    
    
    
    
    
    17,000
 5




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY  (A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS DEFICIENCY - Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED)
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholders'Price per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    

development stage
    
    
    stage deficiencyStock issued for consulting services on November 20, 2001
    
    
    0.98
    
    
    
    43,000
    
    
    
    43
    
    
    
    
    
    
    
    42,097
    
    
    
    
    
    
    
    
    
    
    
    42,140Stock issued for consulting services on November 27, 2001
    
    
    0.98
    
    
    
    10,000
    
    
    
    10
    
    
    
    
    
    
    
    9,790
    
    
    
    
    
    
    
    
    
    
    
    9,800Stock issued for consulting services on November 28, 2001
    
    
    0.98
    
    
    
    187,000
    
    
    
    187
    
    
    
    
    
    
    
    183,073
    
    
    
    
    
    
    
    
    
    
    
    183,260Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600,000
    
    
    
    (2,600,000
    )
    
    
    
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,318
    
    
    
    
    
    
    
    
    
    
    
    142,318Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,667
    
    
    
    
    
    
    
    191,667Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,735,013
    )
    
    
    (2,735,013
    )Balance, December 31, 2001
    
    
    
    
    
    
    18,085,847
    
    
    
    18,086
    
    
    
    
    
    
    
    6,220,322
    
    
    
    (2,408,333
    )
    
    
    (5,102,346
    )
    
    
    (1,272,271
    )Stock issued for directors services on December 10, 2002
    
    
    0.40
    
    
    
    2,150,000
    
    
    
    2,150
    
    
    
    
    
    
    
    857,850
    
    
    
    
    
    
    
    
    
    
    
    860,000Common stock paid for, but not issued (2,305,000 shares)
    
    
    0.15-0.25
    
    
    
    
    
    
    
    
    
    
    
    389,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389,875Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,909
    
    
    
    (54,909
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    891,182
    
    
    
    
    
    
    
    891,182Net loss for the year ended December 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,749,199
    )
    
    
    (2,749,199
    )Balance, December 31, 2002
    
    
    
    
    
    
    20,235,847
    
    
    
    20,236
    
    
    
    389,875
    
    
    
    7,133,081
    
    
    
    (1,572,060
    )
    
    
    (7,851,545
    )
    
    
    (1,880,413
    )Common stock issued, previously paid for
    
    
    0.15
    
    
    
    1,425,000
    
    
    
    1,425
    
    
    
    (213,750
    )
    
    
    212,325
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued, previously paid for
    
    
    0.25
    
    
    
    880,000
    
    
    
    880
    
    
    
    (220,000
    )
    
    
    219,120
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for cash on March 20, 2003
    
    
    0.25
    
    
    
    670,000
    
    
    
    670
    
    
    
    
    
    
    
    166,830
    
    
    
    
    
    
    
    
    
    
    
    167,500Stock issued for cash on April 4, 2003
    
    
    0.25
    
    
    
    900,000
    
    
    
    900
    
    
    
    
    
    
    
    224,062
    
    
    
    
    
    
    
    
    
    
    
    224,962Stock issued for cash on April 8, 2003
    
    
    0.25
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    24,900
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on May 8, 2003
    
    
    0.25
    
    
    
    1,150,000
    
    
    
    1,150
    
    
    
    
    
    
    
    286,330
    
    
    
    
    
    
    
    
    
    
    
    287,480Stock issued for cash on June 16, 2003
    
    
    0.25
    
    
    
    475,000
    
    
    
    475
    
    
    
    
    
    
    
    118,275
    
    
    
    
    
    
    
    
    
    
    
    118,750Stock issued for legal services on June 27, 2003
    
    
    0.55
    
    
    
    83,414
    
    
    
    83
    
    
    
    
    
    
    
    45,794
    
    
    
    
    
    
    
    
    
    
    
    45,877Debt converted to stock on June 27, 2003
    
    
    0.25
    
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    
    
    
    
    498,000
    
    
    
    
    
    
    
    
    
    
    
    500,000Stock and warrants issued for cash on July 11, 2003
    
    
    0.25
    
    
    
    519,000
    
    
    
    519
    
    
    
    
    
    
    
    129,231
    
    
    
    
    
    
    
    
    
    
    
    129,750Stock and warrants issued for cash on September 29, 2003
    
    
    0.25
    
    
    
    1,775,000
    
    
    
    1,775
    
    
    
    
    
    
    
    441,976
    
    
    
    
    
    
    
    
    
    
    
    443,751Stock and warrants issued for cash on October 21, 2003
    
    
    0.25
    
    
    
    1,845,000
    
    
    
    1,845
    
    
    
    
    
    
    
    459,405
    
    
    
    
    
    
    
    
    
    
    
    461,250Stock and warrants issued for cash on October 28, 2003
    
    
    0.25
    
    
    
    1,570,000
    
    
    
    1,570
    
    
    
    
    
    
    
    390,930
    
    
    
    
    
    
    
    
    
    
    
    392,500Stock and warrants issued for cash on November 19, 2003
    
    
    0.25
    
    
    
    500,000
    
    
    
    500
    
    
    
    
    
    
    
    124,500
    
    
    
    
    
    
    
    
    
    
    
    125,000
 6




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyFinders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,875
    
    
    
    (312,582
    )
    
    
    
    
    
    
    
    
    
    
    (268,707
    )Common stock paid for, but not issued (25,000 shares)
    
    
    0.25
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,250Amortization of deferred comp
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    863,727
    
    
    
    
    
    
    
    863,727Net loss for year ended December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,476,063
    )
    
    
    (2,476,063
    )Balance, December 31, 2003
    
    
    
    
    
    
    34,128,261
    
    
    
    34,128
    
    
    
    6,250
    
    
    
    10,162,177
    
    
    
    (708,333
    )
    
    
    (10,327,608
    )
    
    
    (833,386
    )Common stock issued, previously paid for
    
    
    0.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    (6,250
    )
    
    
    6,225
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for director services on March 31, 2004
    
    
    1.50
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    74,950
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued for finders fees on March 31, 2004
    
    
    0.15
    
    
    
    82,500
    
    
    
    82
    
    
    
    
    
    
    
    12,293
    
    
    
    
    
    
    
    
    
    
    
    12,375Stock issued for finders fees on March 31, 2004
    
    
    0.25
    
    
    
    406,060
    
    
    
    407
    
    
    
    
    
    
    
    101,199
    
    
    
    
    
    
    
    
    
    
    
    101,606Stock issued for services on April 2, 2004
    
    
    1.53
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    99,385
    
    
    
    
    
    
    
    
    
    
    
    99,450Debt converted to stock on April 2, 2004
    
    
    1.53
    
    
    
    60,000
    
    
    
    60
    
    
    
    
    
    
    
    91,740
    
    
    
    
    
    
    
    
    
    
    
    91,800Stock issued upon exercise of warrants on May 21, 2004
    
    
    0.20
    
    
    
    950,000
    
    
    
    950
    
    
    
    
    
    
    
    189,050
    
    
    
    
    
    
    
    
    
    
    
    190,000Stock issued for directors services on June 8, 2004
    
    
    1.70
    
    
    
    600,000
    
    
    
    600
    
    
    
    
    
    
    
    1,019,400
    
    
    
    
    
    
    
    
    
    
    
    1,020,000Stock issued for cash on August 25, 2004
    
    
    1.00
    
    
    
    550,000
    
    
    
    550
    
    
    
    
    
    
    
    549,450
    
    
    
    
    
    
    
    
    
    
    
    550,000Stock issued upon exercise of options on August 30, 2004
    
    
    0.40
    
    
    
    4,000
    
    
    
    4
    
    
    
    
    
    
    
    1,596
    
    
    
    
    
    
    
    
    
    
    
    1,600Stock issued for cash on September 8, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for consulting services on September 15, 2004
    
    
    1.31
    
    
    
    50,000
    
    
    
    49
    
    
    
    
    
    
    
    65,451
    
    
    
    
    
    
    
    
    
    
    
    65,500Stock issued for patent settlement on September 22, 2004
    
    
    1.24
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    24,780
    
    
    
    
    
    
    
    
    
    
    
    24,800Stock issued for research and development on October 6, 2004
    
    
    1.40
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    90,935
    
    
    
    
    
    
    
    
    
    
    
    91,000Stock issued for cash on October 6, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on October 15, 2004
    
    
    1.00
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    149,850
    
    
    
    
    
    
    
    
    
    
    
    150,000Stock issued upon exercise of stock options on October 21, 2004
    
    
    0.40
    
    
    
    6,500
    
    
    
    6
    
    
    
    
    
    
    
    2,594
    
    
    
    
    
    
    
    
    
    
    
    2,600Stock issued for cash on November 3, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on November 18, 2004
    
    
    1.00
    
    
    
    172,500
    
    
    
    173
    
    
    
    
    
    
    
    172,327
    
    
    
    
    
    
    
    
    
    
    
    172,500Stock issued for cash on December 9, 2004
    
    
    1.00
    
    
    
    75,000
    
    
    
    75
    
    
    
    
    
    
    
    74,925
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued for cash on December 23, 2004
    
    
    1.00
    
    
    
    250,000
    
    
    
    250
    
    
    
    
    
    
    
    249,750
    
    
    
    
    
    
    
    
    
    
    
    250,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,384
    )
    
    
    
    
    
    
    
    
    
    
    (88,384
    )Common stock paid for, but not issued (119,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000
 7




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED
 Additional

    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyIntrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,891
    
    
    
    (248,891
    )
    
    
    
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,381
    
    
    
    (55,381
    )
    
    
    
    
    
    
    Fair value of warrants issued for settlement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,585,266
    
    
    
    
    
    
    
    
    
    
    
    1,585,266Fair value of warrants issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,872
    
    
    
    
    
    
    
    
    
    
    
    28,872Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936,537
    
    
    
    
    
    
    
    936,537Net loss for year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,803,280
    )
    
    
    (6,803,280
    )Balance, December 31, 2004
    
    
    
    
    
    
    37,784,821
    
    
    
    37,784
    
    
    
    119,000
    
    
    
    15,043,028
    
    
    
    (76,068
    )
    
    
    (17,130,888
    )
    
    
    (2,007,144
    )Common stock issued, previously paid for
    
    
    1.00
    
    
    
    69,000
    
    
    
    69
    
    
    
    (69,000
    )
    
    
    68,931
    
    
    
    
    
    
    
    
    
    
    
    Stock issued upon exercise of warrants, previously paid for
    
    
    1.00
    
    
    
    50,000
    
    
    
    50
    
    
    
    (50,000
    )
    
    
    49,950
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for cash on January 20, 2005
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued upon exercise of warrants on January 31, 2005
    
    
    0.40
    
    
    
    500
    
    
    
    1
    
    
    
    
    
    
    
    199
    
    
    
    
    
    
    
    
    
    
    
    200Stock issued for cash on February 17, 2005
    
    
    1.00
    
    
    
    325,000
    
    
    
    325
    
    
    
    
    
    
    
    324,675
    
    
    
    
    
    
    
    
    
    
    
    325,000Stock issued for cash on March 31, 2005
    
    
    1.00
    
    
    
    215,000
    
    
    
    215
    
    
    
    
    
    
    
    214,785
    
    
    
    
    
    
    
    
    
    
    
    215,000Stock issued for cash on May 17, 2005
    
    
    1.00
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    4,995
    
    
    
    
    
    
    
    
    
    
    
    5,000Stock issued for cash on June 7, 2005
    
    
    1.00
    
    
    
    300,000
    
    
    
    300
    
    
    
    
    
    
    
    299,700
    
    
    
    
    
    
    
    
    
    
    
    300,000Stock issued for cash on August 5, 2005
    
    
    1.00
    
    
    
    480,500
    
    
    
    480
    
    
    
    
    
    
    
    480,020
    
    
    
    
    
    
    
    
    
    
    
    480,500Stock issued for cash on August 9, 2005
    
    
    1.00
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    99,900
    
    
    
    
    
    
    
    
    
    
    
    100,000Stock issued for cash on October 27, 2005
    
    
    1.00
    
    
    
    80,000
    
    
    
    80
    
    
    
    
    
    
    
    79,920
    
    
    
    
    
    
    
    
    
    
    
    80,000Common stock cancelled on December 7, 2005
    
    Various
    
    
    (8,047,403
    )
    
    
    (8,047
    )
    
    
    
    
    
    
    8,047
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for settlement of payables on December 21, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,092Stock issued for settlement of payables on December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    555,429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    555,429Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (109,840
    )
    
    
    
    
    
    
    
    
    
    
    (109,840
    )Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243,750
    
    
    
    (243,750
    )
    
    
    
    
    
    
    Fair value of options issued for settlement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,500
    
    
    
    
    
    
    
    
    
    
    
    31,500Fair value of warrants issued for settlement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,957
    
    
    
    
    
    
    
    
    
    
    
    4,957Fair value of warrants issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,505
    
    
    
    
    
    
    
    
    
    
    
    13,505Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,631
    
    
    
    
    
    
    
    177,631Warrants issued with convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756,768
    
    
    
    
    
    
    
    
    
    
    
    756,768
 8




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS DEFICIENCY - Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyIntrinsic value of beneficial conversion associated with convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    696,413
    
    
    
    
    
    
    
    
    
    
    
    696,413Net loss for year ended December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,115,186
    )
    
    
    (3,115,186
    )Balance, December 31, 2005
    
    
    
    
    
    
    31,387,418
    
    
    $
    31,387
    
    
    $
    612,521
    
    
    $
    18,336,178
    
    
    $
    (142,187
    )
    
    $
    (20,246,074
    )
    
    $
    (1,408,175
    )Stock issued, for previously settled payables (unaudited)
    
    
    
    
    
    
    846,549
    
    
    
    847
    
    
    
    (612,521
    )
    
    
    611,674
    
    
    
    
    
    
    
    
    
    
    
    Stock issued upon exercise of warrants on March 23, 2006 (unaudited)
    
    
    1.50
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    37,475
    
    
    
    
    
    
    
    
    
    
    
    37,500Stock issued upon exercise of warrants on March 27, 2006 (unaudited)
    
    
    1.50
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    74,950
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued upon exercise of warrants on March 27, 2006 (unaudited)
    
    
    0.50
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    12,475
    
    
    
    
    
    
    
    
    
    
    
    12,500Stock issued upon exercise of warrants on March 30, 2006 (unaudited)
    
    
    1.00
    
    
    
    10,000
    
    
    
    10
    
    
    
    
    
    
    
    9,990
    
    
    
    
    
    
    
    
    
    
    
    10,000Stock issued upon exercise of warrants on April 10, 2006 (unaudited)
    
    
    0.50
    
    
    
    36,250
    
    
    
    36
    
    
    
    
    
    
    
    18,089
    
    
    
    
    
    
    
    
    
    
    
    18,125Common stock issued for convertible debt on April 10, 2006 (unaudited)
    
    
    0.70
    
    
    
    269,600
    
    
    
    270
    
    
    
    
    
    
    
    188,450
    
    
    
    
    
    
    
    
    
    
    
    188,720Stock issued for cash April 24, 2006 (unaudited)
    
    
    1.56
    
    
    
    473,000
    
    
    
    473
    
    
    
    
    
    
    
    737,408
    
    
    
    
    
    
    
    
    
    
    
    737,881Stock issued upon exercise of warrants on April 26, 2006 (unaudited)
    
    
    0.50
    
    
    
    125,000
    
    
    
    125
    
    
    
    
    
    
    
    62,375
    
    
    
    
    
    
    
    
    
    
    
    62,500Stock issued upon exercise of warrants on April 26, 2006 (unaudited)
    
    
    1.50
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    149,900
    
    
    
    
    
    
    
    
    
    
    
    150,000Common stock issued for convertible debt on April 26, 2006 (unaudited)
    
    
    0.70
    
    
    
    35,714
    
    
    
    36
    
    
    
    
    
    
    
    24,964
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued upon exercise of warrants on May 6, 2006 (unaudited)
    
    
    0.50
    
    
    
    200,000
    
    
    
    200
    
    
    
    
    
    
    
    99,800
    
    
    
    
    
    
    
    
    
    
    
    100,000Stock issued upon exercise of warrants on May 15, 2006 (unaudited)
    
    
    1.50
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    37,475
    
    
    
    
    
    
    
    
    
    
    
    37,500Stock issued upon exercise of warrants on May 15, 2006 (unaudited)
    
    
    0.50
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    24,950
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on June 7, 2006 (unaudited)
    
    
    1.89
    
    
    
    873,018
    
    
    
    872
    
    
    
    
    
    
    
    1,649,136
    
    
    
    
    
    
    
    
    
    
    
    1,650,008Common stock issued for convertible debt on June 7, 2006 (unaudited)
    
    
    0.70
    
    
    
    1,535,715
    
    
    
    1,536
    
    
    
    
    
    
    
    1,073,464
    
    
    
    
    
    
    
    
    
    
    
    1,075,000Stock issued upon exercise of warrants on June 8, 2006 (unaudited)
    
    
    0.50
    
    
    
    900,000
    
    
    
    900
    
    
    
    
    
    
    
    449,100
    
    
    
    
    
    
    
    
    
    
    
    450,000Stock issued upon exercise of warrants on June 9, 2006 (unaudited)
    
    
    0.50
    
    
    
    9,000
    
    
    
    9
    
    
    
    
    
    
    
    4,491
    
    
    
    
    
    
    
    
    
    
    
    4,500Stock issued upon exercise of warrants on June 23, 2006 (unaudited)
    
    
    0.50
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    74,850
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued upon exercise of warrants on June 23, 2006 (unaudited)
    
    
    1.50
    
    
    
    15,000
    
    
    
    15
    
    
    
    
    
    
    
    22,485
    
    
    
    
    
    
    
    
    
    
    
    22,500
 9




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyCommon stock issued for convertible debt on June 30, 2006 (unaudited)
    
    
    0.70
    
    
    
    219,104
    
    
    
    219
    
    
    
    
    
    
    
    153,155
    
    
    
    
    
    
    
    
    
    
    
    153,374Common stock paid for, but not issued (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,500Common stock for convertible notes converted to stock, but not issued (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,222Fair value of options issued to employees and officers (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,214,775
    
    
    
    
    
    
    
    
    
    
    
    1,214,775Fair value of warrants issued for services (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    401,130
    
    
    
    
    
    
    
    
    
    
    
    401,130Write off of deferred compensation (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142,187
    )
    
    
    142,187
    
    
    
    
    
    
    
    Warrants issued for consulting services (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,660
    
    
    
    
    
    
    
    
    
    
    
    43,660Warrants issued with convertible notes (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290,248
    
    
    
    
    
    
    
    
    
    
    
    290,248Intrinsic value of beneficial conversion associated with convertible notes (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    620,252
    
    
    
    
    
    
    
    
    
    
    
    620,252Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (284,579
    )
    
    
    
    
    
    
    
    
    
    
    (284,579
    )Net loss for six months ended June 30, 2006 (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,990,330
    )
    
    
    (5,990,330
    )Balance, June 30, 2006 (unaudited)
    
    
    
    
    
    
    37,360,368
    
    
    $
    37,360
    
    
    $
    47,722
    
    
    $
    25,996,133
    
    
    $
    
    
    
    $
    (26,236,404
    )
    
    $
    (155,189
    )
  10




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 SIX MONTHS ENDED JUNE 30, 2006 AND 2005 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO
JUNE 30, 2006
 CumulativeJune 30,
    
    
    June 30,
    
    
    since2006
    
    
    2005
    
    
    inceptionCash flows from operating activitiesNet loss
    
    $
    (5,990,330
    )
    
    $
    (1,839,573
    )
    
    $
    (26,236,404
    )Adjustments to reconcile net loss to net
cash
used in operating activities:Write off of intangible assets
    
    
    
    
    
    
    
    
    
    
    505,000Settlement of litigation and debt
    
    
    
    
    
    
    
    
    
    
    (1,017,208
    )Fair value of options and warrants
issued for
services
    
    
    1,659,565
    
    
    
    13,505
    
    
    
    1,844,260Issuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    4,668,102Issuance of options for legal
settlement
    
    
    
    
    
    
    31,500
    
    
    
    31,500Issuance of warrants for legal
settlement
    
    
    
    
    
    
    4,957
    
    
    
    4,957Patent acquisition cost
    
    
    
    
    
    
    
    
    
    
    1,610,066Amortization of issuance cost
    
    
    2,113,825
    
    
    
    
    
    
    
    2,432,583Amortization of deferred compensation
    
    
    
    
    
    
    76,068
    
    
    
    3,060,744Depreciation
    
    
    57,217
    
    
    
    4,536
    
    
    
    90,979Changes in operating assets and liabilities:Inventory
    
    
    (3,719
    )
    
    
    
    
    
    
    (3,719
    )Prepaid expenses and other
    
    
    (113,579
    )
    
    
    (550
    )
    
    
    (122,588
    )Other assets
    
    
    
    
    
    
    
    
    
    
    (4,500
    )Accounts payable and accrued expenses
    
    
    (172,872
    )
    
    
    363,261
    
    
    
    2,137,862Net cash used in operating
activities
    
    
    (2,449,893
    )
    
    
    (1,346,296
    )
    
    
    (10,998,366
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (129,115
    )
    
    
    
    
    
    
    (454,701
    )Net cash used in investing
activities
    
    
    (129,115
    )
    
    
    
    
    
    
    (454,701
    )Cash flows from financing activitiesIncrease (decrease) in payables to related
parties
    
    
    (158,732
    )
    
    
    122,255
    
    
    
    517,208Advances from founding executive officer
    
    
    
    
    
    
    
    
    
    
    556,450Net proceeds from convertible debentures
    
    
    865,500
    
    
    
    
    
    
    
    2,318,683Net proceeds from issuance of common stock
and common stock issuable
    
    
    3,220,936
    
    
    
    1,351,200
    
    
    
    9,689,243Net cash provided by
financing activities
    
    
    3,927,704
    
    
    
    1,473,455
    
    
    
    13,081,584Net increase (decrease) in cash
    
    
    1,348,696
    
    
    
    127,159
    
    
    
    1,628,517Cash, beginning of period
    
    
    279,821
    
    
    
    84,826
    
    
    
    Cash, end of period
    
    $
    1,628,517
    
    
    $
    211,985
    
    
    $
    1,628,517
  11




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  Continued
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO
JUNE 30, 2006
 CumulativeJune 30,
    
    
    June 30,
    
    
    since2006
    
    
    2005
    
    
    inceptionSupplemental disclosures of cash flow informationCash paid during the year forInterest
    
    $
    93,688
    
    
    $
    
    
    
    $
    109,573Income taxes
    
    $
    800
    
    
    $
    1,976
    
    
    $
    5,969Non-cash investing and financing activitiesAcquisition of intangible asset through advance
from
related party and issuance of common stock
    
    $
    
    
    
    $
    
    
    
    $
    505,000Deferred compensation for stock options issued for
services
    
    
    
    
    
    
    
    
    
    
    3,202,931Purchase of property and equipment financed by
advance from related party
    
    
    
    
    
    
    
    
    
    
    3,550Conversion of related party debt to equity
    
    
    
    
    
    
    
    
    
    
    515,000Issuance of common stock in settlement of payable
    
    
    
    
    
    
    
    
    
    
    113,981Finders fees accrued for issuance of common stock
    
    
    
    
    
    
    95,280
    
    
    
    113,492Value of warrants and beneficial conversion
feature of
convertible notes
    
    
    865,500
    
    
    
    
    
    
    
    2,318,683Cancellation of stock
    
    
    
    
    
    
    
    
    
    
    8,047Conversion of accounts payable and accrued
expenses to common stock issued
    
    
    612,521
    
    
    
    
    
    
    
    612,521Conversion of related party debt to convertible
debentures
    
    
    45,000
    
    
    
    
    
    
    
    45,000Conversion of convertible debentures to common
stock
    
    
    1,452,319
    
    
    
    
    
    
    
    206,720Write off of deferred compensation
    
    
    142,187
    
    
    
    
    
    
    
    142,187
  12




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 1.
    
    Organization and basis of presentation
     13




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 1.
    
    Organization and basis of presentation  Continued
        14




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 1.
    
    Organization and basis of presentation  Continued
       2.
    
    Net loss per share
  15




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 3.
    
    Recent accounting pronouncements
     16




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 3.
    
    Recent accounting pronouncements  Continued
  Three months
    
    
    Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2005
    
    
    2005Net loss as reported
    
    $
    (774,517
    )
    
    $
    (1,839,573
    )Add: total fair value method
stock-based employee based
compensation expense
    
    
    
    
    
    
    (323,705
    )Less: deferred compensation
amortization for below market
employee options
    
    
    
    
    
    
    76,068Pro forma net loss
    
    $
    (774,517
    )
    
    $
    (2,087,210
    )Net loss per share:As reported  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.05
    )Pro forma  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.05
    )
  17




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 3.
    
    Recent accounting pronouncements  Continued
       18




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 3.
    
    Recent accounting pronouncements  Continued
   4.
    
    Inventories
  5.
    
    Certain relationships and related transactions
     19




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 5.
    
    Certain relationships and related transactions  Continued
           6.
    
    Convertible debentures
  20




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
      21




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 6.
    
    Convertible debentures  Continued
      7.
    
    Capital stock
   22




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 7.
    
    Capital stock  Continued
      8.
    
    Stock options and warrants
  23




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 8.
    
    Stock options and warrants  Continued
  Weighted Avg.
    
    
    Weighted Avg.Options
    
    
    Exercise PriceOptions, January 1, 2004
    
    
    13,250,000
    
    
    
    0.11Options granted
    
    
    1,172,652
    
    
    
    1.03Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, December 31, 2004
    
    
    14,422,652
    
    
    
    0.18Options granted
    
    
    2,085,909
    
    
    
    0.92Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    (10,000,000
    )
    
    
    0.10Options, December 31, 2005
    
    
    6,508,561
    
    
    
    0.53Options granted (unaudited)
    
    
    1,163,605
    
    
    
    1.08Options exercised (unaudited)
    
    
    
    
    
    
    Options forfeited (unaudited)
    
    
    (490,909
    )
    
    
    0.90Options cancelled (unaudited)
    
    
    
    
    
    
    Options, June 30, 2006 (unaudited)
    
    
    7,181,257
    
    
    $
    0.59
  24




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##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 8.
    
    Stock options and warrants  Continued
  Total
    
    
    
    
    
    
    ExercisableWeighted
    
    
    weighted
    
    
    
    
    
    
    weightedaverage
    
    
    average
    
    
    
    
    
    
    averageExercise
    
    
    Total options
    
    
    remaining
    
    
    exercise
    
    
    Options
    
    
    exerciseprices
    
    
    outstanding
    
    
    life in years
    
    
    price
    
    
    exercisable
    
    
    price$
    0.10
    
    
    
    3,000,000
    
    
    
    3.84
    
    
    $
    0.10
    
    
    
    3,000,000
    
    
    $
    0.100.40
    
    
    
    250,000
    
    
    
    3.17
    
    
    
    0.40
    
    
    
    250,000
    
    
    
    0.400.85
    
    
    
    400,000
    
    
    
    4.58
    
    
    
    0.85
    
    
    
    
    
    
    
    0.85
    
    
    
    1,225,000
    
    
    
    9.58
    
    
    
    0.85
    
    
    
    
    
    
    
    0.98
    
    
    
    900,000
    
    
    
    3.17
    
    
    
    0.98
    
    
    
    900,000
    
    
    
    0.981.00
    
    
    
    370,000
    
    
    
    9.58
    
    
    
    1.00
    
    
    
    
    
    
    
    1.10
    
    
    
    90,909
    
    
    
    4.58
    
    
    
    1.10
    
    
    
    
    
    
    
    1.15
    
    
    
    193,912
    
    
    
    3.17
    
    
    
    1.15
    
    
    
    193,912
    
    
    
    1.151.27
    
    
    
    78,740
    
    
    
    3.17
    
    
    
    1.27
    
    
    
    78,740
    
    
    
    1.276,508,561
    
    
    
    5.26
    
    
    $
    0.53
    
    
    
    4,422,652
    
    
    $
    0.36
  WeightedWeighted
    
    
    AverageNumber
    
    
    Average
    
    
    Remainingof
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsicshares
    
    
    Price
    
    
    Life (Years)
    
    
    ValueAs of December 31, 2005:Outstanding
    
    
    6,508,561
    
    
    $
    0.53
    
    
    
    5.26
    
    
    $
    2,600,000Expected to Vest
    
    
    6,017,652
    
    
    $
    0.43
    
    
    
    5.31
    
    
    $
    2,600,000Exercisable
    
    
    4,422,652
    
    
    $
    0.52
    
    
    
    3.62
    
    
    $
    2,600,000
  25




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 8.
    
    Stock options and warrants  Continued
  Total
    
    
    
    
    
    
    ExercisableWeighted
    
    
    weighted
    
    
    
    
    
    
    weightedaverage
    
    
    average
    
    
    
    
    
    
    averageExercise
    
    
    Total options
    
    
    remaining
    
    
    exercise
    
    
    Options
    
    
    exerciseprices
    
    
    outstanding
    
    
    life in years
    
    
    price
    
    
    exercisable
    
    
    price$
    0.10
    
    
    
    3,000,000
    
    
    
    3.35
    
    
    $
    0.10
    
    
    
    3,000,000
    
    
    $
    0.100.40
    
    
    
    250,000
    
    
    
    2.67
    
    
    
    0.40
    
    
    
    250,000
    
    
    
    0.400.85
    
    
    
    1,225,000
    
    
    
    9.08
    
    
    
    0.85
    
    
    
    
    
    
    
    0.85
    
    
    
    850,000
    
    
    
    9.65
    
    
    
    0.850.98
    
    
    
    900,000
    
    
    
    2.67
    
    
    
    0.98
    
    
    
    900,000
    
    
    
    0.981.00
    
    
    
    370,000
    
    
    
    9.08
    
    
    
    1.00
    
    
    
    
    
    
    
    1.15
    
    
    
    193,912
    
    
    
    2.67
    
    
    
    1.15
    
    
    
    193,912
    
    
    
    1.151.27
    
    
    
    78,740
    
    
    
    2.67
    
    
    
    1.27
    
    
    
    78,740
    
    
    
    1.271.69
    
    
    
    313,605
    
    
    
    9.65
    
    
    
    1.69
    
    
    
    
    
    
    
    7,181,257
    
    
    
    5.60
    
    
    $
    0.59
    
    
    
    4,422,652
    
    
    $
    0.36
    8.
    
    Stock options and warrants  ContinuedIntrinsic value of employee options  Continued
 26




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
    Expected life (years)
    
    
    5.26Risk free interest rate
    
    
    4.02
    %Volatility
    
    
    188.83
    %Expected dividend yield
    
    
    0.00
    %
  27




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 8.
    
    Stock options and warrants  Continued
   Weighted Avg.Warrants
    
    
    Exercise PriceWarrants outstanding, January 1, 2004
    
    
    14,117,414
    
    
    $
    0.48Warrants granted
    
    
    2,372,500
    
    
    
    1.27Warrants exercised
    
    
    (960,500
    )
    
    
    0.20Warrants cancelled
    
    
    
    
    
    
    Warrants outstanding, December 31, 2004
    
    
    15,529,414
    
    
    
    0.62Warrants granted
    
    
    5,198,578
    
    
    
    1.16Warrants exercised
    
    
    (50,500
    )
    
    
    0.59Warrants cancelled
    
    
    (20,000
    )
    
    
    1.50Warrants outstanding, December 31, 2005
    
    
    20,657,492
    
    
    
    0.75Warrants granted (unaudited)
    
    
    3,264,600
    
    
    
    1.33Warrants exercised (unaudited)
    
    
    (1,745,250
    )
    
    
    0.61Warrants cancelled (unaudited)
    
    
    (126,784
    )
    
    
    1.00Warrants outstanding, June 30, 2006 (unaudited)
    
    
    22,050,058
    
    
    $
    0.85
   28




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 8.
    
    Stock options and warrants  Continued
   9.
    
    Research and developmentThe Company has research and development facilities in Morgan Hill, California and
Queensland, Australia. The Company has expanded research and development to include
application of the technologies utilized by the ZEFS and CAT-MATE device for diesel engines,
motorbikes, boats, generators, lawnmowers and other small engines. The Company has
purchased test vehicles, test engines and testing equipment. The Company has completed
testing on ZEFS and CAT-MATE devices for multiple automobiles, trucks motorcycles, off-road
vehicles and stationary engines, the results of which have been provided to RAND Corporation
(RAND) for evaluation. RAND oversees the research and development facilities. The Company
also uses third party research and development facilities in Los Angeles, California for the
development of the ZEFS and CAT-MATE devices. The Company spent $121,111 and $190,637 for
the three months ended June 30, 2006 and 2005, respectively. The Company spent $178,873 and
$592,122 for the six months ended June 30, 2006 and 2005, respectively.10.
    
    Going concernThe accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments in
the normal course of business. As reflected in the accompanying financial statements, the
Company had a net loss of $5,990,330 and a negative cash flow from operations of $2,454,893
for the six months ended June 30, 2006, and had a working capital deficiency of $526,961 and
a stockholders deficiency of $155,189 at June 30, 2006. These factors raise substantial
doubt about its ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon the Companys ability to raise additional
funds and implement its business plan. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern.
 29




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 11.
    
    Commitments and contingencies (TO BE UPDATED BY LANCE/MATTHEWS)
    30




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 11.
    
    Commitments and contingencies  Continued
      31




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 11.
    
    Commitments and contingencies  ContinuedLegal matters  Continued
     32




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SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Continued  SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
 11.
    
    Commitments and contingencies  ContinuedLegal matters  Continued
   12.
    
    Subsequent eventsSubsequent to June 30, 2006, $1,127,658 of the convertible notes plus $112 of interest were
converted to 1,611,100 shares of stock at $0.70 per share.As of July 26, 2006, individuals exercised outstanding warrants, at $1.50 per share, to
purchase an additional 150,000 shares for an aggregate $225,000 gross and net proceeds.In August 2006, the Company approved and authorized a grant to non-employee directors
options to purchase 120,000 shares of common stock at an exercise price of $2.255 per share.
The options vest in twelve months and expire in five years. The Company also approved and
authorized a grant to a non-employee director an option to purchase 30,000 shares of common
stock at an exercise price of $2.255 per share. The option vests immediately and expires in
one year.
 33




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Item 2. Managements Discussion and Analysis or Plan of Operations
  
    
    revenues and profits;
    
    customers;
    
    research and development expenses and efforts;
    
    scientific test results;
    
    sales and marketing expenses and efforts;
    
    liquidity and sufficiency of existing cash;
    
    pending and future financings;
    
    the success of new product development;
    
    market acceptance and commercial viability of our existing and new products;
    
    the outcome of pending or threatened litigation; and
    
    the effect of recent accounting pronouncements on our financial condition and results of operations.
   Overview
   34




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35




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##### Table of Contents



Results of Operations
        36




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Liquidity and Capital Resources
    ,
  37




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##### Table of Contents



Critical Accounting Policies and Estimates
    38




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Stock-Based Compensation
   Recent Accounting Pronouncements
   
 Item 3. Controls and Procedures
 Evaluation of disclosure controls and procedures:
 39




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##### Table of Contents



Changes in internal control over financial reporting:
 40




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##### Table of Contents



PART II
 
 Item 1. Legal Proceedings
   tm
   41




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42




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
      
 Item 3. Defaults Upon Senior Securities
 43




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Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    Elected seven directors to serve until our 2006 annual meeting of stockholders or until his
or her successor is duly elected and qualified:
 Name
    
    For
    
    WithheldEugene E. Eichler
    
    
    21,658,928
    
    
    
    1,547,353Bruce H. McKinnon
    
    
    21,790,419
    
    
    
    1,415,862John Brown
    
    
    21,756,613
    
    
    
    1,449,668John F. Price
    
    
    22,941,988
    
    
    
    264,293Joseph Helleis
    
    
    22,941,136
    
    
    
    265,145Cecil Kyte
    
    
    22,941,136
    
    
    
    265,145
 2.
    
    Approved the amendment of the Save the World Air, Inc. 2004 Stock Option Plan:
 Votes For
    
    
    13,540,022Votes Against
    
    
    1,536,760Abstentions
    
    
    90,915Broker Non-Votes
    
    
    8,038,584
 3.
    
    Ratified the appointment of Weinberg & Company, P.A., as our independent auditors
for the current fiscal year:
 Votes For
    
    
    22,903,013Votes Against
    
    
    288,416Abstentions
    
    
    14,852Broker Non-Votes
    
    
    0
 
 Item 5. Other Information
   Board Member
    
    $
    7,500Chairman of the Board
    
    $
    25,000Audit Committee Chair
    
    $
    20,000Compensation Committee Chair
    
    $
    15,000Nominating/Corporate Governance Committee Chair
    
    $
    15,000
  44




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Item 6. Exhibits
 Exhibit No.
    
    Description10.1
    
    Summary of non-employee director compensation10.2
    
    Summary of compensation for John Bautista31.1
    
    Certification of Chief Executive Officer of Quarterly Report
Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e)31.2
    
    Certification of Chief Financial Officer of Quarterly Report
Pursuant to 18 U.S.C. Section 135032
    
    Certification of Chief Executive Officer and Chief Financial
Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or
Rule 15(d)-15(e)
 
 
    
    Management contract or compensatory plan, contract or arrangement 45




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##### Table of Contents



SIGNATURES
  Date: August 11, 2006
    SAVE THE WORLD AIR, INC.By:
    /s/ EUGENE E. EICHLEREugene E. EichlerChief Executive Officer 46




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Summary of non-employee director compensation10.2
    
    Summary of amended compensation for John Richard Bautista III31.1
    
    Certification of Chief Executive Officer of Quarterly Report
Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e)31.2
    
    Certification of Chief Financial Officer of Quarterly Report
Pursuant to 18 U.S.C. Section 135032
    
    Certification of Chief Executive Officer and Chief Financial
Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or
Rule 15(d)-15(e)
 
 
    
    Management contract or compensatory plan, contract or arrangement 47