##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended March 31, 2004. 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
incorporation or organization)
    
    (I.R.S. Employer
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. Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x     No o The number of shares of the Registrants Common Stock outstanding as of
March 31, 2004 was 34,691,821 shares. DOCUMENTS INCORPORATED BY REFERENCE Transitional Small Business Disclosure Format (Check one): Yes o     No x




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##### Table of Contents



SAVE THE WORLD AIR, INC.
FORM 10-QSB
INDEX PagePART IITEM 1
    
    Financial Statements
    
    
    2ITEM 2
    
    Management's Discussion and Analysis
    
    
    22ITEM 3
    
    Controls and Procedures
    
    
    26PART IIITEM 1
    
    Legal Proceedings
    
    
    27ITEM 2
    
    Changes in Securities
    
    
    28ITEM 6
    
    Exhibits and Reports on Form 8-K
    
    
    29SIGNATURES
    
    
    
    
    30EXHIBIT INDEX
    
    
    
    
    31EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 1




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PART I 
 Item 1.
Financial Statements SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) THREE MONTHS ENDED MARCH 31, 2004 CONTENTS  
 PageFinancial statementsBalance sheets
    
    
    3-4Statements of operations
    
    
    5Statements of stockholders deficiency
    
    
    6-9Statements of cash flows
    
    
    10-11Notes to financial statements
    
    
    12-21EX-10.5EX-10.6EX-10.7Exhibit 31.1Exhibit 31.2Exhibit 32
  2




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003 March 31, 2004
    
    December 31,(unaudited)
    
    2003ASSETSCurrent assetsCash
    
    $
    462,533
    
    
    $
    926,052Total current assets
    
    
    462,533
    
    
    
    926,052Property and equipment, net of accumulated depreciation
    
    
    38,822
    
    
    
    35,244$
    501,355
    
    
    $
    961,296
 See notes to financial statements. 3




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS - Continued
MARCH 31, 2004 AND DECEMBER 31, 2003 March 31, 2004
    
    December 31,(unaudited)
    
    2003LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilitiesIncome taxes payable
    
    $
    6,991
    
    
    $
    5,991Payables to related parties
    
    
    36,478
    
    
    
    57,903Accrued expenses
    
    
    606,728
    
    
    
    713,580Total current liabilities
    
    
    650,197
    
    
    
    777,474Due to founding executive officer
    
    
    1,017,208
    
    
    
    1,017,208Commitments and contingenciesStockholders deficiencyCommon stock, $.001 par value: 200,000,000
shares authorized, 34,691,821 and
34,128,261 shares issued and outstanding
at March 31, 2004 and December 31, 2003,
respectively
    
    
    34,692
    
    
    
    34,128Common stock to be issued
    
    
    
    
    
    
    6,250Additional paid-in capital
    
    
    10,714,046
    
    
    
    10,162,177Deferred compensation
    
    
    (810,610
    )
    
    
    (708,333
    )Deficit accumulated during the development stage
    
    
    (11,104,178
    )
    
    
    (10,327,608
    )Total stockholders deficiency
    
    
    (1,166,050
    )
    
    
    (833,386
    )$
    501,355
    
    
    $
    961,296
 See notes to financial statements. 4




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 AND
FOR THE PERIOD FROM INCEPTION (FEBRUARY 28, 1998)
TO MARCH 31, 2004 The three months ended
    
    CumulativeMarch 31,
    
    March 31,
    
    since2004
    
    2003
    
    inceptionNet sales
    
    $
    
    
    
    $
    
    
    
    $
    Expenses
    
    
    775,970
    
    
    
    604,981
    
    
    
    11,073,071Net loss before interest income
    
    
    (775,970
    )
    
    
    (604,981
    )
    
    
    (11,073,071
    )Interest income
    
    
    400
    
    
    
    
    
    
    
    840Net loss before provision for income taxes
    
    
    (775,570
    )
    
    
    (604,981
    )
    
    
    (11,072,231
    )Provision for income taxes
    
    
    1,000
    
    
    
    1,020
    
    
    
    6,947Net loss
    
    $
    (776,570
    )
    
    $
    (606,001
    )
    
    $
    (11,079,178
    )Net loss per share, basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )Weighted average shares outstanding, basic and diluted
    
    
    34,556,765
    
    
    
    22,565,847
 See notes to financial statements. 5




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 STATEMENTS OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 28, 1998) TO MARCH 31, 2004 Common Stock
    
    
    
    
    
    AdditionalPrice per
    
    
    
    Common stock
    
    paid-inshare
    
    Shares
    
    Amount
    
    to be issued
    
    capitalBalance, February 18, 1998(date of inception)
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common stock on April 18, 1998
    
    
    .0015  .01
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 1998(as corrected, see Note 1)
    
    
    
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270Issuance of common stock on May 18, 1999
    
    
    1.00  6.40
    
    
    
    198,003
    
    
    
    198
    
    
    
    
    
    
    
    516,738Issuance of common stock for ZEFS on September 14, 1999
    
    
    .001
    
    
    
    5,000,000
    
    
    
    5,000
    
    
    
    
    
    
    
    Stock issued for professional services on May 18, 1999
    
    
    0.88
    
    
    
    69,122
    
    
    
    69
    
    
    
    
    
    
    
    49,444Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 1999(as corrected, see Note 1)
    
    
    
    
    
    
    15,297,125
    
    
    
    15,297
    
    
    
    
    
    
    
    580,452Stock issued for employee compensation on February 8, 2000
    
    
    1.03
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    20,580Stock issued for consulting services on February 8, 2000
    
    
    1.03
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    102,900Stock issued for professional services on April 18, 2000
    
    
    3.38
    
    
    
    27,000
    
    
    
    27
    
    
    
    
    
    
    
    91,233Stock issued for directors fees on April 18, 2000
    
    
    3.38
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    168,950Stock issued for professional services on May 19, 2000
    
    
    4.06
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    20,295Stock issued for directors fees on June 20, 2000
    
    
    4.44
    
    
    
    6,000
    
    
    
    6
    
    
    
    
    
    
    
    26,634Stock issued for professional services on June 20, 2000
    
    
    4.44
    
    
    
    1,633
    
    
    
    2
    
    
    
    
    
    
    
    7,249Stock issued for professional services on June 26, 2000
    
    
    5.31
    
    
    
    1,257
    
    
    
    1
    
    
    
    
    
    
    
    6,674Stock issued for employee compensation on June 26, 2000
    
    
    5.31
    
    
    
    22,000
    
    
    
    22
    
    
    
    
    
    
    
    116,798Stock issued for consulting services on June 26, 2000
    
    
    5.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    52,203Stock issued for promotional services on July 28, 2000
    
    
    4.88
    
    
    
    9,675
    
    
    
    9
    
    
    
    
    
    
    
    47,205Stock issued for consulting services on July 28, 2000
    
    
    4.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    47,975Stock issued for consulting services on August 4, 2000
    
    
    2.13
    
    
    
    35,033
    
    
    
    35
    
    
    
    
    
    
    
    74,585Stock issued for promotional services on August 16, 2000
    
    
    2.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    56,225Stock issued for consulting services on September 5, 2000
    
    
    2.25
    
    
    
    12,833
    
    
    
    13
    
    
    
    
    
    
    
    28,861Stock issued for consulting services on September 10, 2000
    
    
    1.50
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    14,740Stock issued for consulting services on November 2, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643Stock issued for consulting services on November 4, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643Stock issued for consulting services on December 20, 2000
    
    
    0.50
    
    
    
    19,082
    
    
    
    19
    
    
    
    
    
    
    
    9,522
   [Continued from above table, first column(s) repeated] Deficit accumulated
    
    Total stockholdersDeferred
    
    during the
    
    developmentcompensation
    
    development stage
    
    stage deficiencyBalance, February 18, 1998(date of inception)$
    
    
    
    $

    
    
    
    $
    Issuance of common stock on April 18, 1998
    
    
    
    
    
    
    
    
    
    
    24,300Net loss
    
    
    
    
    
    
    (21,307
    )
    
    
    (21,307
    )Balance, December 31, 1998(as corrected, see Note 1)
    
    
    
    
    
    
    (21,307
    )
    
    
    2,993Issuance of common stock on May 18, 1999
    
    
    
    
    
    
    
    
    
    
    516,936Issuance of common stock for ZEFS on September 14, 1999
    
    
    
    
    
    
    
    
    
    
    5,000Stock issued for professional services on May 18, 1999
    
    
    
    
    
    
    
    
    
    
    49,513Net Loss
    
    
    
    
    
    
    (1,075,264
    )
    
    
    (1,075,264
    )Balance, December 31, 1999(as corrected, see Note 1)
    
    
    
    
    
    
    (1,096,571
    )
    
    
    (500,822
    )Stock issued for employee compensation on February 8, 2000
    
    
    
    
    
    
    
    
    
    
    20,600Stock issued for consulting services on February 8, 2000
    
    
    
    
    
    
    
    
    
    
    103,000Stock issued for professional services on April 18, 2000
    
    
    
    
    
    
    
    
    
    
    91,260Stock issued for directors fees on April 18, 2000
    
    
    
    
    
    
    
    
    
    
    169,000Stock issued for professional services on May 19, 2000
    
    
    
    
    
    
    
    
    
    
    20,300Stock issued for directors fees on June 20, 2000
    
    
    
    
    
    
    
    
    
    
    26,640Stock issued for professional services on June 20, 2000
    
    
    
    
    
    
    
    
    
    
    7,251Stock issued for professional services on June 26, 2000
    
    
    
    
    
    
    
    
    
    
    6,675Stock issued for employee compensation on June 26, 2000
    
    
    
    
    
    
    
    
    
    
    116,820Stock issued for consulting services on June 26, 2000
    
    
    
    
    
    
    
    
    
    
    52,213Stock issued for promotional services on July 28, 2000
    
    
    
    
    
    
    
    
    
    
    47,214Stock issued for consulting services on July 28, 2000
    
    
    
    
    
    
    
    
    
    
    47,985Stock issued for consulting services on August 4, 2000
    
    
    
    
    
    
    
    
    
    
    74,620Stock issued for promotional services on August 16, 2000
    
    
    
    
    
    
    
    
    
    
    56,250Stock issued for consulting services on September 5, 2000
    
    
    
    
    
    
    
    
    
    
    28,874Stock issued for consulting services on September 10, 2000
    
    
    
    
    
    
    
    
    
    
    14,750Stock issued for consulting services on November 2, 2000
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on November 4, 2000
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on December 20, 2000
    
    
    
    
    
    
    
    
    
    
    9,541
 See notes to financial statements. 6




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS DEFICIENCY - Continued
FROM INCEPTION (FEBRUARY 28, 1998) TO MARCH 31, 2004 Common Stock
    
    
    
    
    
    AdditionalPrice per
    
    
    
    Common stock
    
    paid-inshare
    
    Shares
    
    Amount
    
    to be issued
    
    capitalStock issued for filing services on December 20, 2000
    
    
    0.50
    
    
    
    5,172
    
    
    
    5
    
    
    
    
    
    
    
    2,581Stock issued for professional services on December 26, 2000
    
    
    0.38
    
    
    
    12,960
    
    
    
    13
    
    
    
    
    
    
    
    4,912Other stock issuance on August 24, 2000
    
    
    2.13
    
    
    
    2,000
    
    
    
    2
    
    
    
    
    
    
    
    4,258Common shares cancelled
    
    
    
    
    
    
    (55,000
    )
    
    
    (55
    )
    
    
    
    
    
    
    (64,245
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2000(as corrected, see Note 1)
    
    
    
    
    
    
    15,645,935
    
    
    
    15,646
    
    
    
    
    
    
    
    1,437,873Stock issued for consulting services on January 8, 2001
    
    
    0.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,038Stock issued for consulting services on February 1, 2001
    
    
    0.33
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,235Stock issued for consulting services on March 1, 2001
    
    
    0.28
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,743Stock issued for legal services on March 13, 2001
    
    
    0.32
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    47,850Stock issued for consulting services on April 3, 2001
    
    
    0.25
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,448Stock issued for legal services on April 4, 2001
    
    
    0.25
    
    
    
    30,918
    
    
    
    31
    
    
    
    
    
    
    
    7,699Stock issued for professional services on April 4, 2001
    
    
    0.25
    
    
    
    7,040
    
    
    
    7
    
    
    
    
    
    
    
    1,753Stock issued for consulting services on April 5, 2001
    
    
    0.25
    
    
    
    132,600
    
    
    
    132
    
    
    
    
    
    
    
    33,018Stock issued for filing fees on April 30, 2001
    
    
    1.65
    
    
    
    1,233
    
    
    
    1
    
    
    
    
    
    
    
    2,033Stock issued for filing fees on September 19, 2001
    
    
    0.85
    
    
    
    2,678
    
    
    
    2
    
    
    
    
    
    
    
    2,274Stock issued for professional services on September 28, 2001
    
    
    0.62
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    92,850Stock issued for directors services on October 5, 2001
    
    
    0.60
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    59,900Stock issued for legal services on October 17, 2001
    
    
    0.60
    
    
    
    11,111
    
    
    
    11
    
    
    
    
    
    
    
    6,655Stock issued for consulting services on October 18, 2001
    
    
    0.95
    
    
    
    400,000
    
    
    
    400
    
    
    
    
    
    
    
    379,600Stock issued for consulting services on October 19, 2001
    
    
    1.25
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    187,350Stock issued for exhibit fees on October 22, 2001
    
    
    1.35
    
    
    
    5,000
    
    
    
    6
    
    
    
    
    
    
    
    6,745Stock issued for directors services on November 2, 2001
    
    
    0.95
    
    
    
    1,000,000
    
    
    
    1,000
    
    
    
    
    
    
    
    949,000Stock issued for consulting services on November 7, 2001
    
    
    0.85
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    16,980Stock issued for consulting services on November 20, 2001
    
    
    0.98
    
    
    
    43,000
    
    
    
    43
    
    
    
    
    
    
    
    42,097Stock issued for consulting services on November 27, 2001
    
    
    0.98
    
    
    
    10,000
    
    
    
    10
    
    
    
    
    
    
    
    9,790Stock issued for consulting services on November 28, 2001
    
    
    0.98
    
    
    
    187,000
    
    
    
    187
    
    
    
    
    
    
    
    183,073Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600,000
   [Continued from above table, first column(s) repeated] Deficit accumulated
    
    Total stockholdersDeferred
    
    during the
    
    developmentcompensation
    
    development stage
    
    stage deficiencyStock issued for filing services on December 20, 2000
    
    
    
    
    
    
    
    
    
    
    2,586Stock issued for professional services on December 26, 2000
    
    
    
    
    
    
    
    
    
    
    4,925Other stock issuance on August 24, 2000
    
    
    
    
    
    
    
    
    
    
    4,260Common shares cancelled
    
    
    
    
    
    
    
    
    
    
    (64,300
    )Net loss
    
    
    
    
    
    
    (1,270,762
    )
    
    
    (1,270,762
    )Balance, December 31, 2000(as corrected, see Note 1)
    
    
    
    
    
    
    (2,367,333
    )
    
    
    (913,814
    )Stock issued for consulting services on January 8, 2001
    
    
    
    
    
    
    
    
    
    
    3,048Stock issued for consulting services on February 1, 2001
    
    
    
    
    
    
    
    
    
    
    3,245Stock issued for consulting services on March 1, 2001
    
    
    
    
    
    
    
    
    
    
    2,753Stock issued for legal services on March 13, 2001
    
    
    
    
    
    
    
    
    
    
    48,000Stock issued for consulting services on April 3, 2001
    
    
    
    
    
    
    
    
    
    
    2,458Stock issued for legal services on April 4, 2001
    
    
    
    
    
    
    
    
    
    
    7,730Stock issued for professional services on April 4, 2001
    
    
    
    
    
    
    
    
    
    
    1,760Stock issued for consulting services on April 5, 2001
    
    
    
    
    
    
    
    
    
    
    33,150Stock issued for filing fees on April 30, 2001
    
    
    
    
    
    
    
    
    
    
    2,034Stock issued for filing fees on September 19, 2001
    
    
    
    
    
    
    
    
    
    
    2,276Stock issued for professional services on September 28, 2001
    
    
    
    
    
    
    
    
    
    
    93,000Stock issued for directors services on October 5, 2001
    
    
    
    
    
    
    
    
    
    
    60,000Stock issued for legal services on October 17, 2001
    
    
    
    
    
    
    
    
    
    
    6,666Stock issued for consulting services on October 18, 2001
    
    
    
    
    
    
    
    
    
    
    380,000Stock issued for consulting services on October 19, 2001
    
    
    
    
    
    
    
    
    
    
    187,500Stock issued for exhibit fees on October 22, 2001
    
    
    
    
    
    
    
    
    
    
    6,751Stock issued for directors services on November 2, 2001
    
    
    
    
    
    
    
    
    
    
    950,000Stock issued for consulting services on November 7, 2001
    
    
    
    
    
    
    
    
    
    
    17,000Stock issued for consulting services on November 20, 2001
    
    
    
    
    
    
    
    
    
    
    42,140Stock issued for consulting services on November 27, 2001
    
    
    
    
    
    
    
    
    
    
    9,800Stock issued for consulting services on November 28, 2001
    
    
    
    
    
    
    
    
    
    
    183,260Intrinsic value of options issued to employees
    
    
    (2,600,000
    )
    
    
    
    
    
    
    
 See notes to financial statements. 7




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS DEFICIENCY - Continued
FROM INCEPTION (FEBRUARY 28, 1998) TO MARCH 31, 2004 Common Stock
    
    
    
    
    
    AdditionalPrice per
    
    
    
    Common stock
    
    paid-inshare
    
    Shares
    
    Amount
    
    to be issued
    
    capitalFair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,318Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2001
    
    
    
    
    
    
    18,085,847
    
    
    
    18,086
    
    
    
    
    
    
    
    6,220,322Stock issued for directors services on December 10, 2002
    
    
    0.40
    
    
    
    2,150,000
    
    
    
    2,150
    
    
    
    
    
    
    
    857,850Common stock paid for, but not issued (2,305,000 shares)
    
    
    0.15-0.25
    
    
    
    
    
    
    
    
    
    
    
    389,875
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,909Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2002
    
    
    
    
    
    
    20,235,847
    
    
    
    20,236
    
    
    
    389,875
    
    
    
    7,133,081Stock issued, previously paid for
    
    
    0.15
    
    
    
    1,425,000
    
    
    
    1,425
    
    
    
    (213,750
    )
    
    
    212,325Stock issued, previously paid for
    
    
    0.25
    
    
    
    880,000
    
    
    
    880
    
    
    
    (220,000
    )
    
    
    219,120Stock and warrants issued for cash on March 20, 2003
    
    
    0.25
    
    
    
    670,000
    
    
    
    670
    
    
    
    
    
    
    
    166,830Stock and warrants issued for cash on April 4, 2003
    
    
    0.25
    
    
    
    900,000
    
    
    
    900
    
    
    
    
    
    
    
    224,062Stock and warrants issued for cash on April 8, 2003
    
    
    0.25
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    24,900Stock and warrants issued for cash on May 8, 2003
    
    
    0.25
    
    
    
    1,150,000
    
    
    
    1,150
    
    
    
    
    
    
    
    286,330Stock and warrants issued for cash on June 16, 2003
    
    
    0.25
    
    
    
    475,000
    
    
    
    475
    
    
    
    
    
    
    
    118,275Stock issued for legal services on June 27, 2003
    
    
    0.55
    
    
    
    83,414
    
    
    
    83
    
    
    
    
    
    
    
    45,794Debt converted to stock and warrants on June 27, 2003
    
    
    0.25
    
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    
    
    
    
    498,000Stock and warrants issued for cash on July 11, 2003
    
    
    0.25
    
    
    
    519,000
    
    
    
    519
    
    
    
    
    
    
    
    129,231Stock and warrants issued for cash on September 29, 2003
    
    
    0.25
    
    
    
    1,775,000
    
    
    
    1,775
    
    
    
    
    
    
    
    441,976Stock and warrants issued for cash on October 21, 2003
    
    
    0.25
    
    
    
    1,845,000
    
    
    
    1,845
    
    
    
    
    
    
    
    459,405Stock and warrants issued for cash on October 28, 2003
    
    
    0.25
    
    
    
    1,570,000
    
    
    
    1,570
    
    
    
    
    
    
    
    390,930Stock and warrants issued for cash on November 19, 2003
    
    
    0.25
    
    
    
    500,000
    
    
    
    500
    
    
    
    
    
    
    
    124,500Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,875
    
    
    
    (312,582
    )Common stock paid for, but not issued (25,000 shares)
    
    
    0.25
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    Amortization of deferred comp
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for year ended December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2003
    
    
    
    
    
    
    34,128,261
    
    
    
    34,128
    
    
    
    6,250
    
    
    
    10,162,177
   [Continued from above table, first column(s) repeated] Deficit accumulated
    
    Total stockholdersDeferred
    
    during the
    
    developmentcompensation
    
    development stage
    
    stage deficiencyFair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    142,318Amortization of deferred compensation
    
    
    191,667
    
    
    
    
    
    
    
    191,667Net loss
    
    
    
    
    
    
    (2,735,013
    )
    
    
    (2,735,013
    )Balance, December 31, 2001
    
    
    (2,408,333
    )
    
    
    (5,102,346
    )
    
    
    (1,272,271
    )Stock issued for directors services on December 10, 2002
    
    
    
    
    
    
    
    
    
    
    860,000Common stock paid for, but not issued (2,305,000 shares)
    
    
    
    
    
    
    
    
    
    
    389,875Fair value of options issued to non-employees for services
    
    
    (54,909
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    891,182
    
    
    
    
    
    
    
    891,182Net loss
    
    
    
    
    
    
    (2,749,199
    )
    
    
    (2,749,199
    )Balance, December 31, 2002
    
    
    (1,572,060
    )
    
    
    (7,851,545
    )
    
    
    (1,880,413
    )Stock issued, previously paid for
    
    
    
    
    
    
    
    
    
    
    Stock issued, previously paid for
    
    
    
    
    
    
    
    
    
    
    Stock and warrants issued for cash on March 20, 2003
    
    
    
    
    
    
    
    
    
    
    167,500Stock and warrants issued for cash on April 4, 2003
    
    
    
    
    
    
    
    
    
    
    224,962Stock and warrants issued for cash on April 8, 2003
    
    
    
    
    
    
    
    
    
    
    25,000Stock and warrants issued for cash on May 8, 2003
    
    
    
    
    
    
    
    
    
    
    287,480Stock and warrants issued for cash on June 16, 2003
    
    
    
    
    
    
    
    
    
    
    118,750Stock issued for legal services on June 27, 2003
    
    
    
    
    
    
    
    
    
    
    45,877Debt converted to stock and warrants on June 27, 2003
    
    
    
    
    
    
    
    
    
    
    500,000Stock and warrants issued for cash on July 11, 2003
    
    
    
    
    
    
    
    
    
    
    129,750Stock and warrants issued for cash on September 29, 2003
    
    
    
    
    
    
    
    
    
    
    443,751Stock and warrants issued for cash on October 21, 2003
    
    
    
    
    
    
    
    
    
    
    461,250Stock and warrants issued for cash on October 28, 2003
    
    
    
    
    
    
    
    
    
    
    392,500Stock and warrants issued for cash on November 19, 2003
    
    
    
    
    
    
    
    
    
    
    125,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    (268,707
    )Common stock paid for, but not issued (25,000 shares)
    
    
    
    
    
    
    
    
    
    
    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
    
    
    (708,333
    )
    
    
    (10,327,608
    )
    
    
    (833,386
    )
 See notes to financial statements. 8




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS DEFICIENCY - Continued
FROM INCEPTION (FEBRUARY 28, 1998) TO MARCH 31, 2004 Common Stock
    
    
    
    
    
    AdditionalPrice per
    
    
    
    Common stock
    
    paid-inshare
    
    Shares
    
    Amount

    
    to be issued
    
    capitalCommon stock issued, previously paid for
    
    
    0.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    (6,250
    )
    
    
    6,225Stock issued
for director services on March 31, 2004
    
    
    0.25
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    12,450Stock issued
for previously accrued finders fees on March 31, 2004
    
    
    0.15
    
    
    
    82,500
    
    
    
    82
    
    
    
    
    
    
    
    12,293Stock issued
for previously accrued finders fees on March 31, 2004
    
    
    0.25
    
    
    
    406,060
    
    
    
    407
    
    
    
    
    
    
    
    101,199Options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    359,582Options issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,120Amortization of deferred comp
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for three months ended March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance,
March 31, 2004 (unaudited)
    
    
    
    
    
    
    34,691,821
    
    
    $
    34,692
    
    
    $
    
    
    
    $
    10,714,046
   [Continued from above table, first column(s) repeated] Deficit accumulated
    
    Total stockholdersDeferred
    
    during the
    
    developmentcompensation
    
    development stage
    
    stage deficiencyCommon stock issued, previously paid for
    
    
    
    
    
    
    
    
    
    
    Stock issued
for director services on March 31, 2004
    
    
    
    
    
    
    
    
    
    
    12,500Stock issued
for previously accrued finders fees on March 31, 2004
    
    
    
    
    
    
    
    
    
    
    12,375Stock issued
for previously accrued finders fees on March 31, 2004
    
    
    
    
    
    
    
    
    
    
    101,606Options issued to employees
    
    
    (359,582
    )
    
    
    
    
    
    
    Options issued to non-employees
    
    
    (60,120
    )
    
    
    
    
    
    
    Amortization of deferred comp
    
    
    317,425
    
    
    
    
    
    
    
    317,425Net loss for three months ended March 31, 2004
    
    
    
    
    
    
    (776,570
    )
    
    
    (776,570
    )Balance,
March 31, 2004 (unaudited)
    
    $
    (810,610
    )
    
    $
    (11,104,178
    )
    
    $
    (1,166,050
    )
 See notes to financial statements. 9




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 AND 
FOR THE PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2004 CumulativeMarch 31,
    
    March 31,
    
    since2004
    
    2003
    
    inceptionCash flows from operating activitiesNet loss
    
    $
    (776,570
    )
    
    $
    (606,001
    )
    
    $
    (11,104,178
    )Adjustments to reconcile net loss to
net cash used in operating
activities:Write off of intangible assets
    
    
    
    
    
    
    
    
    
    
    505,000Fair value of options issued for services
    
    
    
    
    
    
    
    
    
    
    642,318Issuance of common stock for services
    
    
    12,500
    
    
    
    
    
    
    
    3,322,354Amortization of deferred compensation
    
    
    317,425
    
    
    
    226,226
    
    
    
    2,264,001Depreciation
    
    
    1,292
    
    
    
    1,223
    
    
    
    7,024Changes in operating liabilities:Income taxes payable
    
    
    1,000
    
    
    
    1,064
    
    
    
    6,991Accrued expenses
    
    
    7,129
    
    
    
    12,276
    
    
    
    720,709Net cash used in operating activities
    
    
    (437,224
    )
    
    
    (365,212
    )
    
    
    (3,635,781
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (4,870
    )
    
    
    
    
    
    
    (42,296
    )Net cash used in investing activities
    
    
    (4,870
    )
    
    
    
    
    
    
    (42,296
    )Cash flows from financing activitiesIncrease (decrease) in payables to related parties
    
    
    (21,425
    )
    
    
    59,618
    
    
    
    32,928Advances from founding executive officer
    
    
    
    
    
    
    
    
    
    
    517,208Issuance of common stock for cash
    
    
    
    
    
    
    211,375
    
    
    
    3,590,474Common stock issuable
    
    
    
    
    
    
    349,942
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    (21,425
    )
    
    
    620,935
    
    
    
    4,140,610Net increase (decrease) in cash
    
    
    (463,019
    )
    
    
    255,723
    
    
    
    462,533Cash, beginning of period
    
    
    926,052
    
    
    
    107,489
    
    
    
    Cash, end of period
    
    $
    462,533
    
    
    $
    363,212
    
    
    $
    462,533
 See notes to financial statements. 10




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS -
Continued (unaudited)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 AND 
FOR THE PERIOD FROM INCEPTION (FEBRUARY 18, 1998)
TO MARCH 31, 2004 CumulativeMarch 31,
    
    March 31,
    
    since2004
    
    2003
    
    inceptionSupplemental disclosures of cash flow
informationCash paid during the year forInterest
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    
    
    
    $
    
    
    
    $
    Non-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
    
    
    419,702
    
    
    
    
    
    
    
    3,074,611Purchase of property and equipment financed by advance from related party
    
    
    
    
    
    
    
    
    
    
    3,550Conversion of related party debt to equity
    
    
    
    
    
    
    
    
    
    
    500,000Stock
issued for previously accrued finders fee
    
    
    113,981
    
    
    
    
    
    
    
    113,981
 See notes to financial statements. 11




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  1.
    
    Organization and basis of presentation  Basis of presentation  The accompanying interim condensed financial statements are unaudited,
but in the opinion of management of Save the World Air, Inc. (the
Company), contain all adjustments, which include normal recurring
adjustments, necessary to present fairly the financial position at March
31, 2004, the results of operations for the three months ended March 31,
2004 and 2003, and cash flows for the three months ended March 31, 2004
and 2003. The balance sheet as of December 31, 2003 is derived from the
Companys audited financial statements.Certain information and footnote disclosures normally included in
financial statements that have been prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, although management of the Company believes that the
disclosures contained in these financial statements are adequate to make
the information presented therein not misleading. For further
information, refer to the financial statements and the notes thereto
included in the Companys Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2003, as filed with the Securities and Exchange
Commission.The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expense
during the reporting period. Actual results could differ from those
estimates.The results of operations for the three months ended March 31, 2004 are
not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 2004. 12




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  1.
    
    Organization and basis of presentation- ContinuedDescription of business  Save the World Air, Inc. (the Company) was incorporated in Nevada on
February 18, 1998 under the name Mandalay Capital Corp. The Company
changed its name to Save the World Air, Inc. on February 11, 1999
following the signing of an agreement by and between the Company and
Jeffrey Alan Muller, the Companys founding executive officer and
director, with respect to the Companys purchase of the Zero Emission
Fuel-Saving Device (the Agreement). Under the terms of the Agreement,
the Company issued 5,000,000 shares of its common stock to Mr. Muller
and agreed to pay him a total of $500,000 for the marketing and
distribution rights of the device, and a $10 royalty for every unit of
the device sold. The Company acquired the worldwide exclusive
manufacturing, marketing and distribution rights for the Zero Emission
Fuel-Saving Device (ZEFS) by entering into the Agreement. The ZEFS is
a product, which is fitted to an internal combustion engine and is
expected to reduce carbon monoxide hydrocarbons and toxic exhaust
emissions. The ZEFS is currently undergoing testing to determine the
achievable levels of reduced emissions and commercial viability.  Significant matters  On December 19, 2001, the Securities and Exchange Commission (SEC)
filed civil charges in federal district court in New York, New York,
against the Company, Mr. Muller, and others associated with the
promotion of Company stock sales, alleging that they engaged in a
fraudulent scheme to manipulate the market for the Companys stock.The SECs complaint alleges that from at least February 1999 through at
least April 2001, the Company and Mr. Muller carried out a fraudulent
promotional campaign using press releases, Internet postings, an
elaborate Internet website, and televised media events to disseminate
false and materially misleading information about the Companys product
and commercial prospects. The complaint also alleges that the Companys
and Mr. Mullers actions led to the artificial inflation of the price
and trading volume of the Company stock, causing its market
capitalization to be as much as $218,728,062. The promotional
information distributed by the Company and Mr. Muller included: (1)
announcements of significant licensing agreements and other important
business developments, and (2) announcements concerning public
automotive demonstrations that purportedly proved or would prove that
the ZEFS materially reduces emissions and improves fuel economy in motor
vehicles. The complaint further alleges that the purported licensing
agreements and other purported 13




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  1.
    
    Organization and basis of presentation- ContinuedSignificant matters - Continued  business events simply did not exist, and the then current ZEFS
demonstrations did not prove that the ZEFS actually worked as
represented. At the same time that he publicly promoted the Company,
Mr. Muller privately sold millions of shares of the Companys restricted
stock that, if sold at then-prevailing market prices, would have
provided him with over $9 million in personal profits. He concealed
these sales by failing to disclose in SEC filings, as required, any
changes in his beneficial ownership in the Company. The SEC complaint
also states that the Company and Mr. Muller made at least nine SEC
filings that contain false financial statements and disclosures.In October 2001, Edward Masry became the Companys new President and
Chief Executive Officer. Because of the nature and scope of the SECs
allegations regarding the Companys financial statements and SEC
filings, Masry has assembled a new management team and newly constituted
board of directors for the Company, in addition to selecting new
independent auditors and corporate counsel.The Company entered into discussions with the SEC concerning the SECs
complaint and negotiated a consent order in which it agreed, among other
terms, to observe all securities laws. Based upon this consent order
and related judgment, the proceedings against the Company were
terminated. The Company has since caused an investigation into the
facts and circumstances surrounding the allegations in the SECs
complaint. Based upon review of the history leading to the filing of
the complaint, the Companys board of directors authorized the filing of
cross-claims against Mr. Muller and others (including ten offshore
companies) seeking disgorgement of stock obtained from the Company, to
invalidate the transfer of several million shares to Mr. Muller and
family members for inadequate or no consideration, rescission of stock
options transferred to Mr. Muller and/or his family members, for the
transfer of rights to patent claims from Mr. Muller to the Company and
rescission of royalty rights held by Mr. Muller and/or his family
members. Upon filing of the cross complaint, in July 2002, the Company
obtained a temporary restraining order against Mr. Muller which, among
other things, prohibits Mr. Muller from serving as an officer or
director of the Company and enjoins Mr. Muller and others from selling,
conveying, transferring or encumbering any shares which Mr. Muller
controls or in which he has an interest. The Company believes the
temporary restraining order may affect as many as seventeen million
shares or more of the Companys stock, in the form of issued shares and
option rights.In the course of the legal proceedings, the Company has obtained
complete control over all ownership claims to the ZEFS patent rights and
all royalty interests previously held and claimed by Mr. Muller and
certain others. 14




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  1.
    
    Organization and basis of presentation- ContinuedSignificant matters - Continued  The Company has continued to prosecute its claims and has substantially
completed all pretrial procedures in preparation for the disposition of
the case through dispositive pretrial motions and/or eventual trial on
the merits of the claims. Based upon the substantial discovery
completed and other evidence obtained to date, the Company believes
there is very little risk of an adverse decision on the merits of its
cross complaint.Based on the status of current legal proceedings, the Company believes
it will not have to pay $1,017,208 of advances due to Mr. Muller. The
Company also believes that the option Mr. Muller holds to purchase
10,000,000 shares of the Companys stock will be cancelled.  Development stage enterprise  The Company is a development stage enterprise as defined by Statement of
Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting
by Development Stage Enterprises. All losses accumulated since the
inception of the Company have been considered as part of the Companys
development stage activities.A team has been assembled for the research and development of the
technology and potential markets for the ZEFS and to establish
relationships with potential customers. Significant design work has been
completed, and patent applications have been filed in 64 countries.
There is no assurance that any of the filed patents will be granted.
The Company is continuing in its product development efforts and several
studies are underway to evaluate the effectiveness of the ZEFS in
eliminating pollutants and emissions from internal combustion engines.
The Company has had no sales to date. As such, the Company continues to
remain a development stage enterprise. The ability of the Company to
commercialize its products will depend on, among other things, the
Companys ability to demonstrate the merits of the ZEFS and develop
markets and distribution channels. 15




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  2.
    
    Net loss per share  Basic earnings (loss) per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company. In computing diluted
earnings per share, the treasury stock method assumes that outstanding
options and warrants are exercised and the proceeds are used to purchase
common stock at the average market price during the period. Options and
warrants will have a dilutive effect under the treasury stock method
only when the average market price of the common stock during the period
exceeds the exercise price of the options and warrants. For the three
months ended March 31, 2004 and the year ended December 31, 2003, the
dilutive impact of outstanding stock options of 15,172,652 and
14,000,000, respectively, and 13,367,414 warrants in 2003 has been
excluded because their impact on the loss per share is antidilutive.  3.
    
    New accounting pronouncements  In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). The provisions of SFAS
No. 150 are effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities,
which are subject to the provisions of this statement for the first
fiscal period beginning after December 15, 2004. The Company believes
that the adoption of SFAS No. 150 will not have an impact on its
financial position or results of operations. 16




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  3.
    
    New accounting pronouncements- Continued  In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 (FIN 46R) that replaced the original FIN 46. FIN
46R requires identification of a companys participation in variable interest
entities (VIEs), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE, if any, bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets forth certain
disclosures regarding interests in VIEs that are deemed significant even if
consolidation is not required. The Company is not currently participating in, or
invested in, any VIEs, as defined in FIN 46R. The implementation of the
provisions of FIN 46R in 2003 did not have a significant effect on the Companys
consolidated financial statement presentation or disclosures.  4.
    
    Certain relationships and related transactionsDue to founding executive officer  All of the marketing and manufacturing rights for the ZEFS were acquired
from Mr. Muller, for 5,000,000 shares of common stock, $500,000 and a
$10 royalty for each unit sold (see discussion below), pursuant to the
Agreement entered into in December 1998, by and between the Company and
Mr. Muller. Working capital advances in the amount of $517,208 and
payment in the amount of $500,000 for marketing and distribution rights
of the ZEFS are due to Mr. Muller. Such amounts are interest free and
do not have any due dates for payment.In January 2000, the Company entered into an agreement offering Mr.
Muller and Lynne Muller, Mr. Mullers wife, the option to purchase
5,000,000 shares each at $0.10 per share as consideration for work
performed for the Company. Mrs. Muller subsequently transferred her
option to Mr. Muller. 17




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  4.
    
    Certain relationships and related transactions- Continued  Due to founding executive officer - Continued  In connection with the Companys legal proceedings against Mr. Muller,
the Company is attempting to obtain a judgment that will relieve the
Company of $1,017,208, which represents all amounts due Mr. Muller.
These amounts include the $500,000 due for the marketing and
distribution rights of the ZEFS and the working capital advances of
$517,208. As described in the Significant Matters section of Note 1,
the Company has already been relieved of the $10 royalty interest that
Mr. Muller held for each unit sold. In addition, the Company is also
attempting to obtain a judgment that will cancel the options to purchase
10,000,000 shares granted to Mr. and Mrs. Muller, collectively. Based
on the status of current legal proceedings, the Company does not believe
that it will have to pay Mr. Muller the $500,000 for the rights to the
ZEFS device and the $517,208 of advances. The Company also believes
that the option Mr. Muller holds to purchase 10,000,000 shares of the
Companys stock will be cancelled and no longer valid.  Due to related parties  Masry & Vititoe, a law firm in which Edward Masry is a partner, has
advanced $36,478 and $57,903 as of March 31, 2004 and December 31, 2003
to the Company for working capital purposes. The advances payable to
Masry & Vititoe were allocations to the Company for shared expenses,
primarily payroll. These advances are unsecured, non-interest bearing,
and are due on demand.  5.
    
    Stockholders deficiencyAs of March 31, 2004, the Company has authorized 200,000,000 shares of
its common stock and 34,153,261 shares were issued and outstanding. As
described in Note 1, estimates and judgments were used by management to
determine the fair value for certain issuances of the outstanding shares.The Companys significant stockholders are as follows: Number
    
    Percentageof shares
    
    ownershipMr. Jeffrey Muller and controlled by Mr.
Muller through beneficial ownership
    
    
    8,716,710
    
    
    
    25.1
    %Mr. Edward Masry
    
    
    3,000,000
    
    
    
    8.6
    %Mr. Edward Skoda
    
    
    4,000,000
    
    
    
    11.5
    %Remaining stockholders
    
    
    18,975,111
    
    
    
    54.8
    %34,691,821
    
    
    
    100.0
    %
 18




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  6.
    
    Stock options  The Company issues stock options to employees, directors and consultants
under no formal plan. Employee options vest according to the terms of
the specific grant and expire from 5 to 10 years from date of grant.
Non-employee option grants to date are vested upon issuance or up to one
year. The weighted average remaining contractual life of employee
options outstanding at March 31, 2004 was 7.32 years. Stock option
activity for the years ended December 31, 2002 and 2003, was as follows: Weighted Avg.Options
    
    Exercise PriceOptions outstanding, January 1, 2003
    
    
    14,000,000
    
    
    $
    0.13Options granted
    
    
    
    
    
    
    1.00Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, December 31, 2003
    
    
    14,000,000
    
    
    
    0.13Options granted
    
    
    1,172,652
    
    
    
    1.03Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, March 31, 2004
    
    
    15,172,652
    
    
    $
    0.20
  Options outstanding at March 31, 2004 and the related weighted average
exercise price and remaining life information is as follows: Weighted average
    
    Total weightedRange of exercise
    
    Total options
    
    remaining life in
    
    average exercise
    
    
    
    
    
    Weighted averageprices
    
    outstanding
    
    years
    
    price
    
    Options exercisable
    
    exercise price$
    0.10
    
    
    10,000,000
    
    
    
    N/A
    
    
    $
    0.10
    
    
    
    10,000,000
    
    
    $
    0.100.10
    
    
    3,000,000
    
    
    
    6.83
    
    
    
    0.10
    
    
    
    2,000,000
    
    
    
    0.100.40
    
    
    750,000
    
    
    
    8.79
    
    
    
    0.40
    
    
    
    750,000
    
    
    
    0.400.50
    
    
    150,000
    
    
    
    3.71
    
    
    
    0.50
    
    
    
    150,000
    
    
    
    0.501.00
    
    
    100,000
    
    
    
    8.67
    
    
    
    1.00
    
    
    
    100,000
    
    
    
    1.00.98
    
    
    900,000
    
    
    
    4.75
    
    
    
    .98
    
    
    
    
    
    
    
    1.15
    
    
    193,912
    
    
    
    4.75
    
    
    
    1.15
    
    
    
    
    
    
    
    1.27
    
    
    78,740
    
    
    
    4.75
    
    
    
    1.27
    
    
    
    
    
    
    
    $
    0.10-$1.27
    
    
    15,172,652
    
    
    
    5.55
    
    
    $
    0.20
    
    
    
    13,000,000
    
    
    $
    0.19
 19




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  6.
    
    Stock options Continued  The 10,000,000 options exercisable at $0.10 per share in the table above
are held by Mr. Muller. The options have been accounted for as employee
stock options under the provisions of APB No. 25. Accordingly, no
compensation expense has been recorded in the statements of operations.
However, the $1,000,000 fair value of the options has been reflected in
the pro forma net loss below. The 10,000,000 options do not have an
expiration date and vested in 1999. For purposes of computing fair value
method stock-based employee compensation expense for the 10,000,000
employee options above, a ten-year life was used in the Black-Scholes
option-pricing model, as ten years is the longest term for other option
grants.Intrinsic value of employee options  Certain employee options were granted with exercise prices less the than
fair market value of the Companys stock at the date of grant. As the
grants were to employees, the intrinsic value method, as allowed under
APB No. 25, was used to calculate the related compensation expense. For
the three months ended March 31, 2004, $302,395 of employee deferred
compensation was amortized and recognized as expense. The remaining
deferred compensation expense will be recognized over the remaining
vesting periods of the employee options through 2004.The Company has elected to account for stock-based compensation using
the intrinsic value method prescribed in APB No. 25 and related
interpretations, and follow the pro forma disclosure requirements of
SFAS No. 123. Accordingly, no compensation expense has been recognized
related to the granting of stock options, except as noted above. The
following table illustrates the effect on net income as if the Company
had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation. CumulativeMarch 31,
    
    December 31,
    
    since2004
    
    2003
    
    inceptionNet loss, as reported
    
    $
    (776,570
    )
    
    $
    (2,476,063
    )
    
    $
    (11,104,177
    )Less: total fair value method
stock-based employee compensation
expense
    
    
    (573,906
    )
    
    
    (949,977
    )
    
    
    (2,782,188
    )Add: deferred compensation
amortization for below market
employee options
    
    
    302,395
    
    
    
    850,000
    
    
    
    2,194,062Pro forma net loss
    
    $
    (1,048,081
    )
    
    $
    (2,576,040
    )
    
    $
    (11,692,303
    )Pro forma loss per share
    
    $
    (0.03
    )
    
    $
    (0.10
    )
 20




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2004 (unaudited)  7.
    
    Going concern  The 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 has a net loss of $776,570, a negative cash flow from operations
of $437,224, a working capital deficiency of $187,664 and a stockholders deficiency of $1,166,050. 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
on 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. 21




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##### Table of Contents



Item 2. Managements Discussion and Analysis This Quarterly Report on Form 10-QSB contains forward-looking statements.
These forward-looking statements include predictions regarding our future:  
    
    research and development expenses;  
    
    scientific test results;  
    
    general and administrative expenses;  
    
    liquidity and sufficiency of existing cash;  
    
    technology;  
    
    the outcome of pending or threatened litigation. You can identify these and other forward-looking statements by the use of
words such as may, will, expects, anticipates, believes,
estimates,, continues, or the negative of such terms, or other comparable
terminology. Forward-looking statements also include the assumptions underlying
or relating to any of the foregoing statements. Such statements, which include statements concerning future revenue
sources and concentrations, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed elsewhere in this Form 10-QSB, that could actual
results to differ materially from those projected. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below under the heading Risk Factors in our Annual Report on Form
10-KSB for the year ended December 31, 2003. All forward-looking statements
included in this document are based on information available to us on the date
hereof. We assume no obligation to update any forward-looking statements. The forward-looking statements set forth in this Form 10-QSB are as of
March 31, 2004, and we undertake no duty to update this information. 22




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##### Table of Contents



Overview The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Financial
Statements and notes thereto included in Part I, Item 1 of this Form 10-QSB and
the Financial Statements and notes thereto contained in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2003. The company is a development stage company that has not yet commenced
operations and does not generate revenue. The companys current focus is on
research and development of proprietary devices that can be installed on motor
vehicles and which are designed to reduce harmful emissions, improve fuel
efficiency and improve performance. Our prototype device is called ZEFS. We
have devoted the bulk of our efforts to complete the design and development of
our production models and raise the financing required to do so and fund our
expenses. We anticipate that these research and development efforts will continue
for at least the remainder of 2004. We do not envision generating any
significant revenue in 2004, although limited marketing activities later in
2004 could produce nominal revenue. We will need to raise additional capital to
fund continuing research and development activities and meet our operating
expenses, including marketing activities, for the remainder of 2004. Results of Operation To date, we have not generated any revenues and our business is in the
development stage. Our operating costs and expenses consist primarily of research and
development expenses and general and administrative expenses. We expect our
operating costs to increase once we begin to manufacture and market the ZEFS
device, which we do not expect to occur earlier than the fourth quarter of
2004. Our research and development expenses include contractual payments to
RAND Corporation, consultants fees, capital expenditures, cost of services and
supplies We expect our research and development costs to increase as we
continue to develop the ZEFS device and develop new applications of our
technology. Our general and administrative expenses include compensation expenses
related to executive and other administrative personnel, facility lease, the
costs of our insurance and legal and accounting support. We expect our general
and administrative expenses to increase as we expand our infrastructure in
support of our anticipated increased operations, which we do not expect to
occur earlier than the fourth quarter of 2004. We had a net loss of $751,570 for the three months ended March 31, 2004,
compared to a net loss of $ 606,001 for the three months ended March 31, 2003.
The increase in loss is primarily attributable to an increase in research and
development expenses as a result of the agreement we entered into with RAND
Corporation in December 2002. We expect an increase in net loss 23




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##### Table of Contents



through 2004 attributable to increased research and development, and general and
administrative expenses, as well as the commencement of marketing activities. Liquidity and Capital Resources We have incurred negative cash flow from operations in the developmental
stage since our inception in 1998. As of March 31, 2004 we had cash of $462,533
and an accumulated deficit of $11,104,178. Our 2004 negative operating cash
flows were funded primarily through the net proceeds of a private financing
that we commenced in November 2002 and completed in October 2003. We anticipate
additional operating losses, which may increase, through at least the remainder
of 2004 as we expand our research and development program, provide for general
and administrative expenses and commence marketing activities, without the
benefit of revenue. The 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 has a net loss of $776,570, a negative cash flow from operations
of $437,224, a working capital deficiency of $187,664 and a stockholders deficiency of $1,166,050. 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
on 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. We believe that we have sufficient cash to fund our operations through
approximately July 2004. We will need to raise additional capital or incur new
debt to fund our operations as described above and management is actively pursuing financing possibilities.
However, there can be no assurance that additional equity or debt financing
will be available or, if it is available, that is will be available on terms
that are favorable to the Company. If we are unable to obtain additional
capital, we may be required to delay, reduce the scope of, or eliminate our
research and development programs, or relinquish rights to technologies that we
might otherwise seek to develop or commercialize. Capitalization In the action by the Securities and Exchange Commission (the SEC)
against Jeffrey Muller, the founder and former sole director of the Company,
and others, we seek, among other relief, the cancellation of all shares of our
common stock controlled, directly or indirectly, by Mr. Muller and his
affiliates, options to purchase an additional 10,000,000 shares of our common
stock, and Mr. Mullers original royalty agreement. See Part II, Item 1, Legal
Proceeding. The cancellation of these shares and options would have a
significant positive effect on our capitalization. Critical Accounting Policies Our discussion and analysis of financial condition and results of
operations is based upon our Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these Financial Statements and related
disclosures requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, expenses, and related disclosure of
contingent assets and liabilities. We evaluate, on an on-going basis, our
estimates and judgments, including those related to the useful life of the
assets. We base our estimates on historical experience and assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates. 24




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##### Table of Contents



The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results that we report in
our Financial Statements. The SEC considers an entitys most critical
accounting policies to be those policies that are both most important to the
portrayal of a companys financial condition and results of operations and
those that require managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates about matters that
are inherently uncertain at the time of estimation. We believe the following
critical accounting policies, among others, require significant judgments and
estimates used in the preparation of our Financial Statements: Stock-Based Compensation We account for stock-based compensation to employees as defined by using
the intrinsic-value method prescribed in Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees. We account for stock option and warrant grants issued to non-employees
using the guidance of SFAS No. 123, Accounting for Stock-Based Compensation
and EITF No. 96-18: Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, whereby the fair value of such option and warrant grants is
determined using the Black-Scholes option pricing model at the earlier of the
date at which the non-employees performance is completed or a performance
commitment is reached. Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Certain significant estimates were made in connection with
preparing our financial statements as described in Note 1 of our Financial Statements. See Item 1, Part
I, Financial Statements. Actual results could differ from those estimates. New Accounting Pronouncements 25




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##### Table of Contents



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities., which are subject to
the provisions of this statement for the first fiscal period beginning after
December 15, 2004. The Company believes that the adoption of SFAS No. 150 will
not have an impact on its financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 (FIN 46R) that replaced the original FIN 46. FIN
46R requires identification of a companys participation in variable interest
entities (VIEs), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE, if any, bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets forth certain
disclosures regarding interests in VIEs that are deemed significant even if
consolidation is not required. The Company is not currently participating in, or
invested in, any VIEs, as defined in FIN 46R. The implementation of the
provisions of FIN 46R in 2003 did not have a significant effect on the Companys
consolidated financial statement presentation or disclosures. 
 Item 3. Controls and Procedures (a) Evaluation of disclosure controls and procedures: Our management
evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. It should be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. (b) Changes in internal control over financial reporting: There was no
change in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-QSB that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. 26




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##### Table of Contents



PART II 
 Item 1. Legal Proceedings On December 19, 2001, the SEC filed civil charges in the United States
Federal District Court, Southern District of New York, against us, our former
President and then sole director Jeffrey Muller, and others, alleging that we
and the other defendants were engaged in a fraudulent scheme to promote our
stock. The SEC complaint alleged the existence of a promotional campaign using
press releases, Internet postings, an elaborate website, and televised media
events to disseminate false and materially misleading information as part of a
fraudulent scheme to manipulate the market for stock in our corporation, which
was then controlled by Mr. Muller. On March 22, 2002, we signed a Consent to
Final Judgment of Permanent Injunction and Other Relief in settlement of this
action as against the corporation only, which the court approved on July 2,
2002. Under this settlement, we were not required to pay any fines or
restitution. The SECs action continues against Mr. Muller and others. On July 2, 2002, after an investigation by our newly constituted board of
directors, we filed a cross-complaint in the SEC action against Mr. Muller and
others seeking injunctive relief, disgorgement and financial restitution for a
variety of acts and omissions in connection with sales of our stock and other
transactions occurring between 1998 and 2002. Among other things, we allege
that Mr. Muller and certain others sold stock without consideration and without
registration under federal securities laws; engaged in self-dealing and entered
into various undisclosed related-party transactions; misappropriated for their
own use proceeds from sales of our stock; and entered into various undisclosed
arrangements regarding the control, voting and disposition of their stock. We
contend that we are entitled to a judgment canceling all of the approximately
8,716,710 shares of our common stock which we believe are controlled, directly
or indirectly, by Mr. Muller, divesting Mr. Muller of any right to exercise
options for 10,000,000 shares of our stock, the entry of an existing
preliminary injunction to prevent Mr. Muller from any involvement with the
company and a monetary judgment against Muller and others in the amount of
several million dollars. We are also seeking cancellation of the previous
royalty arrangement with Mr. Muller. On July 30, 2002, the U.S. Federal District Court, Southern District of
New York, granted our application for a preliminary injunction against Mr.
Muller and others, which prevents Mr. Muller and other cross-defendants from
selling, transferring, or encumbering any of our assets and property, from
selling or transferring any of our stock that they may own or control, or from
taking any action to injure us or our business and shareholders. The order also
prevents Mr. Muller from exercising any control over our corporation and
serving as an officer or director of our company. While we believe that we have
valid claims, there can be no assurance that an adverse result or settlement
would not have a material adverse effect on our financial position or cash
flow. 27




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In the course of the litigation, we have obtained control over Mr.
Mullers patent rights to the ZEFS device. Under a Buy-Sell Agreement between
Jeffrey Muller and us dated December 29, 1998, Mr. Muller, who was listed on
the ZEFS devise patent application as the inventor of the ZEFS device, granted
us the marketing, manufacturing and distribution rights to the ZEFS device. In
conjunction with these proceedings, a settlement agreement was reached whereby
the $10 per unit royalty previously due to Mr. Muller was terminated and
replaced with a $.20 per unit royalty payable to the bankruptcy trustee. On
November 7, 2002, under our settlement with the Muller bankruptcy trustee, the
trustee transferred all ownership and legal rights to this international patent
application for the ZEFS device to us. The SEC filed a motion for summary judgement on May 28, 2004.
Further proceedings for pretrial motions have been assigned to
U.S. Magistrate Frank Mass. Judge Mass postponed and rescheduled
the filing date for the Company to file its motion for summary
judgment until July 16, 2004. After a period of time during
which Mr. Muller will have an opportunity to reply and the
Company and the SEC will have an opportunity to respond, it is
expected that a hearing to resolve the issues raised in these motions
will be calendared during September 2004. Although the outcome of this litigation cannot be predicted with any
degree of certainty, we are optimistic that the Courts ruling will either
significantly narrow the issues for any later trial or will result in a
disposition of the case in a manner favorable to the company. While we believe
that we have valid claims, there can be no assurance that an adverse result or
settlement would not have a material adverse effect on our financial position
or cash flow. 
 Item 2. Changes in
Securities On October 14, 2003, the Company sold 25,000 shares of common stock to one
individual. These shares were not issued until February 3, 2004. In January 2004, the Company issued 50,000 shares of common stock to Jack
Bradham, for his services on the Companys advisory board. In February 2004, the Company issued an aggregate 488,560 shares of common
stock to various individuals who provided services to the Company in connection
with its private offering of common stock between November 2002 and October
2003. The
issuance of the shares described above was made in reliance
on the exemptions from registration set forth in Section 4(2) of the Securities
Act of 1933 (the Act), as amended. We made no public solicitation in
connection with the issuance of the above-mentioned securities. We relied on
representation from the purchasers of the securities that they purchased the
securities for investment only and not with a view to any distribution thereof
and that they were aware of our business affairs and financial condition and
had sufficient information to reach an informed and knowledgeable decision
regarding their acquisition of the securities. In March 2004, the Board of Directors
approved the issuance stock options for an aggregate 1,172,652 shares of the
Companys common stock to 11 individuals, who are employees, directors or
consultants of the Company. These options were issued pursuant to the
Companys 2004 Stock Option Plan approved by the Board of Directors on the same
date, subject to stockholder approval of the plan at the 2004 annual meeting of
stockholders. The stockholders approved the plan at the 2004 annual meeting,
which was held on May 24, 2004. The Company intends to register the shares of common stock which may be
issued upon exercise of the options in a registration statement on Form S-8 to
be filed with the Securities and Exchange Commission. 28




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Item 6. Exhibits and Reports on Form 8-K The exhibits listed below are required by Item 601 of Regulation S-B. Exhibit No.
    
    Description10.1(1)
    
    Commercial Sublease between the Registrant and KZ Golf, Inc.,
dated October 16, 2003.10.2(1)
    
    General Tenancy Agreement between the Registrant and Autumlee Pty
Ltd., dated November 15, 2003.10.3(2)
    
    Agreement between the Registrant and RAND, dated December 13, 2002.10.4(1)*
    
    Agreement between the Registrant and RAND, dated May 7, 2003.10.5
    
    Modification No. 1 dated as of
August 21, 2003 to Exhibit 10.410.6
    
    Modification No. 2 dated as of
October 17, 2003 to Exhibit 10.410.7
    
    Modification No. 3 dated as of
January 20, 2004 to Exhibit 10.410.8(3)
    
    Deed and Document Conveyance between the Trustee of the Property
of Jeffrey Ann Muller and Lynette Anne Muller (Bankrupts).10.9(3)
    
    Assignment and Bill of Sale between Pro Hart and the Registrant
dated May 28, 2002.31.1
    
    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 1350.32
    
    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).
   *
    
    Confidential Treatment Requested.(1)
    
    Incorporated by reference from Registrants Form 10-KSB for fiscal year ended December 31, 2002.(2)
    
    Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.(3)
    
    Incorporated by reference from Registrants Form 8-K filed on November 12, 2002 29




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized. SAVE THE WORLD AIR, INC.Date: July 14, 2004
    By:
    /s/ Edward L. MasryEdward L. MasryChief Executive Officer 30




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EXHIBIT INDEX Exhibit No.
    
    Description10.1(1)
    
    Commercial Sublease between the Registrant and KZ Golf, Inc.,
dated October 16, 2003.10.2(1)
    
    General Tenancy Agreement between the Registrant and Autumlee Pty
Ltd., dated November 15, 2003.10.3(2)
    
    Agreement between the Registrant and RAND, dated December 13, 2002.10.4(1)*
    
    Agreement between the Registrant and RAND, dated May 7, 2003.10.5
    
    Modification No. 1 dated as of
August 21, 2003 to Exhibit 10.410.6
    
    Modification No. 2 dated as of
October 17, 2003 to Exhibit 10.410.7
    
    Modification No. 3 dated as of
January 20, 2004 to Exhibit 10.410.8(3)
    
    Deed and Document Conveyance between the Trustee of the Property
of Jeffrey Ann Muller and Lynette Anne Muller (Bankrupts).10.9(3)
    
    Assignment and Bill of Sale between Pro Hart and the Registrant
dated May 28, 2002.31.1
    
    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 1350.32
    
    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).
   *
    
    Confidential Treatment Requested.(1)
    
    Incorporated by reference from Registrants Form 10-KSB for fiscal year ended December 31, 2002.(2)
    
    Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.(3)
    
    Incorporated by reference from Registrants Form 8-K filed on November 12, 2002. 31