UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-QSB


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




For
the quarterly period ended March 31, 2008


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.)




235
Tennant Avenue


Morgan
Hill, California 95037


(Address,
including zip code, of principal executive offices)




(408) 778-0101


(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




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




The
number of shares of the Registrant’s Common Stock outstanding as of May 7, 2008
was 56,109,125 shares.




Transitional
Small Business Disclosure Format (Check one): Yes o  No þ

















Table
of Contents
  SAVE
THE WORLD AIR, INC.
 FORM
10-QSB


INDEX


PagePART I
            
            
            3ITEM 1. Financial
Statements
            
            
            3Condensed consolidatedbalance
      sheets
            
            
            3-4Condensed consolidatedstatements of
      operations (unaudited)
            
            
            5Condensed consolidated statementof changes in stockholders’ deficiency
      (unaudited)
            
            
            6-32Condensed consolidatedstatements of cash flows
      (unaudited)
            
            
            33-34Notes to condensed consolidatedfinancial statements
      (unaudited)
            
            
            35ITEM 2. Management’s Discussion and Analysis or
      Plan of Operations
            
            
            52ITEM 3. Controls and
    Procedures
            
            
            62PART II
            
            
            64ITEM 1. Legal Proceedings
            
            
            64ITEM 2. Unregistered Sales of Equity Securities
      and Use of Proceeds
            
            
            64ITEM 3. Defaults Upon Senior
      Securities
            
            
            66ITEM 4. Submission of Matters to a Vote of
      Security Holders
            
            
            66ITEM 5. Other Information
            
            
            66ITEM 6. Exhibits
            
            
            66SIGNATURES
            
            
            67EXHIBIT INDEX
            
            
            68EXHIBIT
      31.1EXHIBIT
      31.2EXHIBIT
      32










PART
I


Item 1.
Financial Statements


SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





CONDENSED
CONSOLIDATED BALANCE SHEETS


MARCH
31, 2008 (UNAUDITED) AND DECEMBER 31, 2007





March
      31, 2008
            
            December
      31,(unaudited)
            
            2007ASSETSCurrent
      assetsCash
            
            $
            143,127
            
            
            $
            47,660Accounts
      receivable, net of allowance for doubtful accounts of $1,380 and $0,
      respectively
            
            
            -
            
            
            
            1,380Inventory
            
            
            30,256
            
            
            
            30,256Other
      current assets
            
            
            22,700
            
            
            
            20,552Total
      current assets
            
            
            196,083
            
            
            
            99,848Equipment,
      net
            
            
            163,599
            
            
            
            201,058Other
      assets
            
            
            4,500
            
            
            
            4,500Total
      assets
            
            $
            364,182
            
            
            $
            305,406








See notes
to condensed consolidated financial statements.




3


SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





CONDENSED
CONSOLIDATED BALANCE SHEETS


MARCH
31, 2008 (UNAUDITED) AND DECEMBER 31, 2007





March
      31, 2008
            
            
            December
      31,(unaudited)
            
            
            2007LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilitiesAccounts
      payable-related parties
            
            $
            344,587
            
            
            $
            323,413Accounts
      payable-other
            
            
            929,632
            
            
            
            716,986Accrued
      expenses
            
            
            685,748
            
            
            
            742,719Accrued
      research and development fees
            
            
            38,347
            
            
            
            53,347Accrued
      professional fees
            
            
            270,113
            
            
            
            747,261Loan
      payable-related party
            
            
            84,817
            
            
            
            83,596Loan
      payable-other
            
            
            —
            
            
            
            20,334Convertible
      debentures, net-related parties
            
            
            315,419
            
            
            
            227,136Convertible
      debentures, net-others
            
            
            414,483
            
            
            
            1,078,408Convertible
      debentures, net-other-default
            
            
            —
            
            
            
            671,992Total
      current liabilities
            
            
            3,083,146
            
            
            
            4,665,192Commitments
      and contingenciesStockholders’
      deficiencyCommon
      stock, $.001 par value: 200,000,000 shares authorized, 54,751,117 and
              46,470,413
      shares issued and outstanding at March 31, 2008 and December 31,
      2007,
              respectively
            
            
            54,752
            
            
            
            46,471Common
      stock to be issued
            
            
            459,105
            
            
            
            4,000Additional
      paid-in capital
            
            
            35,741,366
            
            
            
            32,280,083Deficit
      accumulated during the development stage
            
            
            (38,974,187
            )
            
            
            (36,690,340
            )Total
      stockholders’ deficiency
            
            
            (2,718,964
            )
            
            
            (4,359,786
            )Total
      liabilities and stockholders’ deficiency
            
            $
            364,182
            
            
            $
            305,406




See notes
to condensed consolidated financial statements.





4





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


THREE
MONTHS ENDED MARCH 31, 2008 AND 2007 AND FOR THE PERIOD


FEBRUARY
18, 1998 (DATE OF INCEPTION) TO MARCH 31, 2008





CumulativeMarch
      31,
            
            
            March
      31,
            
            
            since2008
            
            
            2007
            
            
            inceptionNet
      sales
            
            $
            —
            
            
            $
            22,000
            
            
            $
            69,000Cost
      of goods sold
            
            
            —
            
            
            
            5,360
            
            
            
            24,120Gross
      profit
            
            
            —
            
            
            
            —
            
            
            
            44,880Operating
      expenses
            
            
            760,142
            
            
            
            1,279,775
            
            
            
            27,619,463Research
      and development expenses
            
            
            259,670
            
            
            
            340,452
            
            
            
            5,065,9000Non-cash
      patent settlement cost
            
            
            —
            
            
            
            —
            
            
            
            1,610,066Loss
      before other income(expense)
            
            
            (1,019,812
            )
            
            
            (1,603,587
            )
            
            
            (34,250,549
            )Other
      income(expense)Other
      income
            
            
            200
            
            
            
            87
            
            
            
            3,709Interest
      income
            
            
            354
            
            
            
            17
            
            
            
            16,696Interest
      expense
            
            
            (1,254,906
            )
            
            
            (309,878
            )
            
            
            (5,747,286
            )Loss
      on sale of equipment
            
            
            (9,683
            )
            
            
            —
            
            
            
            (9,683
            )Settlement
      of litigation and debt
            
            
            —
            
            
            
            —
            
            
            
            1,017,208Loss
      before provision for income taxes
            
            
            (2,283,847
            )
            
            
            (1,913,361
            )
            
            
            (38,969,905
            )Provision
      for income taxes
            
            
            —
            
            
            
            800
            
            
            
            4,282Net
      loss
            
            $
            (2,283,847
            )
            
            $
            (1,914,161
            )
            
            $
            (38,974,187
            )Net
      loss per common share, basic and diluted
            
            $
            (0.05
            )
            
            $
            (0.05
            )Weighted
      average common shares outstanding, basic and diluted
            
            
            49,551,981
            
            
            
            39,012,446








See notes
to condensed consolidated financial statements





5





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  Deficit
      AccumulatedPrice per
              
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              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
              
              
              
              —
              
              
              
              —
              
              
              
              7,251
  6
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  Deficit
      AccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              Deferred
              
              During
      the Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              Compensation
              
              Stage
              
              
              DeficiencyStock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              28,874
 Stock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              8,653Stock
      issued for consulting services on November 4, 2000
              
              
              0.88
              
              
              
              9,833
              
              
              
              10
              
              
              
              —
              
              
              
              8,643
              
              
              
              —
              
              
              
              —
              
              
              
              8,653
 
 7
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  Deficit
                AccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              AdditionalPaid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              3,048
 Stock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              2,753
 
  8
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
 Deficit
                AccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional Paid-in
              
              
              Deferred
              
              
              During
      the Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              6,666
  9
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  Deficit
                AccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      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
              
              
              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
 Stock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              142,318
 
 
 10
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  Deficit
                AccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyAmortization
      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
              
              
              
              —
              
              
              
              —
              
              
              
              118,750
  11
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      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
 Finders’
      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
              )
  12
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      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
              
              
              
              —
              
              
              
              —
              
              
              
              65,500
  13
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
 DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              250,000
 Finders
      fees related to stock issuances
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (88,384
              )
              
              
              —
              
              
              
              —
              
              
              
              (88,384
              )Common
      stock paid for, but not issued (119,000 shares)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              119,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              119,000
  14
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              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
              
              
              
              —
              
              
              
              —
              
              
              
              —
  15
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
 DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              200
 Stock
      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
      to be  issued for settlement of payables on December 21,
      2005
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              57,092
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
 
  16
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      to be  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
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              696,413
              
              
              
              —
              
              
              
              —
              
              
              
              696,413Intrinsic
      value of beneficial conversion associated with convertible
      notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              756,768
              
              
              
              —
              
              
              
              —
              
              
              
              756,768
  17
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      issued for cash on April 24, 2006
              
              
              1.56
              
              
              
              473,000
              
              
              
              473
              
              
              
              —
              
              
              
              737,408
              
              
              
              —
              
              
              
              —
              
              
              
              737,881
 Stock
      issued upon exercise of warrants on April 26, 2006
              
              
              0.50
              
              
              
              125,000
              
              
              
              125
              
              
              
              —
              
              
              
              62,375
              
              
              
              —
              
              
              
              —
              
              
              
              62,500Stock
      issued upon exercise of warrants on April 26, 2006
              
              
              1.50
              
              
              
              100,000
              
              
              
              100
              
              
              
              —
              
              
              
              149,900
              
              
              
              —
              
              
              
              —
              
              
              
              150,000Common
      stock issued for convertible debt on April 26, 2006
              
              
              0.70
              
              
              
              35,714
              
              
              
              36
              
              
              
              —
              
              
              
              24,964
              
              
              
              —
              
              
              
              —
              
              
              
              25,000Stock
      issued upon exercise of warrants on May 6, 2006
              
              
              0.50
              
              
              
              200,000
              
              
              
              200
              
              
              
              —
              
              
              
              99,800
              
              
              
              —
              
              
              
              —
              
              
              
              100,000Stock
      issued upon exercise of warrants on May 15, 2006
              
              
              1.50
              
              
              
              25,000
              
              
              
              25
              
              
              
              —
              
              
              
              37,475
              
              
              
              —
              
              
              
              —
              
              
              
              37,500Stock
      issued upon exercise of warrants on May 15, 2006
              
              
              0.50
              
              
              
              50,000
              
              
              
              50
              
              
              
              —
              
              
              
              24,950
              
              
              
              —
              
              
              
              —
              
              
              
              25,000Stock
      issued for cash on June 7, 2006
              
              
              1.89
              
              
              
              873,018
              
              
              
              872
              
              
              
              —
              
              
              
              1,649,136
              
              
              
              —
              
              
              
              —
              
              
              
              1,650,008
 Common
      stock issued for convertible debt on June 7, 2006
              
              
              0.70
              
              
              
              1,535,716
              
              
              
              1,536
              
              
              
              —
              
              
              
              1,073,464
              
              
              
              —
              
              
              
              —
              
              
              
              1,075,000Stock
      issued upon exercise of warrants on June 8, 2006
              
              
              0.50
              
              
              
              900,000
              
              
              
              900
              
              
              
              —
              
              
              
              449,100
              
              
              
              —
              
              
              
              —
              
              
              
              450,000
  18
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
 DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyStock
      issued upon exercise of warrants on June 9, 2006
              
              
              0.50
              
              
              
              9,000
              
              
              
              9
              
              
              
              —
              
              
              
              4,491
              
              
              
              —
              
              
              
              —
              
              
              
              4,500Stock
      issued upon exercise of warrants on June 23, 2006
              
              
              0.50
              
              
              
              150,000
              
              
              
              150
              
              
              
              —
              
              
              
              74,850
              
              
              
              —
              
              
              
              —
              
              
              
              75,000Stock
      issued upon exercise of warrants on June 23, 2006
              
              
              1.50
              
              
              
              15,000
              
              
              
              15
              
              
              
              —
              
              
              
              22,485
              
              
              
              —
              
              
              
              —
              
              
              
              22,500Common
      stock issued for convertible debt on June 30, 2006
              
              
              0.70
              
              
              
              219,104
              
              
              
              219
              
              
              
              —
              
              
              
              153,155
              
              
              
              —
              
              
              
              —
              
              
              
              153,374Common
      stock issued for convertible debt on July 11, 2006
              
              
              0.70
              
              
              
              14,603
              
              
              
              15
              
              
              
              —
              
              
              
              10,207
              
              
              
              —
              
              
              
              —
              
              
              
              10,222Common
      stock issued for convertible debt on August 7, 2006
              
              
              0.70
              
              
              
              1,540,160
              
              
              
              1,540
              
              
              
              —
              
              
              
              1,076,572
              
              
              
              —
              
              
              
              —
              
              
              
              1,078,112
 Common
      stock issued upon exercise of warrants on August 7, 2006
              
              
              1.50
              
              
              
              175,000
              
              
              
              175
              
              
              
              —
              
              
              
              262,325
              
              
              
              —
              
              
              
              —
              
              
              
              262,500
 
 
 19
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock issued upon exercise of warrants on August 21, 2006
              
              
              1.50
              
              
              
              50,000
              
              
              
              50
              
              
              
              —
              
              
              
              74,950
              
              
              
              —
              
              
              
              —
              
              
              
              75,000Common
      stock issued for cash on August 22, 2006
              
              
              1.00
              
              
              
              14,519
              
              
              
              15
              
              
              
              —
              
              
              
              14,504
              
              
              
              —
              
              
              
              —
              
              
              
              14,519Common
      stock issued upon exercise of warrants on August 23, 2006
              
              
              1.00
              
              
              
              3,683
              
              
              
              4
              
              
              
              —
              
              
              
              3679
              
              
              
              —
              
              
              
              —
              
              
              
              3,683Common
      stock issued upon exercise of warrants on August 28, 2006
              
              
              1.50
              
              
              
              5,000
              
              
              
              5
              
              
              
              —
              
              
              
              7,495
              
              
              
              —
              
              
              
              —
              
              
              
              7,500Common
      stock issued for convertible debt on September 13, 2006
              
              
              0.70
              
              
              
              4,286
              
              
              
              4
              
              
              
              —
              
              
              
              2,996
              
              
              
              —
              
              
              
              —
              
              
              
              3,000Common
      stock issued upon exercise of warrants on September 13,
    2006
              
              
              0.50
              
              
              
              150,000
              
              
              
              150
              
              
              
              —
              
              
              
              74,850
              
              
              
              —
              
              
              
              —
              
              
              
              75,000
   20
   SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock issued for convertible debt on October 16, 2006
              
              
              0.70
              
              
              
              66,654
              
              
              
              67
              
              
              
              —
              
              
              
              46,591
              
              
              
              —
              
              
              
              —
              
              
              
              46,658Common
      stock issued upon exercise of warrants on November 3, 2006
              
              
              0.50
              
              
              
              210,000
              
              
              
              210
              
              
              
              —
              
              
              
              104,790
              
              
              
              —
              
              
              
              —
              
              
              
              105,000Common
      stock issued for put on equity line of credit on November 7,
      2006
              
              
              1.22
              
              
              
              94,4700
              
              
              
              94
              
              
              
              —
              
              
              
              115,368
              
              
              
              —
              
              
              
              —
              
              
              
              115,462Common
      stock issued for put on equity line of credit on November 14,
      2006
              
              
              1.14
              
              
              
              7,300
              
              
              
              7
              
              
              
              —
              
              
              
              8,349
              
              
              
              —
              
              
              
              —
              
              
              
              8,356Common
      stock issued for put on equity line of credit on November 27,
      2006
              
              
              0.83
              
              
              
              27,500
              
              
              
              28
              
              
              
              —
              
              
              
              22,913
              
              
              
              —
              
              
              
              —
              
              
              
              22,941Common
      stock issued for put on equity line of credit on November 28,
      2006
              
              
              0.82
              
              
              
              36,500
              
              
              
              36
              
              
              
              —
              
              
              
              30,059
              
              
              
              —
              
              
              
              —
              
              
              
              30,095Common
      stock issued for put on equity line of credit on December 6,
      2006
              
              
              0.78
              
              
              
              73,863
              
              
              
              74
              
              
              
              —
              
              
              
              57,244
              
              
              
              —
              
              
              
              —
              
              
              
              57,318
   21
  SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock issued for put on equity line of credit on December 26,
      2006
              
              
              0.55
              
              
              
              18,800
              
              
              
              19
              
              
              
              —
              
              
              
              10,377
              
              
              
              —
              
              
              
              —
              
              
              
              10,396Common
      stock issued for put on equity line of credit on December 31,
      2006
              
              
              0.59
              
              
              
              229,050
              
              
              
              229
              
              
              
              —
              
              
              
              135,300
              
              
              
              —
              
              
              
              —
              
              
              
              135,529Common
      stock paid for, but not issued
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              60,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              60,000Fair
      value of options issued to employees and officers
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,253,263
              
              
              
              —
              
              
              
              —
              
              
              
              2,253,263
 Fair
      value of warrants issued for services
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              401,130
              
              
              
              —
              
              
              
              —
              
              
              
              401,130Write
      off of deferred compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (142,187
              )
              
              
              142,187
              
              
              
              —
              
              
              
              —
 Warrants
      issued for consulting
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              62,497
              
              
              
              —
              
              
              
              —
              
              
              
              62,497Warrants
      issued with convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              408,596
              
              
              
              —
              
              
              
              —
              
              
              
              408,596
 
 
 22
  SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyIntrinsic
      value of beneficial conversion associated with convertible
      notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              851,100
              
              
              
              —
              
              
              
              —
              
              
              
              851,100Finders
      fees related to stock issuances
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (284,579
              )
              
              
              —
              
              
              
              —
              
              
              
              (284,579
              )Fees
      paid on equity line of credit
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (30,402
              )
              
              
              —
              
              
              
              —
              
              
              
              (30,402
              )Net
      loss for year ended December 31, 2006
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (10,181,523
              )
              
              
              (10,181,523
              )Balance,
      December 31, 2006
              
              
              
              
              
              
              40,081,757
              
              
              $
              40,082
              
              
              $
              60,000
              
              
              $
              29,430,821
              
              
              $
              —
              
              
              $
              (30,427,597
              )
              
              $
              (896,694
              )Common
      stock issued for put on equity line of credit on January 11,
      2007
              
              
              0.63
              
              
              
              63,000
              
              
              
              63
              
              
              
              —
              
              
              
              39,659
              
              
              
              —
              
              
              
              —
              
              
              
              39,722Common
      stock issued for put on equity line of credit on January 22,
      2007
              
              
              0.73
              
              
              
              58,150
              
              
              
              58
              
              
              
              —
              
              
              
              42,246
              
              
              
              —
              
              
              
              —
              
              
              
              42,304
 Common
      stock issued for put on equity line of credit on February 9,
      2007
              
              
              0.73
              
              
              
              35,800
              
              
              
              36
              
              
              
              —
              
              
              
              26,009
              
              
              
              —
              
              
              
              —
              
              
              
              26,045
 
  23
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              DeficiencyCommon
      stock issued for put on equity line of credit on February 16,
      2007
              
              
              0.70
              
              
              
              162,000
              
              
              
              162
              
              
              
              —
              
              
              
              112,979
              
              
              
              —
              
              
              
              —
              
              
              113,141Common
      stock issued for put on equity line of credit on February 26,
      2007
              
              
              0.66
              
              
              
              71,000
              
              
              
              71
              
              
              
              —
              
              
              
              46,761
              
              
              
              —
              
              
              
              —
              
              
              46,832Common
      stock issued for put on equity line of credit on March 5,
    2007
              
              
              0.66
              
              
              
              42,600
              
              
              
              43
              
              
              
              —
              
              
              
              28,056
              
              
              
              —
              
              
              
              —
              
              
              28,099Common
      stock issued for put on equity line of credit on March 12,
      2007
              
              
              0.67
              
              
              
              92,900
              
              
              
              93
              
              
              
              —
              
              
              
              62,085
              
              
              
              —
              
              
              
              —
              
              
              62,178Common
      stock issued for put on equity line of credit on March 19,
      2007
              
              
              0.64
              
              
              
              47,500
              
              
              
              48
              
              
              
              —
              
              
              
              30,362
              
              
              
              —
              
              
              
              —
              
              
              30,410Common
      stock issued for put on equity line of credit on March 26,
      2007
              
              
              0.63
              
              
              
              7,500
              
              
              
              7
              
              
              
              —
              
              
              
              4,722
              
              
              
              —
              
              
              
              —
              
              
              4,729Common
      stock issued for put on equity line of credit on March 31,
      2007
              
              
              0.61
              
              
              
              25,500
              
              
              
              25
              
              
              
              —
              
              
              
              15,558
              
              
              
              —
              
              
              
              —
              
              
              15,583
 Fees
      paid on equity line of credit
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (32,723
              )
              
              
              —
              
              
              
              —
              
              
              (32,723
              )Warrants
      issued with convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              291,936
              
              
              
              —
              
              
              
              —
              
              
              291,936
 
 
 24
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock issued for put on equity line of credit on April 9,
    2007
              
              
              0.63
              
              
              
              56,300
              
              
              
              56
              
              
              
              —
              
              
              
              35,441
              
              
              
              —
              
              
              
              —
              
              
              
              35,497Common
      stock issued for put on equity line of credit on April 17,
      2007
              
              
              0.56
              
              
              
              73,835
              
              
              
              74
              
              
              
              —
              
              
              
              41,466
              
              
              
              —
              
              
              
              —
              
              
              
              41,540Common
      stock issued for put on equity line of credit on April 24,
      2007
              
              
              0.56
              
              
              
              122,857
              
              
              
              123
              
              
              
              —
              
              
              
              68,996
              
              
              
              —
              
              
              
              —
              
              
              
              69,119Common
      stock issued for put on equity line of credit on May 1,
    2007
              
              
              0.55
              
              
              
              226,081
              
              
              
              226
              
              
              
              —
              
              
              
              124,774
              
              
              
              —
              
              
              
              —
              
              
              
              125,000Common
      stock issued for put on equity line of credit on May 8,
    2007
              
              
              0.66
              
              
              
              29,400
              
              
              
              29
              
              
              
              —
              
              
              
              19,363
              
              
              
              —
              
              
              
              —
              
              
              
              19,392
 
 
 
 25
  SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
 DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock issued for put on equity line of credit on May 15,
    2007
              
              
              0.43
              
              
              
              403,502
              
              
              
              404
              
              
              
              —
              
              
              
              171,811
              
              
              
              —
              
              
              
              —
              
              
              
              172,215Common
      stock issued for put on equity line of credit on May 22,
    2007
              
              
              0.39
              
              
              
              119,800
              
              
              
              120
              
              
              
              —
              
              
              
              46,362
              
              
              
              —
              
              
              
              —
              
              
              
              46,482Common
      stock issued for put on equity line of credit on May 30,
    2007
              
              
              0.33
              
              
              
              80,996
              
              
              
              81
              
              
              
              —
              
              
              
              26,631
              
              
              
              —
              
              
              
              —
              
              
              
              26,712Common
      stock issued for put on equity line of credit on June 6,
    2007
              
              
              0.32
              
              
              
              54,700
              
              
              
              55
              
              
              
              —
              
              
              
              17,454
              
              
              
              —
              
              
              
              —
              
              
              
              17,509
 Common
      stock issued for put on equity line of credit on June 15,
    2007
              
              
              0.27
              
              
              
              94,500
              
              
              
              95
              
              
              
              —
              
              
              
              25,571
              
              
              
              —
              
              
              
              —
              
              
              
              25,666Common
      stock issued for put on equity line of credit on June 21,
    2007
              
              
              0.31
              
              
              
              12,500
              
              
              
              12
              
              
              
              —
              
              
              
              3,868
              
              
              
              —
              
              
              
              —
              
              
              
              3,880Fees
      paid on equity line of credit
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (46,641
              )
              
              
              —
              
              
              
              —
              
              
              
              (46,641
              )
 
  26
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
 Deficit
                AccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyWarrants
      issued with convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              260,718
              
              
              
              —
              
              
              
              —
              
              
              
              260,718Fair
      value of options issued to an officer
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,898
              
              
              
              —
              
              
              
              —
              
              
              
              8,898Common
      stock issued, previously paid for
              
              
              —
              
              
              
              2,597,524
              
              
              
              2,597
              
              
              
              (60,000
              )
              
              
              57,403
              
              
              
              —
              
              
              
              —
              
              
              
              —Fair
      value of options issued to  officers
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              20,574
              
              
              
              —
              
              
              
              —
              
              
              
              20,574Warrants
      issued with convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              267,930
              
              
              
              —
              
              
              
              —
              
              
              
              267,930Common
      stock issued for convertible debt on October 5, 2007
              
              
              0.53
              
              
              
              51,887
              
              
              
              52
              
              
              
              —
              
              
              
              27,448
              
              
              
              —
              
              
              
              —
              
              
              
              27,500
 Common
      stock issued for convertible debt on November 12, 2007
              
              
              0.37
              
              
              
              255,081
              
              
              
              255
              
              
              
              —
              
              
              
              94,125
              
              
              
              —
              
              
              
              —
              
              
              
              94,380
 
 
 
 27
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock issued for convertible debt on November 12, 2007
              
              
              0.53
              
              
              
              51,887
              
              
              
              52
              
              
              
              —
              
              
              
              27,448
              
              
              
              —
              
              
              
              —
              
              
              
              27,500Common
      stock issued for convertible debt on November 14, 2007
              
              
              0.34
              
              
              
              80,882
              
              
              
              81
              
              
              
              —
              
              
              
              27,419
              
              
              
              —
              
              
              
              —
              
              
              
              27,500Common
      stock issued for convertible debt on November 14, 2007
              
              
              0.37
              
              
              
              95,227
              
              
              
              95
              
              
              
              —
              
              
              
              35,105
              
              
              
              —
              
              
              
              —
              
              
              
              35,200Common
      stock issued for convertible debt on November 15, 2007
              
              
              0.37
              
              
              
              163,514
              
              
              
              164
              
              
              
              —
              
              
              
              60,336
              
              
              
              —
              
              
              
              —
              
              
              
              60,500Common
      stock issued for convertible debt on November 16, 2007
              
              
              0.37
              
              
              
              71,351
              
              
              
              71
              
              
              
              —
              
              
              
              26,329
              
              
              
              —
              
              
              
              —
              
              
              
              26,400Common
      stock issued for convertible debt on November 16, 2007
              
              
              0.34
              
              
              
              80,882
              
              
              
              81
              
              
              
              —
              
              
              
              27,419
              
              
              
              —
              
              
              
              —
              
              
              
              27,500Warrants
      issued with convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              158,652
              
              
              
              —
              
              
              
              —
              
              
              
              158,652
 
  28
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock to be issued for consulting services
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,000Common
      stock issued for convertible debt on December 28, 2007
              
              
              0.17
              
              
              
              1,060,000
              
              
              
              1,060
              
              
              
              —
              
              
              
              198,940
              
              
              
              —
              
              
              
              —
              
              
              
              200,000Fair
      value of options issued to an officer
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              21,818
              
              
              
              —
              
              
              
              —
              
              
              
              21,818Net
      loss for year ended December 31, 2007
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (6,262,743
              )
              
              
              (6,262,743
              )Balance,
      December 31, 2007
              
              
              
              
              
              
              46,470,413
              
              
              $
              46,471
              
              
              $
              4,000
              
              
              $
              32,280,083
              
              
              $
              —
              
              
              $
              (36,690,340
              )
              
              $
              (4,359,786
              )
 Fair
      value of warrants issued with convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              116,913
              
              
              
              —
              
              
              
              —
              
              
              
              116,913Common
      stock issued for convertible debt on January 31, 2008
              
              
              0.37
              
              
              
              118,918
              
              
              
              119
              
              
              
              —
              
              
              
              43,881
              
              
              
              —
              
              
              
              —
              
              
              
              44,000Common
      stock issued for convertible debt on January 31, 2008
              
              
              0.39
              
              
              
              279,232
              
              
              
              279
              
              
              
              —
              
              
              
              108,621
              
              
              
              —
              
              
              
              —
              
              
              
              108,900Common
      stock issued for convertible debt on March 10, 2008
              
              
              0.39
              
              
              
              442,820
              
              
              
              443
              
              
              
              —
              
              
              
              172,257
              
              
              
              —
              
              
              
              —
              
              
              
              172,700
 
  29
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
      Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock issued for convertible debt on March 10, 2008
              
              
              0.38
              
              
              
              5,450,848
              
              
              
              5,451
              
              
              
              —
              
              
              
              2,039,243
              
              
              
              —
              
              
              
              —
              
              
              
              2,044,694
 Common
      stock issued on March 10, 2008 for settlement of loan on January 31,
      2008
              
              
              0.37
              
              
              
              80,000
              
              
              
              80
              
              
              
              —
              
              
              
              29,603
              
              
              
              —
              
              
              
              —
              
              
              
              29,683Common
      stock issued on March 10, 2008 for settlement of payable on January 31,
      2008
              
              
              0.38
              
              
              
              1,891,048
              
              
              
              1,891
              
              
              
              —
              
              
              
              707,443
              
              
              
              —
              
              
              
              —
              
              
              
              709,334Common
      stock issued on March 10, 2008 for settlement of consulting services on
      December 13, 2007
              
              
              0.40
              
              
              
              10,000
              
              
              
              10
              
              
              
              (4,000
              )
              
              
              3,990
              
              
              
              —
              
              
              
              —
              
              
              
              —Common
      stock issued on March 10, 2008 for settlement of payable on February 1,
      2008
              
              
              0.37
              
              
              
              7,838
              
              
              
              8
              
              
              
              —
              
              
              
              2,892
              
              
              
              —
              
              
              
              —
              
              
              
              2,900Common
      stock to be issued for settlement of payable
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              25,375
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              25,375Common
      stock to be issued upon exercise of warrants on March 18,
    2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,000
 
 
 30
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock to be issued upon exercise of warrants on March 19,
    2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              50,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              50,000Common
      stock to be issued upon exercise of warrants on March 20,
    2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              50,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              50,000Common
      stock to be issued upon exercise of warrants on March 21,
    2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              50,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              50,000Common
      stock to be issued upon exercise of warrants on March 26,
    2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              15,130
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              15,130Common
      stock to be issued upon exercise of warrants on March 27,
    2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,700
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,700
 Common
      stock to be issued for notes converted on March 10, 2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              11,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              11,000Common
      stock to be issued for notes converted on March 17, 2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              82,500
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              82,500
 
 
 31
 
 SAVE
THE WORLD AIR, INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE ENTERPRISE)
 
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
 FROM
INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2008
  DeficitAccumulatedPrice
      per
              
              
              Common
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
              
              
              Deferred
              
              
              During
      the
                Development
              
              
              Total
                Stockholders’Share
              
              
              Shares
              
              
              Amount
              
              
              to
      be Issued
              
              
              Capital
              
              
              Compensation
              
              
              Stage
              
              
              DeficiencyCommon
      stock to be issued for notes converted on March 20, 2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              158,400
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              158,400Common
      stock to be issued for notes converted on March 21, 2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              11,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              11,000Fair
      value of options issued to an officer
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              21,818
              
              
              
              —
              
              
              
              —
              
              
              
              21,818Fair
      value of warrants issued with convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              96,883
              
              
              
              —
              
              
              
              —
              
              
              
              96,883Intrinsic
      value of beneficial conversion associated with convertible
      notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              117,739
              
              
              
              —
              
              
              
              —
              
              
              
              117,739Net
      loss for  the three months ended March 31, 2008
    2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2,283,847
              )
              
              
              (2,283,847
              )Balance,
      March 31, 2008
              
              
              
              
              
              
              54,751,117
              
              
              $
              54,752
              
              
              $
              459,105
              
              
              $
              35,741,366
              
              
              $
              —
              
              
              $
              (38,974,187
              )
              
              $
              (2,718,964
              )
 
 
 See notes
to condensed financial statements.
 
 32
  SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


THREE
MONTHS ENDED MARCH 31, 2008 AND 2007 AND FOR THE PERIOD


FEBRUARY 18, 1998 (DATE OF
INCEPTION) TO MARCH 31, 2008




CumulativeMarch
      31,
            
            
            March
      31,
            
            
            since2008
            
            
            2007
            
            
            inceptionCash
      flows from operating activitiesNet
      loss
            
            $
            (2,283,847
            )
            
            $
            (1,914,161
            )
            
            $
            (38,974,187
            )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
            )Stock
      based compensation expense
            
            
            21,818
            
            
            
            16,302
            
            
            
            2,943,890Issuance
      of common stock for services
            
            
            501,037
            
            
            
            —
            
            
            
            5,173,139Legal
      and interest expense converted into common stock
            
            
            928,237
            
            
            
            —
            
            
            
            928,237Issuance
      of common stock for payment of loan
            
            
            20,000
            
            
            
            —
            
            
            
            20,000Issuance
      of options for legal settlement
            
            
            —
            
            
            
            —
            
            
            
            31,500Issuance
      of warrants for legal settlement
            
            
            —
            
            
            
            —
            
            
            
            4,957Issuance
      of warrants for financing fees
            
            
            —
            
            
            
            47,104
            
            
            
            82,444Patent
      acquisition cost
            
            
            —
            
            
            
            —
            
            
            
            1,610,066Amortization
      of issuance costs and original issue debt
            
            
            471,643
            
            
            
            217,695
            
            
            
            4,844,544Amortization
      of deferred compensation
            
            
            —
            
            
            
            —
            
            
            
            3,060,744Loss
      on sale of equipment
            
            
            9,683
            
            
            
            —
            
            
            
            9,683Depreciation
            
            
            10,299
            
            
            
            53,832
            
            
            
            365,898Bad
      debt
            
            
            1,380
            
            
            
            —
            
            
            
            1,380Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            —
            
            
            
            —
            
            
            
            (1,380
            )Inventory
            
            
            —
            
            
            
            (4,409)
            
            
            
            (30,256
            )Prepaid
      expenses and other
            
            
            (2,148
            )
            
            
            (12,911)
            
            
            
            (22,700
            )Other
      assets
            
            
            —
            
            
            
            —
            
            
            
            (4,500
            )Accounts
      payable and accrued expenses
            
            
            (315,299
            )
            
            
            276,023
            
            
            
            3,108,476Net
      cash used in operating activities
            
            
            (637,197
            )
            
            
            (1,320,525
            )
            
            
            (17,360,273
            )Cash
      flows from investing activitiesPurchase
      of property and equipment
            
            
            —
            
            
            
            (38,937
            )
            
            
            (553,107
            )Proceeds
      from sale of equipment
            
            
            17,477
            
            
            
            —
            
            
            
            17,477Net
      cash used in investing activities
            
            
            17,477
            
            
            
            (38,937
            )
            
            
            (535,630
            )Cash
      flows from financing activitiesNet
      proceeds under equity line of credit
            
            
            —
            
            
            
            376,320
            
            
            
            1,262,386Increase
      (decrease) in payables to related parties and shareholder
            
            
            (19,113
            )
            
            
            —
            
            
            
            596,267Increase
      in convertible notes
            
            
            89,470
            
            
            
            —
            
            
            
            163,962Advances
      from founding executive officer
            
            
            —
            
            
            
            —
            
            
            
            517,208Net
      proceeds from issuance of convertible notes and warrants
            
            
            474,000
            
            
            
            850,000
            
            
            
            5,299,678Repayment
      of convertible notes
            
            
            
            
            
            
            (18,750)
            
            
            
            (226,250
            )Net
      proceeds from issuance of common stock and common stock
      issuable
            
            
            170,830
            
            
            
            —
            
            
            
            10,425,779Net
      cash provided by financing activities
            
            
            715,187
            
            
            
            1,207,570
            
            
            
            18,039,030Net
      increase (decrease) in cash
            
            
            95,467
            
            
            
            (151,892)
            
            
            
            143,127Cash, beginning of
      period
            
            
            47,660
            
            
            
            244,228
            
            
            
            —Cash, end of
      period
            
            $
            143,127
            
            
            $
            92,336
            
            
            $
            143,127




See notes
to condensed consolidated financial statements.





33





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) — Continued


THREE
MONTHS ENDED MARCH 31, 2008 AND 2007 AND FOR THE PERIOD FROM


INCEPTION
(FEBRUARY 18, 1998) TO MARCH 31, 2008







March
      31,2008
            
            March
      31,2007
            
            CumulativesinceinceptionSupplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
            
            $
            499
            
            
            $
            3,079
            
            
            $
            135,543Income
      taxes
            
            $
            —
            
            
            $
            800
            
            
            $
            4,282


Non-cash
      investing and financing activities


Acquisition
      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
            
            
            ---
            
            
            
            —
            
            
            
            113,981Cancellation
      of stock
            
            
            —
            
            
            
            —
            
            
            
            8,047Conversion
      of accounts payable and accrued expenses to common stock
      issued
            
            
            —
            
            
            
            —
            
            
            
            612,521Conversion
      of related party debt to convertible debentures
            
            
            —
            
            
            
            —
            
            
            
            45,000Conversion
      of convertible debentures to common stock
            
            
            1,951,212
            
            
            
            —
            
            
            
            4,924,626Write
      off of deferred compensation
            
            
            —
            
            
            
            —
            
            
            
            142,187Non-cash
      equity-warrant valuation and intrinsic value of beneficial conversion
      associated with convertible notes
            
            
            331,535
            
            
            
            566,248
            
            
            
            4,297,960






See notes
to condensed consolidated financial statements.


34







SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)








1.
Organization and basis of presentation





Basis
of presentation





The
accompanying interim condensed consolidated 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, 2008, the results of
operations and cash flows for the three months ended March 31, 2008 and
2007. The balance sheet as of December 31, 2007 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 condensed consolidated
financial statements are adequate to make the information presented therein not
misleading. For further information, refer to the condensed consolidated
financial statements and the notes thereto included in the Company’s Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2007, 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 condensed consolidated results of
operations for the three months ended March 31, 2008 are not necessarily
indicative of the results of operations to be expected for the full fiscal year
ending December 31, 2008.




Going
Concern




The
accompanying condensed consolidated 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 condensed consolidated financial statements,
the Company had a net loss of $2,283,847 and a negative cash flow from
operations of $637,197 for the three months ended March 31, 2008, and had a
working capital deficiency of $2,887,063 and a stockholders’ deficiency of
$2,718,964 at March 31, 2008. These factors raise substantial doubt about the
Company’s 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 condensed consolidated
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.




Description
of business





Save the
World Air, Inc. (the "Company") is a green technology company that leverages a
suite of patented, patent-pending and licensed intellectual properties related
to the treatment of fuels. These technologies utilize either magnetic or uniform
electrical fields to alter physical characteristics of fuels and are designed to
create a cleaner combustion. Cleaner combustion has been shown to improve
performance, enhance fuel economy and/or reduce harmful emissions in laboratory
testing.





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 purchase of the worldwide
exclusive manufacturing, marketing and distribution rights for the ZEFS
technology.





During
the past several years, the Company has been acquiring new technologies,
developing prototype products using the Company’s technologies and conducting
scientific tests regarding the technologies and prototype products. The
Company‘s ECO ChargRTM and MAG ChargRTM products, use fixed magnetic fields to
alter some physical properties of fuel, by incorporating our patented and
patent-pending ZEFS, MK IV technologies.  When fitted to an internal
combustion engine, these products are expected to increase power and improve
mileage and may also reduce carbon monoxide, hydrocarbons and nitrous oxide
emissions and to.  The Company also has developed certain products
incorporating its CAT-MATE technology, although at this time the Company does
not intend to devote significant effort to the commercialization of products
incorporating the CAT-MATE technology.




35




SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




The
Company has entered into two License Agreements with Temple University, one
covering Temple University’s current patent application concerning certain
electric field effects on gasoline, kerosene and diesel fuel particle size
distribution, and the other covering Temple University’s current patent
application concerning electric field effects on crude oil and edible oil
viscosity, and any and all United States and foreign patents issuing in respect
of the technologies described in such applications. Initially, the License
Agreements are exclusive and the territory licensed to the Company is worldwide.
Pursuant to the License Agreements, the Company will pay to Temple University
(i) license fees in the aggregate amount of $250,000, payable in three
installments of $100,000, the first installment of which was paid in March 2007,
and $75,000 on each of February 2, 2008, which has not been paid, and
February 2, 2009, respectively; and (ii) annual maintenance fees of
$125,000 annually commencing January 1, 2008, which has not been paid. In
addition, each License Agreement separately provides that the Company will pay
royalties to Temple University on net sales of products incorporating the
technology licensed under that License Agreement in an amount equal to 7% of the
first $20 million of net sales, 6% of the next $20 million of net
sales and 5% of net sales in excess of $40 million. Sales under the two
License Agreements are not aggregated for purposes of calculating the royalties
payable to Temple University. In addition, the Company has agreed to bear all
costs of obtaining and maintaining patents in any jurisdiction where the Company
directs Temple University to pursue a patent for either of the licensed
technologies. Should the Company not wish to pursue a patent in a particular
jurisdiction, that jurisdiction would not be included in the territory licensed
to the Company.




The
Company is in default in connection with its payment obligations under the
License Agreements.  Nonetheless, the Company has not received any
written notice from Temple University of a material breach relating to required
payments under the License Agreements.  Any such notice must provide
the Company with 60 days’ notice to cure the material breach.  Should
the Company receive such notice, the Company’s failure to cure could result in a
termination of the License Agreements. Under the License Agreements the Company
must pay a penalty equal to 1% per month of the amounts due and unpaid under the
License Agreements.




The
Company has also entered into a research and development agreement (R&D
Agreement) with Temple University to conduct further research on the ELEKTRA
technology. Under the R&D Agreement Temple University will conduct a
24-month research project towards expanding the scope of, and developing
products utilizing, the technologies covered under the License Agreements,
including design and manufacture of prototypes utilizing electric fields to
improve diesel, gasoline and kerosene fuel injection in engines using such fuels
and a device utilizing a magnetic field to reduce crude oil viscosity for crude
oil (paraffin and mixed base) and edible oil flow in pipelines. Pursuant to the
R&D Agreement, the Company will make payments to Temple University in the
aggregate amount of $500,000, payable in eight non-refundable installments
commencing with $123,750, which was paid in March 2007, and seven payments
of $53,750 every three months thereafter until paid in full. The payments of
$53,750 due in June, September, December 2007 and March 2008 have not been
paid.  The Company is in default under the R&D Agreement, however,
the Company has not received any notice of default from Temple University. If
the research project yields results within the scope of the technologies
licensed pursuant to the License Agreements, those results will be deemed
included as rights licensed to the Company pursuant to the License Agreements.
If the research project yields results outside of the scope of the technologies
covered by the License Agreements, the Company has a six-month right of first
negotiation to enter into a new worldwide, exclusive license agreement with
Temple University for the intellectual property covered by those
results.





The
accompanying condensed consolidated financial statements of Save the World Air,
Inc. and Subsidiary include the accounts of Save the World Air, Inc. and its
wholly-owned subsidiary STWA Asia Pte. Limited, incorporated on January 17,
2006. As of March 31, 2008, the subsidiary held $2,244 in cash and
had operating expenses of $4,210. Inter-company transactions and balances
have been eliminated in consolidation





2.
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.





The
Company’s focus is on product development and marketing of proprietary devices
that are designed to reduce harmful emissions, and improve fuel efficiency and
engine performance on equipment and vehicles driven by internal combustion
engines and has not yet generated meaningful revenues. The technologies are
called “ZEFS”, “MK IV”, “ELEKTRA” and “CAT-MATE”. The Company is currently
marketing its ECO and MAG ChargR products incorporating ZEFS and MK IV
technologies in the United States and certain countries in Asia; and the Company
is in the early stages of developing ELEKTRA products. Expenses have been funded
primarily through the sale of company stock, convertible notes and the exercise
of warrants.





The
Company has taken actions to secure the intellectual property rights to the
ZEFS, MK IV and CAT-MATE devices and is the worldwide exclusive licensee for
patent pending technologies associated with the development of
ELEKTRA.





36





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED




3.
Significant Accounting Policies





Revenue
Recognition





The
Company has adopted Staff Accounting Bulletin 104, “Revenue Recognition” and
therefore recognizes revenue based upon meeting four criteria:




•
            Persuasive
      evidence of an arrangement exists;•
            Delivery
      has Delivery has occurred or services rendered;•
            The
      seller’s price to the buyer is fixed or determinable;
  and•
            Collectability
      is reasonably assured.





The
Company contract manufactures fixed magnetic field products and sells them to
various original equipment manufacturers in the motor vehicle and small utility
motor markets. The Company negotiates an initial contract with the customer
fixing the terms of the sale and then receives a letter of credit or full
payment in advance of shipment. Upon shipment, the Company recognizes the
revenue associated with the sale of the products to the customer.





Inventories





Inventories
are valued at the lower of cost (first-in, first-out) or market and consist of
finished goods.





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 the
Company’s financial statements. Actual results could differ from those
estimates.








Stock-based
compensation





On
January 1, 2006, the Company adopted Statements of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”)
which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors based on estimated
fair values. SFAS 123(R) supersedes the Company’s previous accounting under
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(“SAB107”) relating to SFAS 123(R).  The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123(R).





The
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of January 1,
2006, the first day of the Company’s fiscal year 2006. The Company’s financial
statements as of and for the three months ended March 31, 2008 reflect the
impact of SFAS 123(R). In accordance with the modified prospective transition
method, the Company’s financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS
123(R).  Stock-based compensation expense recognized under SFAS 123(R)
for employee and directors for the three months ended March 31, 2008 and
2007 was $21,818 and $16,302 respectively.





Prior to
the adoption of SFAS 123(R), the Company accounted for stock-based awards to
employees and directors using the intrinsic value method in accordance with APB
25. Under the intrinsic value method, the Company recognized share-based
compensation equal to the award’s intrinsic value at the time of grant over the
requisite service periods using the straight-line method. Forfeitures were
recognized as incurred.





The
Company’s determination of fair value of share-based payment awards to employees
and directors on the date of grant using the Black-Scholes model, which is
affected by the Company’s stock price as well as assumptions regarding a number
of highly complex and subjective variables. These variables include, but are not
limited to our expected stock price volatility over the term of the awards, and
actual and projected employee stock option exercise behaviors





The
Company accounts for stock option and warrant grants issued to non-employees for
goods and services using the guidance of SFAS No. 123 and Emerging Issues
Task Force (“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.





37





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




4.
Recent Accounting Pronouncements





Adopted Statements





Statement
No. 157





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a
formal framework for measuring fair value under Generally Accepted Accounting
Principles (“GAAP”). SFAS No. 157 defines and codifies the many definitions of
fair value included among various other authoritative literature, clarifies and,
in some instances, expands on the guidance for implementing fair value
measurements, and increases the level of disclosure required for fair value
measurements. Although SFAS No. 157 applies to and amends the provisions of
existing FASB and American Institute of Certified Public Accountants (“AICPA”)
pronouncements, it does not, of itself, require any new fair value measurements,
nor does it establish valuation standards. SFAS No. 157 applies to all other
accounting pronouncements requiring or permitting fair value measurements,
except for: SFAS No. 123R, share-based payment and related pronouncements, the
practicability exceptions to fair value determinations allowed by various other
authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9
that deal with software revenue recognition. SFAS No. 157 was effective January
1, 2008.





Statement
No. 159





In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”), which provides companies with an option to report
selected financial assets and liabilities at fair value. SFAS No. 159’s
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. Generally accepted accounting principles have required
different measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. SFAS No. 159 helps to mitigate this
type of accounting-induced volatility by enabling companies to report related
assets and liabilities at fair value, which would likely reduce the need for
companies to comply with detailed rules for hedge accounting. SFAS No. 159
also establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 requires companies to
provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the company’s
choice to use fair value on its earnings. SFAS No. 159 also requires companies
to display the fair value of those assets and liabilities for which the company
has chosen to use fair value on the face of the balance sheet. SFAS No. 159 does
not eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included in
SFAS No. 157 and SFAS No. 107. SFAS No. 159 was effective January 1,
2008.





The above statements were adopted
without effect in the reporting period.





Recently
Issued




SFAS
No. 141 (R) and SFAS No. 160




In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS
No. 160, Non-controlling Interests in Condensed consolidated Financial
Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree at their fair values on the acquisition date, with goodwill
being the excess value over the net identifiable assets acquired. SFAS
No. 160 clarifies that a non-controlling interest in a subsidiary should be
reported as equity in the condensed consolidated financial statement. The
calculation of earnings per share will continue to be based on income amounts
attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. We have not yet determined the
effect on our financial statements, if any, upon adoption of SFAS No. 141
(R) or SFAS No. 160.





FAS
No. 161





In March
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“FAS 161”).  The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows.  FAS 161 is effective for the Company in
fiscal 2010.




Management
does not believe that there are any recently-issued, but not yet effective
accounting pronouncements, which could have a material effect on the
accompanying condensed consolidated financial statements .





38





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




5.
Net loss per share





Basic
earnings (loss) per share is computed by dividing net income
(loss) 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 may 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, 2008 and 2007, the dilutive impact of
outstanding stock options of 2,515,396 and 4,019,559 respectively, and
outstanding warrants of 15,608,024 and 21,409,812 have been excluded because
their impact on the loss per share is anti-dilutive.





6.
Certain relationships and related transactions





Loans
from related parties





In
May of 2007, a former officer and director of the Company loaned $31,404 to pay
a Company obligation and in August 2007, the same party loaned $50,000 to the
Company so that it could pay certain operating expenses. These amounts are
unsecured, bear interest at 6% per annum and are due on demand.  At
March 31, 2008, the balance of these loans including interest was
$84,817.




Lease
agreement with related party




During
2003, the Company entered into a sublease agreement with Scottish Glen Golf
Company, Inc. (SGGC) to lease office space in North Hollywood, California for
its principal executive offices.  Bruce McKinnon, the former Chief
Executive Officer and former Director of the Company, is a beneficial owner of
the lessor.




In August
2005, the Company amended this sublease agreement. The original lease term was
from November 1, 2003 through October 16, 2005 and carried an option
to renew for two additional years with a 10 percent increase in the rental
rate. Monthly rent under this lease is $3,740 per month under this
lease.  The Company exercised its option to renew the lease through
October 15, 2007.




In
January 2006, the Company further amended this sublease agreement, as a result
of taking more space and obtaining expanded support services. The term of the
sublease was amended to July 31, 2007 and carries an option to renew for
two additional years with a 10 percent increase in the rental rate. Monthly
rent is $6,208 per month under this amended sublease agreement.
Additionally, the Company began leasing two additional office
spaces for $964 per month beginning July 2006 on a month-to-month
basis.  The Company did not exercise its option to renew this
sublease.




On July
12, 2007, SGGC presented to the Company a Three-Day Notice to Pay or Quit,
demanding payment of unpaid rent, additional rent and penalties.  On
July 19, 2007, SGGC sued the Company in Los Angeles Superior Court, alleging
unlawful detainer by the Company of its then-leased corporate offices at 5125
Lankershim Boulevard, North Hollywood, California, and failure to pay past due
rent and penalties in the aggregate amount of $104,413.  The Company
vacated the premised on July 25, 2007. (See Note 12–Commitments and
contingencies-Legal matters, Litigation Involving Sublessor of Former Corporate
Offices).





Effective
April 30, 2008 the Company and Scottish Glen Golf Company, Inc., dba KZG settled
their pending litigation for $51,000 for which the Company has accrued at March
31, 2008.   (See Note 13, “Subsequent Events”).




39





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




Investments
from related parties




In June
2007, the Company received $100,000 proceeds for investment in the Spring
Offering, from an investor who is more than a 5% beneficial owner of
STWA.  (See Note 8-Convertible notes and warrants).




In
December 2007, the Company received $200,000 proceeds for investment in the Fall
Offering from a Director  who is more than a 5% beneficial owner of
STWA.  (See Note 8-Convertible notes and warrants).




Accounts
Payable to related parties




As
of  March 31, 2008, the Company had accounts payable to related
parties in the amount of $344,587, which was composed of $208,875 in unpaid
Directors Fees,  $32,643 in unreimbursed expenses incurred by Officers
and Directors  and $103,069 accrual for past due rent and contested
penalties payable to a company beneficially owned by a former Chief Executive
Officer and Director. (See Note 12, Litigation Matters and
Leases).




Marketing
and promotional services agreement with related party




In July
2006, the Company entered into an agreement with SS Sales and Marketing Group
(“SS Sales”), to provide exclusive marketing and promotional services in the
western United States and western Canada  (the “Territory”) for the
Company’s products. SS Sales will also provide advice, assistance and
information on marketing the Company’s products in the automotive after-market,
and will seek to recruit and establish a market with distributors, wholesalers
and others. SS Sales will be paid a commission equal to 5% of the gross amount
actually collected on contracts the Company entered into during the term of the
agreement for existing or future customers introduced by SS Sales in the
Territory. The agreement has a term of five years unless sooner terminated by
either party on 30 days’ notice. In the event of termination, SS Sales will be
entitled to receive all commissions payable through the date of termination. No
amount was due or paid under this agreement as of March 31, 2008.  SS
Sales is owned by Nathan Shelton, who has served as one of the directors of the
Company since February 12, 2007.





7.
Equity arrangement





In
September 2006, the Company entered into what is sometimes termed an equity
arrangement with an investment banking firm. Under the arrangement the Company
may sell (put) shares of common stock from time to time over a 36-month period,
at a purchase price calculated at 97% of the lowest best closing bid for the
Company’s common stock for the five trading days following the put notice. The
Company may draw up to $10,000,000. Because the price of the common stock
fluctuates and the number of shares of common stock that the Company may issue
when the Company exercises the put will vary, the Company does not know how many
shares, if any, will actually issue under the put.  On October 6,
2006, the Company filed a Registration Statement which was effective October 30,
2006 which registered and made available 7,000,000 shares of common stock for
possible future draws under the arrangement.





As of
March 31, 2008 the Company has drawn down $1,372,150 ($1,262,378 net of
closing costs) of this commitment and issued 2,367,905 shares of common stock,
leaving 4,632,095 shares of common stock still available under the equity
arrangement.





8.  Convertible
Debentures





Morale Orchards,
LLC





On
December 5, 2006, the Company entered into a Note Purchase Agreement (the “Note
Purchase Agreement”) with Morale, pursuant to which Morale purchased from the
Company two (2) Convertible Promissory Notes, one dated December 5, 2006 (the
“2006 Morale Note”), in the principal face amount of $612,500, and another,
dated January 10, 2007 (the “2007 Morale Note”), also in the principal face
amount of $612,500 (collectively, the “Morale Notes”), and two (2) warrants, one
accompanying the 2006 Morale Note, and the other accompanying the 2007 Morale
Note.  Each warrant provides Morale the right to purchase shares of
common stock of the Company. The aggregate purchase price for the Morale Notes
and Morale Warrants was $1,000,000, of which $500,000 was paid by Morale and
received by the Company on or about December 5, 2006, and of which $500,000 was
paid by Morale and received by the Company on or about January 10,
2007;




The 2006
Morale Note is convertible at the rate of $0.85 per share into 720,588 shares of
the Company’s common stock, and the 2007 Morale Note is convertible at the rate
of $0.70 per share into 875,000 shares of the Company’s common
stock;




The 2006
Morale Warrant is exercisable at $0.85 per share for 360,294 shares of the
Company’s common stock, and the 2007 Morale Warrant is exercisable at $.70 per
share for 437,500 shares of the Company’s common stock;





40





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




The Note
Purchase Agreement provides, in pertinent part, that in the event the Company
has not repaid each of the Morale Notes in full by the anniversary date of their
issuances, the principal balances of each note shall be increased by ten percent
(10%) and the Company shall pay interest at two and one-half percent (21⁄2%) per
month, compounded daily, for each month until each of the Morale Notes is paid
in full.





Morale
has piggy-back registration rights pursuant to which Morale may require the
Company to include the shares of the Company’s common stock issuable upon
conversion of the Morale Notes and exercise of the Morale Warrants in certain
future registration statements the Company may elect to file.





The
aggregate value of the Morale Warrants issued in connection with the January 10,
2007 purchase were valued at $118,955 using the Black-Scholes option valuation
model with the following assumptions; risk-free interest rate of 4.68%; dividend
yield of 0%; volatility factors of the expected market price of common stock of
245%; and an expected life of five years (statutory term) and vest over 180
days.  The Company also determined that the notes contained a
beneficial conversion feature of $231,455.  The value of the Morale
Warrants of $118,955, the conversion option of $231,455 and the transaction fees
of $112,500 are considered as debt discount and are being amortized over the
life of the Note





As of
January 31, 2008, both the 2006 and 2007 Morale Notes were in default, and
neither of the Morale Notes nor the Morale Warrants have been converted into
shares of common stock of the Company. The amount due and owing as of January
31, 2008, under the 2006 Morale Note is $689,327. The amount due and owing as of
January 31, 2008, under the 2007 Morale Note is $672,885.




The
Company borrowed the principal sum of $20,000 from Morale on October 30, 2007,
at an interest rate of ten percent (10%) per annum. Principal and accrued
interest under the Morale Note is due on demand, and no payments there under
have been made by the Company.




Morale is
beneficially owned by Jacqueline Alexander, who is the wife of Leodis Matthews,
who through his law firm, the Matthews Law Firm, serves as outside legal counsel
to the Company.  The Company is indebted to the Matthews Law Firm for
unpaid legal fees and costs through January 31, 2008, in the aggregate amount of
$472,762.




The
Company, Morale and the Matthews Law Firm now desire to modify the terms and
provisions of, and to provide for the satisfaction of the Company’s obligations
under, the Morale Notes, the Additional Morale Note and the Matthews Law Firm
Debt, pursuant to the terms and conditions set forth in this Modification and
Satisfaction Agreement.




The
Company, Morale and the Matthew Law Firm agreed to the following:




1.Waiver of
Interest.




(i)
              Morale
      agrees to forgive and waive any and all accrued interest on the Morale
      Notes from and after January 31,
2008;
  (ii)
              Morale
      agrees to forgive and waive any and all accrued interest due on the
      Additional Morale Note from the date of its issuance; and the Matthews Law
      Firm agrees to forgive any and all interest which may have accrued on the
      Matthews Law Firm Debt.


2.    Cancellation of Notes, Debt and
Obligations.  Upon the execution of this Modification and
Satisfaction Agreement, the 2006 Morale Note, the 2007 Morale Note, the
Additional Morale Note, the Unpaid 2006 Morale Note Debt, the Unpaid 2007 Morale
Note Debt, the Unpaid Additional Morale Note Debt and the Matthews Law Firm
Debt, shall all be cancelled, be deemed satisfied in full and be of no further
force or effect, effective January 31, 2008.




3.No
Registration Rights.  Upon execution hereof, the Morale
Registration Rights shall be cancelled and be of no further force or
effect.




4.Issuance of
Shares.  In consideration of this Modification and Satisfaction
Agreement, including the waivers and cancellations as set forth in paragraphs 1
and 2, above, upon execution hereof, and concurrently with the waivers and
cancellations provided hereunder, the Company shall issue a total of 7,421,896
shares of its common stock to Morale and the Matthews Law Firm, allocable as
follows:  (i) 2,759,308 shares shall be issued to Morale arising out
of and in exchange for cancellation of the 2006 Morale Note and the Unpaid 2006
Morale Note Debt; (ii) 2,691,540 shares shall be issued to Morale arising out of
and in exchange for cancellation of the 2007 Morale Note and the Unpaid 2007
Morale Note Debt; (iii) 80,000 shares shall be issued to Morale arising out of
and in exchange for cancellation of the Additional Morale Note and the Unpaid
Additional Morale Note Debt; and (iv) 1,891,048 shares shall be issued to the
Matthews Law Firm arising out of and in exchange for cancellation of the
Matthews Law Firm Debt.  The Company shall not be required to, and
shall not, file a Registration Statement with the Securities and Exchange
Commission or any state securities agency to register or qualify the shares of
common stock of the Company issuable to Morale and the Matthews Law Firm
hereunder, and all such shares when issued shall be deemed restrictive
securities and bear appropriate legends.




5.Morale
Warrants.  The terms and conditions of the Morale Warrants, to
the extent not expressly amended in this Modification and Satisfaction
Agreement, shall remain in full force and effect.




41




SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




On March
10, 2008, 80,000 shares of the Company’s common stock were issued to Morale
Orchards, LLP, in cancellation of a note payable in the amount of $20,000 as
part of the Modification Agreement entered into on January 31, 2008 between the
Company and Morale Orchards, LLP and Matthews & Partners.




On March
10, 2008, 5,450,848 shares of the Company’s common stock were issued to Morale
Orchards, LLP, in conversion of the Convertible Notes issued December 5, 2006
and January 10, 2007 in the amount of $1,362,712 as part of the Modification
Agreement entered into on January 31, 2008 between the Company and Morale
Orchards, LLP and Matthews & Partners.




On March
10, 2008, 1,891,048 shares of the Company’s common stock were issued to Leodis
C. Matthews, APC, in exchange for accrued professional fees in the amount of
$472,762 as part of the Modification Agreement entered into on January 31, 2008
between the Company and Morale Orchards, LLP and Matthews &
Partners.





As a
result of the debt cancelled and shares of common stock issued in connection
with the Modification Agreement, the Company incurred additional non-cash
interest expense of $691,665 and non-cash legal expense of $236,572 which was
recorded in the first quarter of 2008.




2007 PIPE
Offering.  During the year ended December 31, 2007, the Company
conducted an offering (the “2007 PIPE Offering”), through Spencer Clarke LLC, as
exclusive placement agent, of up to $2,000,000 principal amount of its 10%
convertible notes (the “2007 PIPE Notes”).  Interest on the 2007 PIPE
Notes, at a rate of 10% per annum, is payable quarterly.  The Notes
are due nine months from date of issuance.  The 2007 PIPE Notes are
convertible into shares of common stock at an initial conversion price of $0.70
per share (the “Conversion Shares”).  There is no reset to the
conversion price for any beneficial conversion feature.




The
Company has the right to redeem any or all of the outstanding 2007 PIPE Notes in
its sole discretion anytime after the termination of the 2007 PIPE Offering and
prior to the maturity date of the 2007 PIPE Notes. The redemption price shall be
the face amount of the redeemed 2007 PIPE Notes plus accrued and unpaid interest
thereon.  Subject to the following sentence, at any time prior to the
maturity date of the 2007 PIPE Notes, for each additional $1,000,000 of gross
proceeds raised from one or more offerings of the Company’s equity or
quasi-equity securities, the Company shall redeem 2007 PIPE Notes with a minimum
face value of $500,000 together with accrued and unpaid interest, until the
entire outstanding 2007 PIPE Note is redeemed. Certain financings that the
Company may conduct outside of North America are exempt from this provision to
redeem the 2007 PIPE Notes in whole or in part.




Investors
in the 2007 PIPE Offering also received a warrant (the “2007 PIPE
Warrant”), entitling the holder to purchase a number of shares of the Company’s
common stock equal to 150% of the number of shares of common stock into which
the 2007 PIPE Notes are convertible (the “Warrant Shares”). The 2007 PIPE
Warrant will be exercisable on a cash basis only and will have registration
rights.  The 2007 PIPE Warrant is exercisable at an initial price of
$1.00 per share, and is exercisable immediately upon issuance and for a period
of three years from the date of issuance.





Promptly,
but no later than 90 days following the closing date of the 2007 PIPE Offering,
the Company is required to file a Registration Statement with the SEC to
register the Conversion Shares and the Warrant Shares. The Company shall use its
best efforts to ensure that such Registration Statement is declared effective
within 120 days after filing




Pursuant
to the terms of the PIPE Notes, if a Registration Statement is not filed on
the 91st day following the closing date, (i) the interest rate on the PIPE Notes
increased from 10% to 18% per annum until the event of default is cured and (ii)
the holders of the PIPE Notes became entitled to receive additional warrants in
an amount equal to 25% of the PIPE Warrants originally issued, for each 60-day
period that the Company remains in default.




During
the year ended December 31, 2007, the Company issued $400,000 of the PIPE Notes
which could be converted into 571,429 shares of the Company’s common stock and
2007 PIPE Warrants to purchase 857,144 shares of the Company’s common stock.
These warrants expire March 1, March 30 and April 2, 2010 and are exercisable at
a price of $1.00 per share. The Company had related transaction fees of $48,000,
resulting in net proceeds to the Company of $352,000. In addition to the
transaction fees, warrants to purchase 57,143 shares of the Company’s common
stock were issued to Spencer Clarke LLC, the Company’s exclusive placement agent
for the 2007 PIPE Offering. These warrants expire March 1, March 30 and April 2,
2012 and are exercisable at a price of $0.70 per share.




The
aggregate value of the 2007 PIPE Warrants issued in connection with this
offering and the warrants issued to the placement agent were valued at $256,533
using the Black-Scholes option valuation model with the following assumptions:
risk-free interest rate of 4.40% to 5.16%; dividend yield of 0%; volatility
factors of the expected market price of common stock of 100.28% to 114.98%; and
an expected life of two years (statutory term). The Company also determined that
the notes contained a beneficial conversion feature of $62,857.





42





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




The
Company was unable to meet its obligations to file the Registration Statement
required under the terms of the 2007 PIPE Offering in a timely manner. In early
July 2007, the Company began discussions with Spencer Clarke, acting on behalf
of the holders of the PIPE Notes and PIPE Warrants, for an extension of time to
file the Registration Statement. Notwithstanding such discussions, Spencer
Clarke issued a Notice of Default dated August 1, 2007 (the "Notice") to the
Company for its failure to file the Registration Statement in a timely
manner.





On August
29, 2007, the Company entered into a Modification Agreement with the 2007 PIPE
note holders. The Modification Agreement was entered into as a result of
negotiations between the Company and Spencer Clarke, LLC ("Spencer Clarke"), the
Company's exclusive placement agent for the 2007 PIPE Offering, after the
Company failed to file with the Securities and Exchange Commission (the "SEC")
in a timely manner a Registration Statement to register the shares of the
Company's common stock into which the PIPE Notes are convertible and for which
the PIPE Warrants may be exercised.




Pursuant
to the Modification Agreement, the parties have agreed as follows:




●
            Promptly,
      but no later than November 30, 2007 (instead of on or before July 2,
      2007), the Company shall file the Registration Statement with the SEC to
      register the Conversion Shares and the Warrant Shares.●
            Effective
      August 1, 2007, the interest rate on the PIPE Notes shall be increased
      from 10% per annum to 18% per annum until such time as the Registration
      Statement is declared effective by the SEC.●
            The
      price at which the PIPE Notes may be converted into Conversion Shares (the
      "Conversion Price") shall be reduced from $0.70 to $0.45 per
      share.●
            Each
      Investor shall receive, for no additional consideration, additional
      warrants ("Additional Warrants") in an amount equal to an additional 50%
      of the PIPE Warrants originally issued pursuant to the terms of the 2007
      PIPE Offering. These Additional Warrants total 428,575 and shall have the
      same registration rights as are described in the Private Placement
      Memorandum dated January 12, 2007 (the "Offering Memorandum") used in
      connection with the 2007 PIPE Offering applicable to the PIPE Warrants;
      shall be exercisable immediately upon issuance; shall remain exercisable
      for a period of five years from the date of the Modification Agreement, on
      a cash basis only, at an initial exercise price of $0.45 per share; and
      shall, in all other respects, have the same terms and conditions, and be
      in the same form, as the PIPE Warrants.●
            If
      the Company does not file the Registration Statement with the SEC by
      November 30, 2007, each Investor shall receive, for no additional
      consideration, warrants ("Delay Warrants") in an amount equal to an
      additional 50% of the PIPE Warrants originally issued pursuant to the
      terms of the Offering Memorandum. The Delay Warrants shall have the same
      registration rights as are described in the Offering Memorandum applicable
      to the PIPE Warrants; shall be exercisable immediately upon issuance;
      shall remain exercisable for a period of five years from the date of this
      Agreement, on a cash basis only, at an initial exercise price of $0.45 per
      share; and shall, in all other respects, have the same terms and
      conditions, and be in the same form, as the PIPE
  Warrants.




The terms
and conditions of the Offering Memorandum, the PIPE Notes and the PIPE Warrants,
to the extent not expressly amended in the Modification Agreement, remain in
full force and effect. The issuance of the Additional Warrants (“Delay
Warrants”), if any, and the reduction of the Conversion Price of the PIPE Notes,
has the potential to dilute the percentage ownership interest of the Company's
existing shareholders.




The
aggregate value of the 2007 PIPE Warrants issued in connection with this
Modification Agreement were valued at $138,107 using the Black-Scholes valuation
model with the following assumptions: risk-free interest rate of 4.43%; dividend
yield of 0%; volatility factors of the expected market price of common stock of
113.55%; and an expected life of two years (statutory term).




On
November 30, 2007, the Company and the Investors entered into the Second
Modification Agreement and pursuant to this agreement have agreed as
follows:




●
            The
      Investors have agreed to forgive all accrued interest on their PIPE Notes,
      from the date of issuance thereof through December 14,
      2007.●
            On
      December 14, 2007, the Company agreed to pay all Investors 50% of the
      principal amount of their original PIPE Notes which equals a total cash
      repayment of $200,000.  Additionally, in repayment of the other
      50% of the principal amount of the original PIPE Notes, the Company, on
      December 14, 2007, agreed to issue to Investors a total of 1,060,000
      shares of the Company’s common stock (the “Conversion
      Shares”).●
            Concurrently
      with the cash payment and the issuance of the Conversion Shares as noted
      in paragraph 2 above, the Investors agreed to deliver to the Company the
      original of the PIPE Notes, which will be marked and deemed cancelled and
      of no further force or
effect.







43




SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ETERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




●
            In
      further consideration of the above terms and conditions, the Investors
      have agreed that the Company shall not be required to, and shall not, file
      a Registration Statement with the Securities and Exchange Commission or
      any state securities agency to register or qualify the PIPE Notes, the
      Conversion Shares, the PIPE Warrants, or any shares issuable pursuant to
      the PIPE Warrants (the Warrant Shares”).  The Conversion Shares
      and Warrant Shares when issued will be deemed restricted securities and
      bear appropriate legends.●
            The
      terms and conditions of the PIPE Warrants, to the extent not expressly
      amended in the Second Modification Agreement, shall remain in full force
      and effect in furtherance of the terms and conditions set forth in the
      Modification Agreement.




Payment
of $200,000 was made by the Company in accordance with the Second Modification
Agreement, the Original Notes were surrendered by the Investors and 1,060,000
shares of common stock were issued to the Investors on December 27,
2007.  Included in interest expense is the excess of the cost to
settle the obligation over the carrying value at the settlement date totaling
$222,368.





The
aggregate value of the 2007 PIPE warrants in connection with the Second
Modification Agreement were valued at $116,913 using the Black-Scholes valuation
model with the following assumptions: risk-free interest rate of 4.39%; dividend
yield of 0%; volatility factors of the expected market price of common stock of
116.75%; and an expected life of five years (statutory term).  The
Company recorded and issued these warrants in January 2008.




2007 Spring
Offering. From
June 13, 2007 through June 26, 2007, the Company conducted a private
offering (the “Spring 2007 Offering”) of up to $550,000 aggregate face amount of
its convertible notes (the “Spring 2007 Notes”) with a small number of
accredited investors. Of this amount, $451,000 aggregate face amount of the
Spring 2007 Notes were sold for an aggregate purchase price of $410,000 net
proceeds. Therefore, while the stated interest rate on the Spring 2007 Notes is
0%, the implied interest rate on the Spring 2007 Notes is 10%. The Spring 2007
Notes mature on the first anniversary of their date of issuance. The Spring 2007
Notes are convertible, at the option of the noteholders, into shares of common
stock of the Company (the “Conversion Shares”) at an initial conversion price
equal to the average of the closing bid price of the Company’s common stock for
the five trading days preceding the closing dates of the Spring 2007 Offering
(the “Conversion Prices”). On the first closing, 1,002,941 Conversion Shares are
issuable at Conversion Price of $0.34 per share. On the second closing,
207,548 conversion shares are issuable at a conversion price of $0.53 per
share. The per share price of the Company’s common stock on the Pink Sheets
during this period ranged from a low bid price (intraday) of $0.35 to a high bid
price (intraday) of $0.59.




Each of
the investors in the Spring 2007 Offering also received a warrant (the
“Spring 2007 Warrants”), entitling the holder to purchase a number of shares of
the Company’s common stock equal to 50% of the number of shares of common stock
into which the Spring 2007 Notes are convertible (the “Warrant Shares”). Each
Spring 2007 Warrant is exercisable on a cash basis only at an initial price of
$0.50 per share, and is exercisable immediately upon issuance and for a period
of two years from the date of issuance. A total of 605,242 Warrant Shares were
issued.  Investors converted $110,000 of the Convertible Notes into
265,538 shares of the Company’s common stock during October and November
2007.




The
aggregate value of the Spring 2007 Offering Warrants issued in connection with
the June 13, 2007 closing were valued at $59, 296 using the Black-Scholes option
valuation model with the following assumptions; risk-free interest rate of
5.11%; dividend yield of 0%; volatility factors of the expected market price of
common stock of 113.56%; and an expected life of two years (statutory term) and
vest immediately upon issuance.  The Company also determined that the
notes contained a beneficial conversion feature of $119,472.  The
value of the Spring 2007 Offering Warrants of $59,296, the conversion option of
$119,472, and the transaction fees of $31,000 are considered as debt discount
and are being amortized over the life of the Note.




The
aggregate value of the Spring 2007 Offering Warrants issued in connection with
the June 26, 2007 closing were valued at $19, 580 using the Black-Scholes option
valuation model with the following assumptions; risk-free interest rate of
5.11%; dividend yield of 0%; volatility factors of the expected market price of
common stock of 117.65%; and an expected life of two years (statutory term) and
vest immediately upon issuance.  The Company also determined that the
notes contained a beneficial conversion feature of $21,655.  The value
of the Spring 2007 Offering Warrants of $19,580, the conversion option of
$21,655 and the transaction fees of $112,500 are considered as debt discount and
are being amortized over the life of the Note.




2007 Summer
Offering.From August 8, 2007
through September 27, 2007, the Company conducted a private offering (the
"Summer 2007 Offering") of up to $330,000 aggregate face amount of its
convertible notes (the "Summer 2007 Notes") with a small number of accredited
investors. Of this amount, $309,980 aggregate face amount of the Summer 2007
Notes were sold for an aggregate purchase price of $281,800 net proceeds. While
the stated interest rate on the Summer 2007 Notes is 0%, the implied interest
rate on the Summer 2007 Notes is 10%. The Summer 2007 Notes mature on the first
anniversary of their date of issuance. The Summer 2007 Notes are convertible, at
the option of the noteholder, into shares of common stock of the Company (the
"Conversion Shares") at a conversion price equal to the average of the closing
bid price of the Company's common stock for the five trading days preceding the
closing date of the Summer 2007 Offering (the "Conversion Prices"). Up to
837,784 Conversion Shares are issuable at a Conversion Price of $0.37 per
share.




44


SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ETERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




Each of
the investors in the Summer 2007 Offering also received a warrant (the
"Summer 2007 Warrants"), entitling the holder to purchase a number of shares of
the Company's common stock equal to 50% of the number of shares of common stock
into which the Summer 2007 Notes are convertible (the "Warrant Shares"). Each
Summer 2007 Warrant is exercisable on a cash basis only at a price of $0.50 per
share, and is exercisable for a period of two years from the date of issuance. A
total of 418,892 Warrant Shares were issued. In November 2007, Investors
converted $216,480 of the Convertible Notes into 585,173 shares of the Company’s
common stock and in January 2008, Investors converted $44,000 of the Convertible
Notes into 118,918 shares of the Company’s common stock.




The
aggregate value of the Summer 2007 Offering Warrants issued in connection with
the September 28, 2007 closing were valued at $60,678 using the Black-Scholes
option valuation model with the following assumptions; risk-free interest rate
of 4.87%; dividend yield of 0%; volatility factors of the expected market price
of common stock of 124.83%; and an expected life of two years (statutory term)
and vest immediately upon issuance.  The Company also determined that
the notes contained a beneficial conversion feature of $69,055.  The
value of the Summer 2007 Offering Warrants of $60,678, the conversion option of
$69,055 and the transaction fees of $28,180 are considered as debt discount and
are being amortized over the life of the Note.




2007 Fall
Offering.From November 14, 2007
through December 17, 2007, the Company conducted a private offering (the "Fall
2007 Offering") of up to $1,100,000 aggregate face amount of its convertible
notes (the "Fall 2007 Notes") with a small number of accredited investors. Of
this amount, $622,600 aggregate face amount of the Fall 2007 Notes were sold for
an aggregate purchase price of $566,000 net proceeds. While the stated interest
rate on the Fall 2007 Notes is 0%, the implied interest rate on the Fall 2007
Notes is 10%. The Fall 2007 Notes mature on the first anniversary of their date
of issuance. The Fall 2007 Notes are convertible, at the option of the
noteholder, into shares of common stock of the Company (the "Conversion Shares")
at a conversion price equal to the average of the closing bid price of the
Company's common stock for the five trading days preceding the closing date of
the Fall 2007 Offering (the "Conversion Prices"). Up to 1,596,410 Conversion
Shares are issuable at a Conversion Price of $0.39 per share.




Each of
the investors in the Fall 2007 Offering also received a warrant (the "Fall
2007 Warrants"), entitling the holder to purchase a number of shares of the
Company's common stock equal to 50% of the number of shares of common stock into
which the (Fall 2007 Notes) are convertible (the "Warrant Shares"). Each Fall
2007 Warrant is exercisable on a cash basis only at a price of $0.50 per share,
and is exercisable for a period of two years from the date of issuance. Up to
796,205 Warrant Shares are initially issuable on exercise of the Fall 2007
Warrants.  In January, February and March, 2008, investors converted
$292,600 of the Convertible Notes into 750,258 shares of the Company’s common
stock.




The
aggregate value of the Fall 2007 Offering Warrants issued in connection with the
December 17, 2007 closing were valued at $95,290 using the Black-Scholes option
valuation model with the following assumptions; risk-free interest rate of
5.11%; dividend yield of 0%; volatility factors of the expected market price of
common stock of 137.25%; and an expected life of two years (statutory term) and
vest immediately upon issuance.  The Company also determined that the
notes contained a beneficial conversion feature of $63,362.  The value
of the Fall 2007 Offering Warrants of $95,290, the conversion option of $63,362,
and the transaction fees of $56,600 are considered as debt discount and are
being amortized over the life of the Note.




On March
10, 2008, 442,820 shares of the Company’s common stock were issued to
noteholders in the 2007 Fall Offering who converted and cancelled Convertible
Notes in the amount of $172,700 at a conversion price of $0.39 per
share.




2008 Winter
Offering.  From December 27, 2007 to February 29,
2008  the Company conducted an offering (the “2008 Winter Offering”)
of up to $1,000,000 aggregate face amount of its convertible notes (the “ 2008
Winter Notes”) with a small number of accredited investors.  Of this
amount, $521,400 aggregate face amount of the 2008 Winter Notes were sold for an
aggregate purchase price of $474,000 net proceeds.  Therefore, while
the stated interest rate on the 2008 Winter Notes is 0%, the implied interest
rate on the 2008 Winter Notes is 10%.  The 2008 Winter Notes mature on
the first anniversary of their date of issuance.  The 2008 Winter
Notes are convertible, at the option of the noteholder, into shares of common
stock of the Company (the “Conversion Shares”) at a conversion price equal to
the average of the closing bid price of the Company’s common stock for the five
trading days preceding the closing date of the 2008 Winter Offering (the
“Conversion Price”).  Up to $1,042,800 Conversion Shares are issuable
at a Conversion Price of $0.50 per share.




Each of
the investors in the 2008 Winter Offering received, for no additional
consideration, a warrant (the “ 2008 Winter Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the ( 2008 Winter Notes) are
convertible (the “2008 Warrant Shares”)  Each  2008 Winter
Warrant is exercisable on a cash basis only at a Price of $0.50 per share, and
is exercisable for a period of two years from the date of
issuance.  Up to 521,400 2008 Warrant Shares are initially issuable on
exercise of the 2008 Winter Warrants.  In March 2008, Investors
converted $251,900 of the Convertible Notes into 503,800 shares of the Company’s
common stock.





45





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ETERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




9.
Capital stock





As of
March 31, 2008, the Company has authorized 200,000,000 shares of its common
stock, of which 54,751,117 shares were issued and outstanding.





In
September 2006, the Company entered into what is sometimes termed an equity
arrangement with an investment banking firm.  Under the
arrangement the Company may sell (put) shares of common stock
from time to time over a 36-month period, at a purchase price calculated at 97%
of the lowest best closing bid for the Company’s common stock for the five
trading days following the put notice for cash.  The Company may draw
up to $10,000,000. Because the price of the common stock fluctuates, the number
of shares of common stock that the Company may issue when the Company
exercises the put rights will vary, the Company does not know how many
shares will actually be issued under the put. On October 6, 2006, the
Company filed a Registration Statement which was effective October 30, 2006
which registered and made available 7,000,000 shares of common stock for
possible future draws under the line of credit.




During
the year ended December 31, 2007 the Company drew down $ 992,055 ($912,683 net
of closing costs) and issued 1,880,421 shares of common stock.  As
of March 31, 2008 the Company has drawn down $1,372,150 ($1,262,378) net of
closing costs) of this commitment and issued 2,367,905 shares at an average
price of $0.58 per share, leaving 4,632,095 shares available under the equity
line of credit.





In August
2007, the Company issued 2,597,524 shares in connection with the exercise of
options that were originally granted to the late Edward L. Masry.





During
the year ended December 31, 2007, the Company issued 1,910,711 shares of common
stock in exchange for conversion of $526,480 of Convertible
Notes




During
the three months ended March 31, 2008, the Company issued 7,421,896 shares of
common stock in exchange for  $1,855,474 conversion
of  Convertible Notes and settlement of debt in accordance with the
Morale Orchards-Matthews Modification Agreement.  The Company incurred
and recorded additional non-cash interest and legal expense in the amount of
$928,237.




During
the three months ended March 31, 2008, the Company issued 840,970 shares of
common stock in exchange for conversion of $325,600 of other Convertible
Notes.




During
the three months ended March 31, 2008, the Company issued 17,838 shares of
common stock in exchange for consulting servicesin the amount of
$$6,900.




During
the three months ended March 31, 2008, the Company received notice of conversion
of $262,900 convertible notes into 532,006 shares of common stock.  As
of March 31, 2008, these shares are reflected as common stock to be issued and
were subsequently issued in April 2008




During
the three months ended March 31, 2008, the Company entered an agreement to
issued 84,583 shares of common stock for settlement of $25,375 in
payables.  As of March 31, 2008, these shares are reflected as common
stock to be issued, and were subsequently issued in April 2008.




During
the three months ended March 31, 2008, the Company received $170,830 for
exercise of warrants to purchase 341,660 shares of common stock.  As
of March 31, 2008, these shares are reflected as common stock to be issued, and
were subsequently issued in April 2008.





10.
Stock options and warrants





The
Company currently issues stock options to employees, directors and consultants
under the 2004 Stock Plan (the “Plan”). As of December 31, 2005, the
Company could issue options under the Plan to acquire up to 5,000,000 shares of
common stock. In February 2006, the board approved an amendment to the
Plan, increasing the authorized shares by 2,000,000 shares to 7,000,000 shares.
At March 31, 2008, 4,734,604 shares of common stock were available to be
granted under the Plan. Prior to 2004, the Company granted to officers of the
Company outside the Plan options to purchase 3,250,000 options outside
the  Plan to officers of the Company of which 250,000 are still
outstanding





46





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ETERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




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. The weighted-average, remaining contractual life of employee
options outstanding at March 31, 2008 and December 31, 2007 was
7.1 years and 7.1 years, respectively. Stock option activity for the
three months ended March 31, 2008 and the year ended December 31, 2007
was as follows, which includes 250,000 options granted outside the
Plan:





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
            
            
            1,313,605
            
            
            
            1.21Options
      exercised
            
            
            (2,860,000
            )
            
            
            0.10Options
      forfeited
            
            
            (962,607
            )
            
            
            0.84Options
      cancelled
            
            
            —
            
            
            
            —Options,
      December 31, 2006
            
            
            3,999,559
            
            
            
            0.99Options
      granted
            
            
            238,679
            
            
            
            0.55Options
      exercised
            
            
            —
            
            
            
            —Options
      forfeited
            
            
            (49,793)
            
            
            
            1.96Options
      cancelled
            
            
            —
            
            
            
            —Options,
      December 31, 2007
            
            
            4,188,445
            
            
            $
            0.95Options
      granted (unaudited)
            
            
            —
            
            
            
            —Options
      exercised (unaudited)
            
            
            —
            
            
            
            —Options
      forfeited (unaudited)
            
            
            (1,673,049
            )
            
            
            1.01Options
      cancelled (unaudited)
            
            
            —
            
            
            
            —Options,
      March 31, 2008 (unaudited)
            
            
            2,515,396
            
            
            $
            0.92





During
the three months ended March 31, 2008, no options were
granted.




Number
              of
              Shares
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)As
      of March 31, 2008:Outstanding
            
            
            2,515,396
            
            
            $
            0.92
            
            
            
            7.10Expected
      to
      Vest
            
            
            2,515,396
            
            
            $
            0.92
            
            
            
            7.10Exercisable
            
            
            2,326,717
            
            
            $
            0.96
            
            
            
            6.88





As
of March 31, 2008, the exercise price of all options outstanding exceeds the
market price of the Company’s stock, and therefore there was no intrinsic
value.  Future compensation expense on the options which were not
exercisable at March 31, 2008 is $27,271





47





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ETERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)





Black-Scholes
value of employee options




During
the three month period ended March 31, 2008, the Company valued employee options
for pro-forma purposes at the grant date using the Black-Scholes pricing model
with the following average assumptions:





Expected
      life
      (years)                                                                                                                        
                                       
      5.5Risk
      free interest
      rate                                                                                                                                                      
      4.42%Volatility                                                                                                                                                                        124.57%Expected
      dividend
      yield                                                                                                                                                   
      0.0%





Stock-based
compensation during the three month period ended March 31, 2008 was $21,818,
compared to $16,302 for the three month period ended March 31,
2007.




Warrants





The
following table summarizes certain information about the Company’s stock
purchase warrants.




Warrants
            
            
            Weighted
              Avg.
              Exercise
      PriceWarrants
      outstanding, January 1,
      2004
            
            
            14,252,414
            
            
            
            0.48Warrants
      granted
            
            
            2,372,500
            
            
            
            1.27Warrants
      exercised
            
            
            (960,500
            )
            
            
            0.20Warrants
      cancelled
            
            
            —
            
            
            
            —Warrants
      outstanding, December 31,
      2004
            
            
            15,664,414
            
            
            
            0.62Warrants
      granted
            
            
            5,198,574
            
            
            
            1.16Warrants
      exercised
            
            
            (50,500
            )
            
            
            0.99Warrants
      cancelled
            
            
            (20,000
            )
            
            
            1.50Warrants
      outstanding, December 31,
      2005
            
            
            20,792,488
            
            
            
            0.75Warrants
      granted
            
            
            3,624,894
            
            
            
            1.28Warrants
      exercised
            
            
            (2,328,452
            )
            
            
            0.68Warrants
      cancelled
            
            
            (1,191,619
            )
            
            
            1.46Warrants
      outstanding, December 31,
      2006
            
            
            20,897,311
            
            
            $
            0.81Warrants
      granted
            
            
            3,602,701
            
            
            
            0.64Warrants
      exercised
            
            
            —
            
            
            
            —Warrants
      cancelled
            
            
            (6,580,984
            )
            
            
            1.06Warrants
      outstanding, December 31,
      2007
            
            
            17,919,028
            
            
            $
            0.67Warrants
      granted
            
            
            949,975
            
            
            
            0.48Warrants
      exercised
            
            
            (341,660
            )
            
            
            0.50Warrants
      cancelled
            
            
            (2,919,319
            )
            
            
            0.71Warrants
      outstanding, March 31,
      2008
            
            
            15,608,024
            
            
            $
            0.65




48





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ETERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




11.
Research and development





The
Company has a research and development facility in Morgan Hill, California. The
Company has expanded the research and development to include application of the
ZEFS, MK IV, CAT-MATE and ELECTRA technologies 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 products incorporating its ZEFS, MK IV and CAT-MATE technologies for
multiple automobiles, trucks motorcycles, off-road vehicles and stationary
engines. The Company has entered into a Research & Development Agreement
with Temple University in connection with the ELECTRA technology. The Company
spent $259,670 and $340,452 for the three months ended March 31, 2008 and
2007, respectively.





12.
Commitments and contingencies




Patent
Infringement Claims by Jeffrey A. Muller




In
April 2005, Jeffrey A. Muller, the Company’s former sole director and
executive officer, filed a complaint against the Company in the Federal District
Court for the Central District of California, seeking declaratory and injunctive
relief and alleging unfair competition in connection with a claimed prior patent
interest in the ZEFS device and stock option rights. In seeking declaratory
relief, Mr. Muller is seeking to have the patent rights in the ZEFS device
that were previously transferred to the Company by Mr. Muller’s bankruptcy
trustee declared null and void.




This
lawsuit brought by Mr. Muller arose out of the same claims that were the
subject of litigation in the Federal District Court for the Southern District of
New York, in which the Court entered judgment against Mr.
Muller.  Those claims are pending further
proceedings.  While the Company believes that the Company has valid
claims and defenses, there can be no assurance that an adverse result or outcome
on the pending motions or a trial of this case would not have a material adverse
effect on the Company’s financial position or cash flow.




Employment
agreement





EffectiveJuly 18, 2007, the
Company entered into an employment agreement with Mr. Charles R. Blum to serve
as the Company’s President and Chief Executive Officer.  Pursuant to
the Employment Agreement, Mr. Blum’s employment is for a one-year term, subject
to automatic one-year extensions and provides for annual base compensation of
$200,000 per year, subject to periodic review and adjustment.  In
addition, Mr. Blum will receive an automobile allowance of $900 per month and
four weeks of paid vacation annually.  Also, Mr. Blum is entitled to
participate in all employee benefit plans that the Company makes available to
the Company’s employees generally; provided that if Mr. Blum elects not to
participate in the Company’s group medical insurance plan, Mr. Blum will be
reimbursed in an amount equal to the lesser of (i) the premium the Company would
have paid to include Mr. Blum as a participant in that group health insurance
plan and (ii) the sums paid by Mr. Blum in connection with maintaining Mr.
Blum’s private health insurance.  The Company will also reimburse Mr.
Blum the reasonable costs paid by Mr. Blum for maintaining DSL Internet
access and other direct costs of maintaining an office at Mr. Blum’s home, but
only until such time as the Company shall provide Mr. Blum with an office at a
location reasonably acceptable to Mr. Blum.




Minimum
guaranteed compensation payments under Mr. Blum’s employment agreement amounts
to approximately $121,000 for the year 2008.:




As of
December 31:




Year2008
            
            $
            121,0002009
            
            $
            0Total
            
            $
            121,000





During
the quarter ended March 31, 2008, approximately $50,000 was paid for
employment agreement.




49




SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ETERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




Consulting
agreements





On
January 4, 2007, the Company entered into a Consulting Agreement (the
“Consulting Agreement”) with Spencer Clarke LLC (“Spencer Clarke”) pursuant to
which Spencer Clarke has agreed that for a twelve-month period beginning January
4, 2007, Spencer Clarke will provide the Company with financial consulting
services (including but not limited to executive search, strategic partnerships,
research on new markets, strategic visibility, etc) to help further develop the
Company’s strategic business plan.




For
Spencer Clarke’s services the Company has agreed to pay Spencer Clarke a
nonrefundable fee of $20,000 per month, payable in advance. The first payment,
in the amount of $60,000 and covering three months, was due by the Company on
March 1, 2007. No payments have been made under this agreement. The Company will
also reimburse Spencer Clarke for expenses it incurs in connection with the
performance of its services under the Consulting Agreement, provided that
expenses in excess of $2,000 require the Company’s prior approval before such
expenses may be incurred by Spencer Clarke.




On
December 13, 2007, the Company entered into an agreement with a consultant to
provide financial and marketing services.  Compensation is to be paid
on an hourly rate, half in cash and half in the Company’s common stock to be
issued on the first day of the second month after services are
provided.




On
December 13, 2007, the Company entered into an agreement with a consultant to
provide coordination services with various governmental agencies, in California
for a fee of $2,500 plus 10,000 shares of the Company’s common
stock.





Leases




In
September 2005, the Company entered into a lease for a testing facility located
in Morgan Hill, California. The term of the lease was from September 1,
2005 through August 31, 2007 and carried an option to renew for two
additional years at the then prevailing market rate. The rent was
$2,240 per month under this lease. The lease was amended in February 2006
for additional space. The rent under the amended lease was $4,160 per
month.  The Company renewed this lease on August 9, 2007 for an
additional two-year term.  The rent is $4,640 per month for the first
six months of the new term of the lease and $5,480 per month for the remaining
eighteen months of the new term of the lease.





Total
rent expense under this lease for the three-month periods ended March 31,
2008 and 2007, is $14,760 and $12,480, respectively.  The following is
a schedule by years of future minimum rental payments required under the
non-cancellable operating lease as of March 31, 2008.




2008
            
            $
            64,0802009
            
            
            43,840Total
            
            $
            107,920





13.
Subsequent events




In April 2008, the Company received
$161,495 for exercise of warrants to purchase 322,990 shares of common
stock.





In April 2008, the Company received
notice of conversion of $77,000 convertible notes into 176,769 shares of common
stock.





50





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ETERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED)




Effective April 30, 2008 the Company
and Scottish Glen Golf Company, Inc., dba KZG settled their pending litigation
relating to the Company’s prior offices.  In the interest of avoiding
further litigation costs and expenses, the Company and SGGC executed a
“Settlement and Mutual Release Agreement effective April 30, 2008. The Company
will pay SGGC the sum of $75,000, execution of which is stayed pending the
following terms:





a.           Company
shall pay to SGGC the sum of $51,000 in two installments, without interest, as
follows;





(1)           $34,000
due on or before June 2, 2008 and


(2)           $17,000
due on or before July 17, 2008





b.
            The
      above payments shall be payable to SCOTTICH GLEN GOLF COMPANY, INC. dba
      KZG and wired transferred to the
latter.





c.
            In
      the event any payment listed above is not paid when due, then the total
      sum of $75,000 shall immediately be due and owing, less any payments
      actually made pursuant to the Agreement and SGGC shall be entitled to file
      the Stipulated Judgment





d.
            The
      Settlement and Mutual Release Agreement also provides for mutual general
      releases.





Upon full and complete execution of all
duties and obligations by Company under the terms of this Agreement, and
provided Paragraph c. above has not occurred, SGGC shall cause the Complaint to
be dismissed, with prejudice, as to all causes of action and as to all
parties.  The Company has recorded the accrued liability of $51,000 at
March 31, 2008.











51





Item 2. Management’s Discussion and Analysis or Plan of
Operations





This
Quarterly Report on Form 10-QSB contains forward-looking statements. These
forward-looking statements include predictions regarding our
future:




•
            revenues
      and profits;•
            customers;•
            research
      and development expenses and efforts;•
            scientific
      and other third-party test results;•
            sales
      and marketing expenses and efforts;•
            liquidity
      and sufficiency of existing cash;•
            technology
      and products;•
            the
      outcome of pending or threatened litigation; and•
            the
      effect of recent accounting pronouncements on our financial condition and
      results of operations





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.




Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under the heading “Risk Factors” in our Annual Report on Form 10-KSB for
the year ended December 31, 2007. 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.





Overview





The
following discussion and analysis of our condensed consolidated financial
condition and condensed consolidated results of operations should be read in
conjunction with the condensed consolidated financial statements and notes
thereto included in Part I, Item 1 of this Form 10-QSB and the
condensed consolidated financial statements and notes thereto contained in our
Annual Report on Form 10-KSB for the fiscal year ended December 31,
2007.




We are a
green technology company that leverages a suite of patented, patent-pending and
licensed intellectual properties related to the treatment of fuels. Technologies
patented by, or licensed to, us utilize either magnetic or uniform electrical
fields to alter physical characteristics of fuels and are designed to create a
cleaner combustion. Cleaner combustion has been shown to improve performance,
enhance fuel economy and/or reduce harmful emissions in laboratory
testing.




Our ECO
ChargRTM and MAG ChargRTM products use fixed magnetic fields to alter some
physical properties of fuel, by incorporating our patented and patent-pending
ZEFS and MK IV technologies.  We differentiate ECO ChargR and MAG
ChargR products based on their differing attributes and marketing focus. ECO
ChargR products are primarily designed to reduce harmful emissions and MAG
ChargR products are primarily designed to enhance performance and fuel economy.
Our ECO ChargR product is intended to reduce exhaust emissions in vehicle and
small utility motors.  ECO ChargR will be marketed primarily to
original equipment manufacturers (“OEMs”) as well as to pilot and
government-mandated emissions programs.  Our MAG ChargR product is
intended to increase power and improve mileage. MAG ChargR will be marketed
primarily to the specialty consumer accessories market for many types of
vehicles, including but not limited to cars, trucks, motorcycles, scooters, all
terrain vehicles (“ATVs”), snowmobiles, personal watercraft and small utility
motors.  On the other hand, because our ECO ChargR and MAG ChargR
products are customized to specific brands, models and engine sizes, these
products ultimately will require hundreds of individually developed parts, which
can be expensive and time-consuming to produce.  See “Our Technologies
and Products” below.




Our first
revenues have come from initial sales in Asia for our ECO ChargR product in the
motorcycle industry. We plan on commencing sales of ECO ChargR to customers in
the United States in the motorcycle industry in second quarter of 2008. We also
plan on commencing initial sales of our MAG ChargR product in Asia and the
United States in the automobile and motorcycle industry in the second quarter of
2008.  See “Recent Developments” and “Sales and Marketing”
below.




We have
obtained a license from Temple University for their patent-pending uniform
electric field technology, tentatively called ELEKTRATM. The ELEKTRA technology
consists of passing fuel through a specific strong electrical
field.  Although ELEKTRA has a similar effect on fuels as our ZEFS and
MK IV technologies, ELEKTRA incorporates a uniform electrical field
principle.  Based on our early research and product development, we
believe that ELEKTRA carries certain advantages over our ZEFS and MK IV
technologies, primarily not requiring as many variations for products
incorporating the ELEKTRA technology compared to products incorporating the ZEFS
or MK IV technologies. Preliminary testing conducted in Europe by an
outside research and development facility indicates that ELEKTRA causes a
significant change in some of the physical characteristics of the fuel,
resulting in better atomization of the fuel and improved
combustion.




52


We have
also entered into a research and development agreement with Temple University to
conduct further research on the ELEKTRA technology and magnetic technologies in
general.  Together with Temple University, we have developed prototype
products using the ELEKTRA technology and we are continuing testing, and
research and development. We are in the early stages of developing ELEKTRA
products that, based on the previously mentioned preliminary testing, is
intended to improve fuel economy and change fuel viscosity, and may improve
performance and reduce emissions, depending upon the specific application. We
are also working with Temple and several domestic and international corporations
investigating applications of this technology to the transportation industry,
oil refineries and pipelines, and OEMs. See “Our Technologies and Products”
below.




We
operate in a highly competitive industry.  Many of our activities may
be subject to governmental regulation.  We have taken aggressive steps
to protect our intellectual property.




There are
significant risks associated with our business, our company and our
stock.




We are a
development stage company that generated its first initial revenues in the
fourth quarter of 2006. Our expenses to date have been funded primarily through
the sale of stock and convertible debt, as well as proceeds from the exercise of
stock purchase warrants. We raised capital in 2007 and will need to raise
substantial additional capital in 2008, and possibly beyond, to fund our sales
and marketing efforts, continuing research and development, and certain other
expenses, until our revenue base grows sufficiently.




Our
company was incorporated on February 18, 1998, as a Nevada corporation,
under the name Mandalay Capital Corporation. We changed our name to Save the
World Air, Inc. on February 11, 1999, following the acquisition of
marketing and manufacturing rights of the ZEFS technologies. Our mailing address
is 235 Tennant Avenue, Morgan Hill, California 95037. Our telephone number is
(408)-778-0101. Our corporate website is www.stwa.com.  Information
contained on the website is not deemed part of this Annual Report.




Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“ZERO.OB”.





Results
of Operations





Revenues
were $0 for the three months ended March 31, 2008, compared to $22,000
for the three months ended March 31, 2007. Cost of goods sold were $0
for the three months ended March 31, 2008, compared to $5,360 for the
three months ended March 31, 2007.




Operating
expenses were $760,142 for the three months ended March 31, 2008, compared
to $1,279,775 for the three months ended March 31, 2007, a decrease of
$519,633. This decrease is attributable to a decrease in cash expenses of
$719,567 offset by an increase in non-cash expenses of $199,934. The decrease in
cash expenses is attributable to decreases in consulting and professional fees
($279,647), salaries and benefits ($220,287), office and other expenses
($112,588), travel expenses (75,556), exhibits and trade shows ($24,562), and
corporate expenses (6,927). The non-cash increase is attributable to an increase
in non-cash legal fees ($236,572), revaluation of options and warrants given to
employees and consultant ($5,516), bad debt ($1,380) offset by a decrease in
depreciation ($43,534).




Research
and development expenses were $259,670 for the three months ended March 31,
2008, compared to $340,452 for the three months ended March 31, 2007, a
decrease of $80,782. This decrease is attributable to decreases in product
testing, research and supplies ($90,309), consulting fees ($16,097), travel
expenses ($7,626) and were offset by an increase in contract fees
($33,250).




Other
expense for the three months ended March 31, 2008 were $1,264,035, compared
to $309,774 for the three months ended March 31, 2007, an increase of
$954,261. This increase is attributable to an increase in non-cash interest
expense ($985,908), decrease in cash interest expense ($40,880), increase in
loss on sale of equipment ($9,683) and increase in other income
($450).




We had a
net loss of $2,283,847, or $0.05 per share, for the three months ended March 31,
2008, compared to a net loss of $1,914,161, or $0.05 per share, for the three
months ended March 31, 2007. We expect to incur additional net loss in the
fiscal year ending December 31, 2008, primarily attributable to continued
operating and marketing-related expenditures without the benefit of any
significant revenue for the remainder of the year.





Liquidity
and Capital Resources





General





We have
incurred negative cash flow from operations in the developmental stage since our
inception in 1998. As of March 31, 2008, we have been funded primarily
through the sale of convertible notes and issuance of our stock upon exercise of
warrants.




53


The
condensed consolidated financial statements accompanying this Quarterly Report
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 our business. As reflected in the accompanying condensed consolidated
financial statements, we had a net loss of $2,283,847 and a negative cash flow
from operations of $637,197 for the three months ended March 31, 2008, and
a stockholders’ deficiency of $2,718,964 as of March 31, 2008, and a net
loss of $6,262,743and a negative cash flow from operations of $3,172,816 for the
year ending December 31, 2007, and a stockholders’ deficiency of $4,359,786
as of December 31, 2007. These factors raise substantial doubt about our
ability to continue as a going concern. Our ability to continue as a going
concern is dependent on our ability to raise additional funds, generate revenue
and implement our business plan. The financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.




Our
current liabilities greatly exceed our assets and we are unable to meet our
obligations as they become due. We face significant challenges in generating
revenue and maintaining adequate working capital during the remainder of 2008 as
a result of several factors. Among other things, to date our distributors,
primarily located in Asia, have placed fewer orders than we had expected them to
place under the terms of our distribution agreements with them. This resulted in
our having less revenue and therefore less working capital available for the
further development of our business at a time when the operating costs of our
business have been increasing. We will require significant additional outside
capital during 2008 in order to meet all of our obligations, produce products
for sale and ship such products





Details of Recent Financing
Transactions





Equity
Arrangement





In
September 2006, the Company entered into what is sometimes termed an equity
arrangement with an investment banking firm. Under the arrangement the Company
may sell (put) shares of common stock from time to time over a 36-month period,
at a purchase price calculated at 97% of the lowest best closing bid for the
Company’s common stock for the five trading days following the put notice. The
Company may draw up to $10,000,000. Because the price of the common stock
fluctuates and the number of shares of common stock that the Company may issue
when the Company exercises the put will vary, the Company does not know how many
shares, if any, will actually issue under the put.  On October 6,
2006, the Company filed a Registration Statement which was effective October 30,
2006 which registered and made available 7,000,000 shares of common stock for
possible future draws under the arrangement.




As of
March 31, 2008 the Company has drawn down $1,372,150 ($1,262,378 net of
closing costs) of this commitment and issued 2,367,905 shares of common stock,
leaving 4,632,095 shares of common stock still available under the equity
arrangement.




Morale Orchards,
LLC





On
December 5, 2006, the Company entered into a Note Purchase Agreement (the “Note
Purchase Agreement”) with Morale, pursuant to which Morale purchased from the
Company two (2) Convertible Promissory Notes, one dated December 5, 2006 (the
“2006 Morale Note”), in the principal face amount of $612,500, and another,
dated January 10, 2007 (the “2007 Morale Note”), also in the principal face
amount of $612,500 (collectively, the “Morale Notes”), and two (2) warrants, one
accompanying the 2006 Morale Note, and the other accompanying the 2007 Morale
Note.  Each warrant provides Morale the right to purchase shares of
common stock of the Company. The aggregate purchase price for the Morale Notes
and Morale Warrants was $1,000,000, of which $500,000 was paid by Morale and
received by the Company on or about December 5, 2006, and of which $500,000 was
paid by Morale and received by the Company on or about January 10,
2007;




The 2006
Morale Note is convertible at the rate of $0.85 per share into 720,588 shares of
the Company’s common stock, and the 2007 Morale Note is convertible at the rate
of $0.70 per share into 875,000 shares of the Company’s common
stock;




The 2006
Morale Warrant is exercisable at $0.85 per share for 360,294 shares of the
Company’s common stock, and the 2007 Morale Warrant is exercisable at $.70 per
share for 437,500 shares of the Company’s common stock;




The Note
Purchase Agreement provides, in pertinent part, that in the event the Company
has not repaid each of the Morale Notes in full by the anniversary date of their
issuances, the principal balances of each note shall be increased by ten percent
(10%) and the Company shall pay interest at two and one-half percent (21⁄2%) per
month, compounded daily, for each month until each of the Morale Notes is paid
in full.





Morale
has piggy-back registration rights pursuant to which Morale may require the
Company to include the shares of the Company’s common stock issuable upon
conversion of the Morale Notes and exercise of the Morale Warrants in certain
future registration statements the Company may elect to file.





The
aggregate value of the Morale Warrants issued in connection with the January 10,
2007 purchase were valued at $118,955 using the Black-Scholes option valuation
model with the following assumptions; risk-free interest rate of 4.68%; dividend
yield of 0%; volatility factors of the expected market price of common stock of
245%; and an expected life of five years (statutory term) and vest over 180
days.  The Company also determined that the notes contained a
beneficial conversion feature of $231,455.  The value of the Morale
Warrants of $118,955, the conversion option of $231,455 and the transaction fees
of $112,500 are considered as debt discount and are being amortized over the
life of the Note





As of
January 31, 2008, both the 2006 and 2007 Morale Notes were in default, and
neither of the Morale Notes nor the Morale Warrants have been converted into
shares of common stock of the Company. The amount due and owing as of January
31, 2008, under the 2006 Morale Note is $689,327. The amount due and owing as of
January 31, 2008, under the 2007 Morale Note is $672,885.





54




The
Company borrowed the principal sum of $20,000 from Morale on October 30, 2007,
at an interest rate of ten percent (10%) per annum. Principal and accrued
interest under the Morale Note is due on demand, and no payments there under
have been made by the Company.




Morale is
beneficially owned by Jacqueline Alexander, who, is the wife of Leodis Matthews,
who, through his law firm, the Matthews Law Firm, serves as outside legal
counsel to the Company.  The Company is indebted to the Matthews Law
Firm for unpaid legal fees and costs through January 31, 2008, in the aggregate
amount of $472,762.





The
Company, Morale and the Matthews Law Firm now desire to modify the terms and
provisions of, and to provide for the satisfaction of the Company’s obligations
under, the Morale Notes, the Additional Morale Note and the Matthews Law Firm
Debt, pursuant to the terms and conditions set forth in this Modification and
Satisfaction Agreement.




The
Company, Morale and the Matthew Law Firm agreed to the following:




1.Waiver of
Interest.


(i)
                Morale
      agrees to forgive and waive any and all accrued interest on the Morale
      Notes from and after January 31,
2008;
  (ii)
                Morale
      agrees to forgive and waive any and all accrued interest due on the
      Additional Morale Note from the date of its issuance; and the Matthews Law
      Firm agrees to forgive any and all interest which may have accrued on the
      Matthews Law Firm Debt.




2.    Cancellation of Notes, Debt and
Obligations.  Upon the execution of this Modification and
Satisfaction Agreement, the 2006 Morale Note, the 2007 Morale Note, the
Additional Morale Note, the Unpaid 2006 Morale Note Debt, the Unpaid 2007 Morale
Note Debt, the Unpaid Additional Morale Note Debt and the Matthews Law Firm
Debt, shall all be cancelled, be deemed satisfied in full and be of no further
force or effect, effective January 31, 2008.




3.No
Registration Rights.  Upon execution hereof, the Morale
Registration Rights shall be cancelled and be of no further force or
effect.




4.Issuance of
Shares.  In consideration of this Modification and Satisfaction
Agreement, including the waivers and cancellations as set forth in paragraphs 1
and 2, above, upon execution hereof, and concurrently with the waivers and
cancellations provided
hereunder, the Company shall issue a total of 7,421,896 shares of its common
stock to Morale and the Matthews Law Firm, allocable as follows:  (i)
2,759,308 shares shall be issued to Morale arising out of and in exchange for
cancellation of the 2006 Morale Note and the Unpaid 2006 Morale Note Debt; (ii)
2,691,540 shares shall be issued to Morale arising out of and in exchange for
cancellation of the 2007 Morale Note and the Unpaid 2007 Morale Note Debt; (iii)
80,000 shares shall be issued to Morale arising out of and in exchange for
cancellation of the Additional Morale Note and the Unpaid Additional Morale Note
Debt; and (iv) 1,891,048 shares shall be issued to the Matthews Law Firm arising
out of and in exchange for cancellation of the Matthews Law Firm
Debt.  The Company shall not be required to, and shall not, file a
Registration Statement with the Securities and Exchange Commission or any state
securities agency to register or qualify the shares of common stock of the
Company issuable to Morale and the Matthews Law Firm hereunder, and all such
shares when issued shall be deemed restrictive securities and bear appropriate
legends.




5.Morale
Warrants.  The terms and conditions of the Morale Warrants, to
the extent not expressly amended in this Modification and Satisfaction
Agreement, shall remain in full force and effect.




On March
10, 2008, 80,000 shares of the Company’s common stock were issued to Morale
Orchards, LLP, in cancellation of a note payable in the amount of $20,000 as
part of the Modification Agreement entered into on January 31, 2008 between the
Company and Morale Orchards, LLP and Matthews & Partners.




On March
10, 2008, 5,450,848 shares of the Company’s common stock were issued to Morale
Orchards, LLP, in conversion and cancellation of the Convertible Notes issued
December 5, 2006 and January 10, 2007 in the amount of $1,362,712 as part of the
Modification Agreement entered into on January 31, 2008 between the Company and
Morale Orchards, LLP and Matthews & Partners.




On March
10, 2008, 1,891,048 shares of the Company’s common stock were issued to Leodis
C. Matthews, APC, in cancellation of accrued professional fees in the amount of
$472,762 as part of the Modification Agreement entered into on January 31, 2008
between the Company and Morale Orchards, LLP and Matthews &
Partners.




As a
result of the debt cancelled and shares of common stock issued in connection
with the Modification Agreement, the Company incurred non-cash interest expense
of $691,665 and non-cash legal expense of $236,572 which was recorded in the
first quarter of 2008.




2007 PIPE
Offering.  During the year ended December 31, 2007, the Company
conducted an offering (the “2007 PIPE Offering”), through Spencer Clarke LLC, as
exclusive placement agent, of up to $2,000,000 principal amount of its 10%
convertible notes (the “2007 PIPE Notes”).  Interest on the 2007 PIPE
Notes, at a rate of 10% per annum, is payable quarterly.  The Notes
are due nine months from date of issuance.  The 2007 PIPE Notes are
convertible into shares of common stock at an initial conversion price of $0.70
per share (the “Conversion Shares”).  There is no reset to the
conversion price for any beneficial conversion feature.




55


The
Company has the right to redeem any or all of the outstanding 2007 PIPE Notes in
its sole discretion anytime after the termination of the 2007 PIPE Offering and
prior to the maturity date of the 2007 PIPE Notes. The redemption price shall be
the face amount of the redeemed 2007 PIPE Notes plus accrued and unpaid interest
thereon.  Subject to the following sentence, at any time prior to the
maturity date of the 2007 PIPE Notes, for each additional $1,000,000 of gross
proceeds raised from one or more offerings of the Company’s equity or
quasi-equity securities, the Company shall redeem 2007 PIPE Notes with a minimum
face value of $500,000 together with accrued and unpaid interest, until the
entire outstanding 2007 PIPE Note is redeemed. Certain financings that the
Company may conduct outside of North America are exempt from this provision to
redeem the 2007 PIPE Notes in whole or in part.




Investors
in the 2007 PIPE Offering also received a warrant (the “2007 PIPE
Warrant”), entitling the holder to purchase a number of shares of the Company’s
common stock equal to 150% of the number of shares of common stock into which
the 2007 PIPE Notes are convertible (the “Warrant Shares”). The 2007 PIPE
Warrant will be exercisable on a cash basis only and will have registration
rights.  The 2007 PIPE Warrant is exercisable
at an initial price of $1.00 per share, and is exercisable immediately upon
issuance and for a period of three years from the date of issuance.




Promptly,
but no later than 90 days following the closing date of the 2007 PIPE Offering,
the Company is required to file a Registration Statement with the SEC to
register the Conversion Shares and the Warrant Shares. The Company shall use its
best efforts to ensure that such Registration Statement is declared effective
within 120 days after filing.




Pursuant
to the terms of the PIPE Notes, if a Registration Statement is not filed on
the 91st day following the closing date, (i) the interest rate on the PIPE Notes
increased from 10% to 18% per annum until the event of default is cured and (ii)
the holders of the PIPE Notes became entitled to receive additional warrants in
an amount equal to 25% of the PIPE Warrants originally issued, for each 60-day
period that the Company remains in default.




During
the year ended December 31, 2007, the Company issued $400,000 of the PIPE Notes
which could be converted into 571,429 shares of the Company’s common stock and
2007 PIPE Warrants to purchase 857,144 shares of the Company’s common stock.
These warrants expire March 1, March 30 and April 2, 2010 and are exercisable at
a price of $1.00 per share. The Company had related transaction fees of $48,000,
resulting in net proceeds to the Company of $352,000. In addition to the
transaction fees, warrants to purchase 57,143 shares of the Company’s common
stock were issued to Spencer Clarke LLC, the Company’s exclusive placement agent
for the 2007 PIPE Offering. These warrants expire March 1, March 30 and April 2,
2010 and are exercisable at a price of $0.70 per share.




The
aggregate value of the 2007 PIPE Warrants issued in connection with this
offering and the warrants issued to the placement agent were valued at $256,533
using the Black-Scholes option valuation model with the following assumptions:
risk-free interest rate of 4.40% to 5.16%; dividend yield of 0%; volatility
factors of the expected market price of common stock of 100.28% to 114.98%; and
an expected life of two years (statutory term). The Company also determined that
the notes contained a beneficial conversion feature of $62,857.




The
Company was unable to meet its obligations to file the Registration Statement
required under the terms of the 2007 PIPE Offering in a timely manner. In early
July 2007, the Company began discussions with Spencer Clarke, acting on behalf
of the holders of the PIPE Notes and PIPE Warrants, for an extension of time to
file the Registration Statement. Notwithstanding such discussions, Spencer
Clarke issued a Notice of Default dated August 1, 2007 (the "Notice") to the
Company for its failure to file the Registration Statement in a timely
manner.





On August
29, 2007, the Company entered into a Modification Agreement with the 2007 PIPE
note holders. The Modification Agreement was entered into as a result of
negotiations between the Company and Spencer Clarke, LLC ("Spencer Clarke"), the
Company's exclusive placement agent for the 2007 PIPE Offering, after the
Company failed to file with the Securities and Exchange Commission (the "SEC")
in a timely manner a Registration Statement to register the shares of the
Company's common stock into which the PIPE Notes are convertible and for which
the PIPE Warrants may be exercised.




Pursuant
to the Modification Agreement, the parties have agreed as follows:





●
            Promptly,
      but no later than November 30, 2007 (instead of on or before July 2,
      2007), the Company shall file the Registration Statement with the SEC to
      register the Conversion Shares and the Warrant
  Shares.





●
            Effective
      August 1, 2007, the interest rate on the PIPE Notes shall be increased
      from 10% per annum to 18% per annum until such time as the Registration
      Statement is declared effective by the
SEC.





●
            The
      price at which the PIPE Notes may be converted into Conversion Shares (the
      "Conversion Price") shall be reduced from $0.70 to $0.45 per
      share.




56




●
            Each
      Investor shall receive, for no additional consideration, additional
      warrants ("Additional Warrants") in an amount equal to an additional 50%
      of the PIPE Warrants originally issued pursuant to the terms of the 2007
      PIPE Offering. These Additional Warrants total 428,575 and shall have the
      same registration rights as are described in the Private Placement
      Memorandum dated January 12, 2007 (the "Offering Memorandum") used in
      connection with the 2007 PIPE Offering applicable to the PIPE Warrants;
      shall be exercisable immediately upon issuance; shall remain exercisable
      for a period of five years from the date of the Modification Agreement, on
      a cash basis only, at an initial exercise price of $0.45 per share; and
      shall, in all other respects, have the same terms and conditions, and be
      in the same form, as the PIPE Warrants.●
            If
      the Company does not file the Registration Statement with the SEC by
      November 30, 2007, each Investor shall receive, for no additional
      consideration, warrants ("Delay Warrants") in an amount equal to an
      additional 50% of the PIPE Warrants originally issued pursuant to the
      terms of the Offering Memorandum. The Delay Warrants shall have the same
      registration rights as are described in the Offering Memorandum applicable
      to the PIPE Warrants; shall be exercisable immediately upon issuance;
      shall remain exercisable for a period of five years from the date of this
      Agreement, on a cash basis only, at an initial exercise price of $0.45 per
      share; and shall, in all other respects, have the same terms and
      conditions, and be in the same form, as the PIPE
  Warrants.




The terms
and conditions of the Offering Memorandum, the PIPE Notes and the PIPE Warrants,
to the extent not expressly amended in the Modification Agreement, remain in
full force and effect. The issuance of the Additional Warrants (“Delay
Warrants”), if any, and the reduction of the Conversion Price of the PIPE Notes,
has the potential to dilute the percentage ownership interest of the Company's
existing shareholders.




The
aggregate value of the 2007 PIPE Warrants issued in connection with this
Modification Agreement were valued at $138,107 using the Black-Scholes option
valuation model with the following assumptions: risk-free interest rate of
4.43%; dividend yield of 0%; volatility factors of the expected market price of
common stock of 113.55%; and an expected life of two years (statutory
term).




On
November 30, 2007, the Company and the Investors entered into the Second
Modification Agreement and pursuant to this agreement have agreed as
follows:




●
            The
      Investors have agreed to forgive all accrued interest on their PIPE Notes,
      from the date of issuance thereof through December 14,
      2007.●
            On
      December 14, 2007, the Company agreed to pay all Investors 50% of the
      principal amount of their original PIPE Notes which equals a total cash
      repayment of $200,000.  Additionally, in repayment of the other
      50% of the principal amount of the original PIPE Notes, the Company, on
      December 14, 2007, agreed to issue to Investors a total of 1,060,000
      shares of the Company’s common stock (the “Conversion
      Shares”).





●
            Concurrently
      with the cash payment and the issuance of the Conversion Shares as noted
      in paragraph 2 above, the Investors agreed to deliver to the Company the
      original of the PIPE Notes, which will be marked and deemed cancelled and
      of no further force or effect.





●
            In
      further consideration of the above terms and conditions, the Investors
      have agreed that the Company shall not be required to, and shall not, file
      a Registration Statement with the Securities and Exchange Commission or
      any state securities agency to register or qualify the PIPE Notes, the
      Conversion Shares, the PIPE Warrants, or any shares issuable pursuant to
      the PIPE Warrants (the Warrant Shares”).  The Conversion Shares
      and Warrant Shares when issued will be deemed restricted securities and
      bear appropriate legends.●
            The
      terms and conditions of the PIPE Warrants, to the extent not expressly
      amended in the Second Modification Agreement, shall remain in full force
      and effect in furtherance of the terms and conditions set forth in the
      Modification Agreement.




Payment
of $200,000 was made by the Company in accordance with the Second Modification
Agreement, the Original Notes were surrendered by the Investors and 1,060,000
shares of common stock were issued to the Investors on December 27,
2007.  Included in interest expense is the excess of the cost to
settle the obligation over the carrying value at the settlement date totaling
$222,368.




2007 Spring
Offering. From
June 13, 2007 through June 26, 2007, the Company conducted a private
offering (the “Spring 2007 Offering”) of up to $550,000 aggregate face amount of
its convertible notes (the “Spring 2007 Notes”) with a small number of
accredited investors. Of this amount, $451,000 aggregate face amount of the
Spring 2007 Notes were sold for an aggregate purchase price of $410,000 net
proceeds. Therefore, while the stated interest rate on the Spring 2007 Notes is
0%, the implied interest rate on the Spring 2007 Notes is 10%. The Spring 2007
Notes mature on the first anniversary of their date of issuance. The Spring 2007
Notes are convertible, at the option of the noteholders, into shares of common
stock of the Company (the “Conversion Shares”) at an initial conversion price
equal to the average of the closing bid price of the Company’s common stock for
the five trading days preceding the closing dates of the Spring 2007 Offering
(the “Conversion Prices”). On the first closing, 1,002,941 Conversion Shares are
issuable at Conversion Price of $0.34 per share. On the second closing,
207,548 conversion shares are issuable at a conversion price of $0.53 per
share. The per share price of the Company’s common stock on the Pink Sheets
during this period ranged from a low bid price (intraday) of $0.35 to a high bid
price (intraday) of $0.59.




57


Each of
the investors in the Spring 2007 Offering also received a warrant (the
“Spring 2007 Warrants”), entitling the holder to purchase a number of shares of
the Company’s common stock equal to 50% of the number of shares of common stock
into which the Spring 2007 Notes are convertible (the “Warrant Shares”). Each
Spring 2007 Warrant is exercisable on a cash basis only at an initial price of
$0.50 per share, and is exercisable immediately upon issuance and for a period
of two years from the date of issuance. A total of 605,242 Warrant Shares were
issued.  Investors converted $110,000 of the Convertible Notes into
265,538 shares of the Company’s common stock during October and November
2007.




The
aggregate value of the Spring 2007 Offering Warrants issued in connection with
the June 13, 2007 closing were valued at $59, 296 using the Black-Scholes option
valuation model with the following assumptions; risk-free interest rate of
5.11%; dividend yield of 0%; volatility factors of the expected market price of
common stock of 113.56%; and an expected life of two years (statutory term) and
vest immediately upon issuance.  The Company also determined that the
notes contained a beneficial conversion feature of $119,472.  The
value of the Spring 2007 Offering Warrants of $59,296, the conversion option of
$119,472, and the transaction fees of $31,000 are considered as debt discount
and are being amortized over the life of the Note.




2007 Summer
Offering.From August 8, 2007
through September 27, 2007, the Company conducted a private offering (the
"Summer 2007 Offering") of up to $330,000 aggregate face amount of its
convertible notes (the "Summer 2007 Notes") with a small number of accredited
investors. Of this amount, $309,980 aggregate face amount of the Summer 2007
Notes were sold for an aggregate purchase price of $281,800 net proceeds. While
the stated interest rate on the Summer 2007 Notes is 0%, the implied interest
rate on the Summer 2007 Notes is 10%. The Summer 2007 Notes mature on the first
anniversary of their date of issuance. The Summer 2007 Notes are convertible, at
the option of the noteholder, into shares of common stock of the Company (the
"Conversion Shares") at a conversion price equal to the average of the closing
bid price of the Company's common stock for the five trading days preceding the
closing date of the Summer 2007 Offering (the "Conversion Prices"). Up to
837,784 Conversion Shares are issuable at a Conversion Price of $0.37 per
share.




Each of
the investors in the Summer 2007 Offering also received a warrant (the
"Summer 2007 Warrants"), entitling the holder to purchase a number of shares of
the Company's common stock equal to 50% of the number of shares of common stock
into which the Summer 2007 Notes are convertible (the "Warrant Shares"). Each
Summer 2007 Warrant is exercisable on a cash basis only at a price of $0.50 per
share, and is exercisable for a period of two years from the date of issuance. A
total of 418,892 Warrant Shares were issued. In November 2007, Investors
converted $216,480 of the Convertible Notes into 585,173 shares of the Company’s
common stock.




The
aggregate value of the Summer 2007 Offering Warrants issued in connection with
the September 28, 2007 closing were valued at $60,678 using the Black-Scholes
option valuation model with the following assumptions; risk-free interest rate
of 4.87%; dividend yield of 0%; volatility factors of the expected market price
of common stock of 124.83%; and an expected life of two years (statutory term)
and vest immediately upon issuance.  The Company also determined that
the notes contained a beneficial conversion feature of $69,055.  The
value of the Summer 2007 Offering Warrants of $60,678, the conversion option of
$69,055 and the transaction fees of $28,180 are considered as debt discount and
are being amortized over the life of the Note.




2007 Fall
Offering.From November 14, 2007
through December 17, 2007, the Company conducted a private offering (the "Fall
2007 Offering") of up to $1,100,000 aggregate face amount of its convertible
notes (the "Fall 2007 Notes") with a small number of accredited investors. Of
this amount, $622,600 aggregate face amount of the Fall 2007 Notes were sold for
an aggregate purchase price of $566,000 net proceeds. While the stated interest
rate on the Fall 2007 Notes is 0%, the implied interest rate on the Fall 2007
Notes is 10%. The Fall 2007 Notes mature on the first anniversary of their date
of issuance. The Fall 2007 Notes are convertible, at the option of the
noteholder, into shares of common stock of the Company (the "Conversion Shares")
at a conversion price equal to the average of the closing bid price of the
Company's common stock for the five trading days preceding the closing date of
the Fall 2007 Offering (the "Conversion Prices"). Up to 1,596,410 Conversion
Shares are issuable at a Conversion Price of $0.39 per share.




Each of
the investors in the Fall 2007 Offering also received a warrant (the "Fall
2007 Warrants"), entitling the holder to purchase a number of shares of the
Company's common stock equal to 50% of the number of shares of common stock into
which the (Fall 2007 Notes) are convertible (the "Warrant Shares"). Each Fall
2007 Warrant is exercisable on a cash basis only at a price of $0.50 per share,
and is exercisable for a period of two years from the date of issuance. Up to
796,205 Warrant Shares are initially issuable on exercise of the Fall 2007
Warrants.




The
aggregate value of the Fall 2007 Offering Warrants issued in connection with the
December 17, 2007 closing were valued at $95,290 using the Black-Scholes option
valuation model with the following assumptions; risk-free interest rate of
5.11%; dividend yield of 0%; volatility factors of the expected market price of
common stock of 137.25%; and an expected life of two years (statutory term) and
vest immediately upon issuance.  The Company also determined that the
notes contained a beneficial conversion feature of $63,362.  The value
of the Fall 2007 Offering Warrants of $95,290, the conversion option of $63,362,
and the transaction fees of $56,600 are considered as debt discount and are
being amortized over the life of the Note.




On March
10, 2008, 442,820 shares of the Company’s common stock were issued to
noteholders in the 2007 Fall Offering who converted and cancelled Convertible
Notes in the amount of $172,700 at a conversion price of $0.39 per
share.




58


2008 Winter
Offering.  From December 27, 2007 to February 29,
2008  the Company conducted an offering (the “2008 Winter Offering”)
of up to $1,000,000 aggregate face amount of its convertible notes (the “ 2008
Winter Notes”) with a small number of accredited investors.  Of this
amount, $521,400 aggregate face amount of the 2008 Winter Notes were sold for an
aggregate purchase price of $474,000 net proceeds.  Therefore, while
the stated interest rate on the 2008 Winter Notes is 0%, the implied interest
rate on the 2008 Winter Notes is 10%.  The 2008 Winter Notes mature on
the first anniversary of their date of issuance.  The 2008 Winter
Notes are convertible, at the option of the noteholder, into shares of common
stock of the Company (the “Conversion Shares”) at a conversion price equal to
the average of the closing bid price of the Company’s common stock for the five
trading days preceding the closing date of the 2008 Winter Offering (the
“Conversion Price”).  Up to $1,042,800 Conversion Shares are issuable
at a Conversion Price of $0.50 per share.




Each of
the investors in the 2008 Winter Offering received, for no additional
consideration, a warrant (the “ 2008 Winter Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the ( 2008 Winter Notes) are
convertible (the “2008 Warrant Shares”)  Each  2008 Winter
Warrant is exercisable on a cash basis only at a Price of $0.50 per share, and
is exercisable for a period of two years from the date of
issuance.  Up to 521,400 2008 Warrant Shares are initially issuable on
exercise of the 2008 Winter Warrants.




With the
exception of some of the proceeds of the 2008 Winter Offering, the net proceeds
of all of the offerings discussed above are largely exhausted and we have cash
on hand to meet expenses only for a short period of time. In order to fund our
capital needs for the foreseeable future, including the operations of our
business, and the repayment of our outstanding 2007 Spring Notes, which are due
in June 2008, our outstanding 2007 Summer Notes which are due in September
2008, out outstanding 2007 Fall Notes which are due in December 2008 and out
2008 Winter Notes which are due in February 2009, we must raise substantial
additional funds.  In addition to the funds required to continue to
operate our business, and retire outstanding notes, we will require additional
funds in connection with the license and research and development agreements
with Temple University, costs associated with product development and
commercialization of the ELEKTRA technology, costs to manufacture and ship our
products, costs to design and implement an effective system of internal controls
and disclosure controls and procedures, costs of maintaining our status as a
public company by filing periodic reports with the SEC, and costs required to
protect our intellectual property. In addition, as discussed below, we have
substantial contractual commitments, including without limitation salaries to
our executive officers pursuant to employment agreements, certain severance
payments to a former officers and consulting fees, during the remainder of 2008
and beyond.




In light
of the Company’s financial commitments over the next several months and its
liquidity constraints, have implemented cost reduction measures in all areas of
operations, including but not limited to personnel lay-offs and/or reductions in
work, reductions in marketing and advertising, deferral of placing orders to
manufacturers of our ECO ChargR and MAG ChargR products for sale to our existing
distributors, reductions in research and development and product development of
ELEKTRA products, and reductions of certain other expenses. We intend to review
these measures on an ongoing basis and make additional decisions as may be
required.




We my
continue to use our equity arrangement for some of our additional requirements
for 2008. However, the equity arrangement will not be sufficient to meet all of
our current liabilities and other obligations in 2008. Among other things, the
thin trading of our common stock may limit our ability to use the equity
arrangement without adversely affecting the price of our common stock.
Therefore, in addition to the recently-completed 2007 Winter Offering, the
Company is actively pursuing additional financing alternatives, but no
commitments have been received and, accordingly, no assurance can be given that
any financing will be available or, if available, that it will be on terms that
are satisfactory to the Company. At present, we have relatively few financing
options available to us.




Contractual
Obligations





The
following table discloses our contractual commitments for future periods.
Long-term commitments are comprised operating leases and minimum guaranteed
compensation payments under employment and other agreements. See Note 12 to
Notes to Condensed consolidated Financial Statements.




Year
      ending December 31,
            
            Operating
      Leases(1)
            
            
            Guaranteed
      Payments2008
            
            $
            64,080
            
            
            $
            231,933
            (2)2009
            
            $
            43,840
            
            
            $
            200,000
            (3)2010
            
            $
            0
            
            
            $
            125,000
            (4)$
            107,920
            
            
            $
            556,933





(1)    Consists
of rent for our Morgan Hill Facility expiring on August 31, 2009. (For
description of this property, see Part 1, Item 2, “Property”).


(2)  
Consists of an aggregate $70,683 in total compensation, including base salary
and certain contractually-provided benefits, to   one executive
officer, pursuant to employment agreement that expire on July 25, 2008; $161,250
in licensing and maintenance fees to Temple University.


(3)  
Consists of license and maintenance fees due to Temple University;


(4)  
Consists of maintenance fees due to Temple University.





59




License agreements with Temple
University





We have
entered into two license agreements with Temple University, one covering Temple
University’s current patent application concerning certain electric field
effects on gasoline, kerosene and diesel fuel particle size distribution, and
the other covering Temple University’s current patent application concerning
electric field effects on crude oil and edible oil viscosity, and any and all
United States and foreign patents issuing in respect of the technologies
described in such applications (individually, a “License Agreement” and
collectively, the “License Agreements”). Initially, the License Agreements are
exclusive and the territory licensed to the Company is worldwide. Pursuant to
the License Agreements, the Company will pay to Temple University
(i) license fees in the aggregate amount of $250,000, payable in three
installments of $100,000, the first installment of which was paid in March 2007,
and $75,000 on each of February 2, 2008, which has not been paid, and
February 2, 2009, respectively; and (ii) annual maintenance fees of
$125,000 annually commencing January 1, 2008, which has not been paid. In
addition, each License Agreement separately provides that the Company will pay
royalties to Temple University on net sales of products incorporating the
technology licensed under that License Agreement in an amount equal to 7% of the
first $20 million of net sales, 6% of the next $20 million of net
sales and 5% of net sales in excess of $40 million. Sales under the two
License Agreements are not aggregated for purposes of calculating the royalties
payable to Temple University. In addition, the Company has agreed to bear all
costs of obtaining and maintaining patents in any jurisdiction where the Company
directs Temple University to pursue a patent for either of the licensed
technologies. Should the Company not wish to pursue a patent in a particular
jurisdiction, that jurisdiction would not be included in the territory licensed
to the Company.




The
Company is in default in connection with its payment obligations under the
License Agreements.  Nonetheless, the Company has not received any
written notice from Temple University of a material breach relating to required
payments under the License Agreements.  Any such notice must provide
the Company with 60 days’ notice to cure the material breach.  Should
the Company receive such notice, the Company’s failure to cure could result in a
termination of the License Agreements. Under the License Agreements the Company
must pay a penalty equal to 1% per month of the amounts due and unpaid under the
License Agreements.




Research and development agreement with
Temple University





We have
also entered into a research and development agreement (“R&D Agreement”)
with Temple University to conduct further research on the ELEKTRA technology.
Under the R&D Agreement Temple University will conduct a 24-month research
project towards expanding the scope of, and developing products utilizing, the
technologies covered under the License Agreements, including design and
manufacture of prototypes utilizing electric fields to improve diesel, gasoline
and kerosene fuel injection in engines using such fuels and a device utilizing a
magnetic field to reduce crude oil viscosity for crude oil (paraffin and mixed
base) and edible oil flow in pipelines. Pursuant to the R&D Agreement, we
will make payments to Temple University in the aggregate amount of $500,000,
payable in eight non-refundable installments commencing with $123,750, which was
paid in March 2007, and seven payments of $53,750 every three months
thereafter until paid in full. The payments of $53,750 due in June, September
and December 2007 have not been paid. The Company is in default under the
R&D Agreement, however, the Company has not received any notice of default
from Temple University. If the research project yields results within the scope
of the technologies licensed pursuant to the License Agreements, those results
will be deemed included as rights licensed to the Company pursuant to the
License Agreements. If the research project yields results outside of the scope
of the technologies covered by the License Agreements, the Company has a
six-month right of first negotiation to enter into a new worldwide, exclusive
license agreement with Temple University for the intellectual property covered
by those results.





Critical
Accounting Policies and Estimates





Our
discussion and analysis of our condensed consolidated 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 condensed consolidated
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.





The
methods, estimates and judgments we use in applying our most critical accounting
policies have a significant impact on the condensed consolidated 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.. For a more detailed discussion of the
accounting policies of the Company, see Note 3 of Notes to the condensed
consolidated financial statements.





We
believe the following critical accounting policies, among others, require
significant judgments and estimates used in the preparation of
our condensed consolidated financial statements:





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 condensed consolidated financial statements as described in Note 1 to
Notes to condensed consolidated financial statements. Actual results could
differ from those estimates





60




Revenue
Recognition




The
Company has adopted Staff Accounting Bulletin 104, “Revenue Recognition” and
therefore recognizes revenue based upon meeting four criteria:





•
            Persuasive
      evidence of an arrangement exists;•
            Delivery
      has occurred or services rendered;•
            The
      seller’s price to the buyer is fixed or determinable;
  and•
            Collectability
      is reasonably assured.





The
Company contract manufactures fixed magnetic field products and sells them to
various original equipment manufacturers in the motor vehicle and small utility
motor markets. The Company negotiates an initial contract with the customer
fixing the terms of the sale and then receives a letter of credit or full
payment in advance of shipment. Upon shipment, the Company recognizes the
revenue associated with the sale of the products to the customer.





Long-lived assets





The
Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” In accordance with SFAS No. 144, long-lived assets to
be held are reviewed for events or changes in circumstances that indicate that
their carrying value may not be recoverable. The Company periodically reviews
the carrying values of long-lived assets to determine whether or not impairment
to such value has occurred. No impairments were recorded for the three months
ended March 31, 2008. The Company recorded an impairment of approximately
$505,000 during the period from inception (February 18, 1998) through
March 31, 2008.





Stock-Based
Compensation






On
January 1, 2006, the Company adopted Statements of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”)
which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors based on estimated
fair values. SFAS 123R supersedes the Company’s previous accounting under APB 25
for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company
has applied the provisions of SAB 107 in its adoption of SFAS 123R.




The
Company adopted SFAS 123R using the modified prospective transition method,
which requires the application of the accounting standard as of January 1,
2006, the first day of the Company’s fiscal year 2006. The Company’s financial
statements as of and for the year ended December 31, 2007 reflect the
impact of SFAS 123R. In accordance with the modified prospective transition
method, the Company’s financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123R. Stock-based
compensation expense recognized under SFAS 123R for employee and directors for
the year ended March 31, 2008 was $21,818.




The
Company’s determination of fair value of share-based payment awards to employees
and directors on the date of grant using the Black-Scholes model, which is
affected by the Company’s stock price as well as assumptions regarding a number
of highly complex and subjective variables. These variables include, but are not
limited to our expected stock price volatility over the term of the awards, and
actual and projected employee stock option exercise behaviors.




The
Company has elected to adopt the detailed method provided in SFAS 123R for
calculating the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Statements of Cash Flows of
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123R.




The
Company accounts for stock option and warrant grants issued to non-employees for
goods and services using the guidance of SFAS 123 and Emerging Issues Task Force
(“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 model at the earlier of the date at which the
non-employee’s performance is completed or a performance commitment is
reached.





Recent
Accounting Pronouncements





Adopted Statements





Statement
No. 157





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a
formal framework for measuring fair value under Generally Accepted Accounting
Principles (“GAAP”). SFAS No. 157 defines and codifies the many definitions of
fair value included among various other authoritative literature, clarifies and,
in some instances, expands on the guidance for implementing fair value
measurements, and increases the level of disclosure required for fair value
measurements. Although SFAS No. 157 applies to and amends the provisions of
existing FASB and American Institute of Certified Public




61


Accountants
(“AICPA”) pronouncements, it does not, of itself, require any new fair value
measurements, nor does it establish valuation standards. SFAS No. 157 applies to
all other accounting pronouncements requiring or permitting fair value
measurements, except for: SFAS No. 123R, share-based payment and related
pronouncements, the practicability exceptions to fair value determinations
allowed by various other authoritative pronouncements, and AICPA Statements of
Position 97-2 and 98-9 that deal with software revenue recognition. SFAS No. 157
was effective January 1, 2008.





Statement
No. 159





In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”), which provides companies with an option to report
selected financial assets and liabilities at fair value. SFAS No. 159’s
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. Generally accepted accounting principles have required
different measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. SFAS No. 159 helps to mitigate this
type of accounting-induced volatility by enabling companies to report related
assets and liabilities at fair value, which would likely reduce the need for
companies to comply with detailed rules for hedge accounting. SFAS No. 159
also establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 requires companies to
provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the company’s
choice to use fair value on its earnings. SFAS No. 159 also requires companies
to display the fair value of those assets and liabilities for which the company
has chosen to use fair value on the face of the balance sheet. SFAS No. 159 does
not eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included in
SFAS No. 157 and SFAS No. 107. SFAS No. 159 was effective January 1,
2008.





The above statements were adopted
without effect in the reporting period.





Recently
Issued




SFAS
No. 141 (R) and SFAS No. 160




In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS
No. 160, Non-controlling Interests in Condensed consolidated Financial
Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree at their fair values on the acquisition date, with goodwill
being the excess value over the net identifiable assets acquired. SFAS
No. 160 clarifies that a non-controlling interest in a subsidiary should be
reported as equity in the condensed consolidated financial statement. The
calculation of earnings per share will continue to be based on income amounts
attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. We have not yet determined the
effect on our financial statements, if any, upon adoption of SFAS No. 141
(R) or SFAS No. 160.





FAS
No. 161





In March
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“FAS 161”).  The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows.  FAS 161 is effective for the Company in
fiscal 2010.




Item 3.
Controls and Procedures





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 Annual Report on Form
10-KSB. 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(b) under the Securities Exchange Act of 1934 (the
“Exchange Act”) are not adequate 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 SEC rules and forms.





Management’s
Annual Report on Internal Control over Financial Reporting.





Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that
(i) pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transaction and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.




62


Because
of its inherent limitation, internal control over financial reporting cannot
provide absolute assurance of achieving financial reporting
objectives.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as required in Rule 13a-15(b).  In
December 2006 our Controller retired and in January 2007 our Chief Financial
Officer retired, although our former Controller still provides certain financial
consulting services for us.  We have hired an Interim Chief Financial
Officer and a full-time Controller.  We have retained a consulting
firm and are conducting an evaluation to design and implement adequate systems
of accounting and financial statement disclosure controls. We expect to complete
this review during 2008 to comply with the requirements of the
SEC.  We believe that the ultimate success of our plan to improve
our internal control over financial reporting will require a
combination of additional financial resources, outside consulting services,
legal advice, additional personnel, further reallocation of responsibility among
various persons, and substantial additional training of those of our officers,
personnel and others, including certain of our directors such as our Chairman of
the Board and committee chairs, who are charged with implementing and/or
carrying out our plan.  It should also be noted that the design of any
system of controls and procedures 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.





Our
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting and
management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only Management’s report in this annual report.




Other
than as described above, there were no changes 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.











63




PART
II




Item 1.
Legal Proceedings




In
April 2005, Jeffrey A. Muller, the Company’s former sole director and
executive officer, filed a complaint against us in the Federal District Court
for the Central District of California, seeking declaratory and injunctive
relief and alleging unfair competition in connection with a claimed prior patent
interest in the ZEFS device and stock option rights. In seeking declaratory
relief, Mr. Muller is seeking to have the patent rights in the ZEFS device
that were previously transferred to us by Mr. Muller’s bankruptcy trustee
declared null and void.




This
lawsuit brought by Mr. Muller arose out of the same claims that were the
subject of litigation in the Federal District Court for the Southern
District of New York, in which the Court entered judgment against Mr.
Muller.  Those claims are pending further
proceedings.  While we believe that we have valid claims and defenses,
there can be no assurance that an adverse result or outcome on the pending
motions or a trial of this case would not have a material adverse effect on our
financial position or cash flow.




Litigation
Involving Scottish Glen Golf Company




We are
involved in litigation with Scottish Glen Golf Company, Inc. (SGGC) doing
business as KZ Golf, Inc., the Company’s previous landlord on claims in the
aggregate amount of $104,413.   STWA does not dispute the fact
that certain amounts of unpaid past rent are due but does dispute that it owes
the aggregate of $104,413 demanded by SGGC; more than half of which are
purported “late fees” which was assessed at the rate of $100 per
day.  It is the company’s position that the late fees are void and
unenforceable and that STWA is entitled to a set-off for office space that
reverted back to SGGC.




While the
Company believes that it has valid claims and defenses, given the inherent
uncertainties of litigation, the Company cannot predict the outcome of this
matter.  Accordingly, there can be no assurance that an adverse result
or outcome of this matter would not have a material adverse effect on the
Company’s financial position or cash flow.  The Company believes that
these claims arose from acts of a related party involving a former officer and
director and his wife as a beneficial owners of SGGC.





Effective
April 30, 2008, the Company and SGGC settled the pending
litigation.  In the interest of avoiding further litigation costs and
expenses, the Company and SGGC executed a “Settlement and Mutual Release
Agreement.”  (See Item 5 “Other Information.”)





Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds




Morale
Orchards Transaction




On
December 5, 2006, we entered into a Note Purchase Agreement (the “Note
Purchase Agreement”) with Morale Orchards, LLC (“Morale”). The Note Purchase
Agreement provides that Morale will purchase the Company’s one-year Convertible
Promissory Notes in the aggregate face amount of $1,225,000 (the “Morale
Notes”), and five-year Warrants (the “Morale Warrants”) to purchase shares of
our Common Stock at prices ranging from $0.70 to $0.85 per share. The aggregate
purchase price for the Morale Notes and Morale Warrants is $1,000,000.
Therefore, while the stated interest on the Morale Notes is 0%, the actual
interest rate is 22.5% because the Morale Notes are being purchased at a
discount from their face amount.




Pursuant
to the terms of the Note Purchase Agreement, Morale purchased one Morale Note in
the principal amount of $612,500 on December 5, 2006, for which it paid
$500,000 and purchased the other Morale Note in the principal amount of $612,500
on January 10, 2007, for which it paid $500,000.  The December 5,
2006 Note is convertible into 720,588 shares of our common stock and 360,294
Warrants to purchase our common stock were issued.  The January 10,
2007 Note is convertible into 875,000 shares of our common stock and 437,500
Warrants to purchase our common stock were issued.  (See “Details of
Recent Financing Transactions”).




On
January 31, 2008, a Modification and Satisfaction Agreement was entered into
between the Company, Morale Orchards, LLP and Matthews &
Partners.  (See “Details of Recent Financing
Transactions”).




2007 PIPE
Offering.




From
January 13 through April 27, 2007, the Company conducted an offering
(the “2007 PIPE Offering”), through Spencer Clarke, as exclusive placement
agent. The Company raised $400,000 gross proceeds and $352,000 net
proceeds.    Interest on the 2007 PIPE Notes, at a rate of
10% per annum, is payable quarterly. The Notes are due nine months from date of
issuance. The Notes are convertible into 571,429 shares of the Company’ Common
Stock and investors received warrants entitling the holders to purchase up to
857,144 shares of the Company’s Common Stock.




The terms
of the 2007 PIPE Offering were modified on August 29, 2007 and again on December
17, 2007.  See (“Details of Recent Financing
Transactions”)





64


2007 Spring
Offering.




From
June 13, 2007 through June 26, 2007, the Company conducted a private
offering (the “2007 Spring Offering”) and issued Convertible Notes in the
aggregate face amount of $451,000.  These notes were sold for an
aggregate purchase price of $410,000.  The Notes are convertible into
1,210,489 shares of the Company’s common stock and in addition, investors
received warrants entitling the holders to purchase up to 605,242 shares of the
Company’s common stock. (See “Details of Recent Financial
Transactions”)





2007
Summer Offering.




From
August 8, 2007 through September 27, 2007, the Company conducted a private
offering (the "2007 Summer Offering") and issued Convertible Notes in the
aggregate face amount $309,980.  These Notes were sold for an
aggregate purchase price of $281,800. The Notes are convertible into 837,784
shares of Company’s common stock and in addition, investors received warrants
entitling the holders to purchase up to 418,892 shares of the Company’s common
stock. (See “Details of Recent Financial Transactions”).




2007
Fall Offering.





From
November 14, 2007 through December 17, 2007 the Company conducted  a
private offering (the “2007 Fall Offering”) and issued Convertible Notes in the
aggregate face amount of $622,600.  These Notes were sold for an
aggregate purchase price of $566,000.  The Notes are convertible into
1,596,410 shares of the Company’s common stock and in addition, investors
received warrants entitling the holders to purchase up to 798,205 shares of the
Company’s common stock. (See “Details of Recent Financing
Transactions”).





2007
Winter Offering





From
December 27, 2008 through February 29, 2008, the Company conducted a private
offering (the “2008 Winter Offering”) and issued Convertible Notes in the
aggregate face amount of $521,400.  These Notes were sold for an
aggregate purchase price of $474,000 net proceeds.  The Notes are
convertible into 1,042,800 shares of the Company’s common stock and in addition,
investors received warrants entitling the holders to purchase up to 521,400
shares of the Company’s common stock.  (See “Details of Recent
Financing Transactions”).




The sales
of the securities described above were made in reliance on the exemptions from
registration set forth in Section 4(2) of the Securities Act of 1933, as
amended (the “Act”), or Regulations D or S promulgated thereunder.





Other
Issuances.





In
September 2006, the Company entered into what is sometimes termed an equity
arrangement with an investment banking firm.  Under the
arrangement the Company may sell (put) shares of common stock
from time to time over a 36-month period, at a purchase price calculated at 97%
of the lowest best closing bid for the Company’s common stock for the five
trading days following the put notice for cash.  The Company may draw
up to $10,000,000. Because the price of the common stock fluctuates, the number
of shares of common stock that the Company may issue when the Company
exercises the put rights will vary, the Company does not know how many
shares will actually be issued under the put. On October 6, 2006, the
Company filed a Registration Statement which was effective October 30, 2006
which registered and made available 7,000,000 shares of common stock for
possible future draws under the line of credit.




During
the year ended December 31, 2007 the Company drew down $ 992,055 ($912,683 net
of closing costs) and issued 1,880,421 shares of common stock.  As
of March 31, 2008 the Company has drawn down $1,372,150 ($1,262,378) net of
closing costs) of this commitment and issued 2,367,905 shares at an average
price of $0.58 per share, leaving 4,632,095 shares available under the equity
line of credit.




In August
2007, the Company issued 2,597,524 shares in connection with the exercise of
options that were originally granted to the late Edward L. Masry.




During
the year ended December 31, 2007, the Company issued 1,910,711 shares of common
stock in exchange for conversion of $526,480 of Convertible
Notes




During
the three months ended March 31, 2008, the Company issued 5,450,848 shares of
common stock in exchange for conversion of $1,362,712 of Morale Orchards, LLC
Convertible Notes in accordance with the Morale Orchards-Matthews Modification
Agreement.  The Company incurred and recorded non-cash interest
expense in the amount of $681,982.




During
the three months ended March 31, 2008, the Company issued 1,891,048 shares of
common stock in exchange for settlement of debt, loans and services in the
amount of $472,762 in accordance with the Morale Orchards-Matthews Modification
Agreement.  The Company incurred and recorded non-cash legal expense
in the amount of $236,572.




During
the three months ended March 31, 2008, the Company issued 80,000 shares of
common stock in exchange for settlement of debt in the amount of $20,000 in
accordance with the Morale Orchards-Matthews Modification
Agreement.  The Company incurred and recorded non-cash interest
expense in the amount of $9,683.




During
the three months ended March 31, 2008, the Company issued 840,970 shares of
common stock in exchange for conversion of $325,600 of other Convertible
Notes.




65


During
the three months ended March 31, 2008, the Company issued 17,838 shares of
common stock in exchange for consulting services in the amount of
$6,900.




During
the three months ended March 31, 2008, the Company received notice of conversion
of $262,900 convertible notes into 532,006 shares of common stock.  As
of March 31, 2008, these shares are reflected as common stock to be issued and
were subsequently issued in April 2008




During
the three months ended March 31, 2008, the Company entered an agreement to
issued 84,583 shares of common stock for settlement of $25,375 in
payables.  As of March 31, 2008, these shares are reflected as common
stock to be issued, and were subsequently issued in April 2008.




During
the three months ended March 31, 2008, the Company received $170,830 for
exercise of warrants to purchase 341,660 shares of common stock.  As
of March 31, 2008, these shares are reflected as common stock to be issued, and
were subsequently issued in April 2008 .





Item 3.
Defaults Upon Senior Securities





None





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





None





Item 5.
Other Information





On February 21, 2008, Joseph Helleis
resigned as a Director of the Company.  Cecil B. Kyte was appointed
Chairman of the Audit Committee and Nathan Shelton was appointed to serve on the
Audit Committee to replace Mr. Helleis.





In April 2008, the Company received
$161,495 for exercise of warrants to purchase 322,990 shares of common
stock.





In April 2008, the Company received
notice of conversion of $77,000 convertible notes into 176,769 shares of common
stock.





Effective
April 30, 2008 the Company and Scottish Glen Golf Company, Inc., dba KZG settled
their pending litigation relating to the Company’s prior offices.  In
the interest of avoiding further litigation costs and expenses, the Company and
SGGC executed a “Settlement and Mutual Release Agreement effective April 30,
2008. The Company will pay SGGC the sum of $75,000, execution of which is hereby
stayed pending the following terms:





a.           Company
shall pay to SGGC the sum of $51,000 in two installments, without interest, as
follows;





(1)           $34,000
due on or before June 2, 2008 and


(2)           $17,000
due on or before July 17, 2008





b.
            The
      above payments shall be payable to SCOTTICH GLEN GOLF COMPANY, INC. dba
      KZG and wired transferred to the
latter.





c.
            In
      the event any payment listed above is not paid when due, then the total
      sum of $75,000 shall immediately be due and owing, less any payments
      actually made pursuant to the Agreement and SGGC shall be entitled to file
      the Stipulated Judgment





d.
            The
      Settlement and Mutual Release Agreement also provides for mutual general
      releases.





Upon full
and complete execution of all duties and obligations by Company under the terms
of this Agreement, and provided Paragraph c. above has not occurred, SGGC shall
cause the Complaint to be dismissed, with prejudice, as to all causes of action
and as to all parties.  The Company has recorded the accrued liability
at March 31, 2008.





Item 6.
Exhibits




Exhibit
      No.
            
            Description31.1
            
            
            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)




66





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:
      May 13, 2008
              By:
              /s/ EUGENE
      E. EICHLEREugene
      E. EichlerInterim
      Chief Financial Officer










67





EXHIBIT INDEX




Exhibit
      No.
            
            Description31.1
            
            
            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 or
arrangement.






68