**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




Amendment
      No. 1 to


**FORM
      10-QSB/A**


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




**For
      the quarterly period ended September 30, 2007**


**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 o  No þ




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 November 19,
      2007 was 44,559,702 shares.




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





**SAVE
      THE WORLD AIR, INC.**




FORM
      10-QSB




INDEX


**Page**PART
                IITEM
                1. Financial Statements
            
            
            1Condensed
                balance sheets
            
            
            1Condensed
                statements of operations (unaudited)
            
            
            3Condensed
                statements of changes in stockholders’ deficiency
                (unaudited)
            
            
            4Condensed
                statements of cash flows (unaudited)
            
            
            13Notes
                to condensed financial statements (unaudited)
            
            
            15ITEM
                2. Management’s Discussion and Analysis or Plan of
                Operations
            
            
            45ITEM
                3. Controls and Procedures
            
            
            58PART
                IIITEM
                1. Legal Proceedings
            
            
            59ITEM
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            61ITEM
                3. Defaults Upon Senior Securities
            
            
            62ITEM
                4. Submission of Matters to a Vote of Security Holders
            
            
            62ITEM
                5. Other Information
            
            
            62ITEM
                6. Exhibits
            
            
            62SIGNATURES
            
            
            63EXHIBIT
                INDEXEXHIBIT
                10.1EXHIBIT
                31.1EXHIBIT
                31.2EXHIBIT
                32







i





**PART
      I**




**Item 1.
      Financial Statements**


**SAVE
        THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 
 
 **ASSETS**
              
              **September
                  30,**
                **2007**
                **(unaudited)**
              
              
              **December
                  31,**
                **2006****Current
                  assets**Cash
              
              $
              102,179
              
              
              $
              244,228Inventory
              
              
              41,461
              
              
              
              21,314Other
                  current assets
              
              
              56,796
              
              
              
              81,232Total
                  current assets
              
              
              200,436
              
              
              
              346,774**Property
                  and equipment**, net of accumulated depreciation
              
              
              212,253
              
              
              
              322,023**Other
                  assets**
              
              
              4,500
              
              
              
              4,500**Total
                  assets**
              
              $
              417,189
              
              
              $
              673,297
 
 See
          notes
          to condensed consolidated financial statements.
 1
 **SAVE
        THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS - Continued**
 
 **September
                  30,**
                **2007**
                **(unaudited)**
              
              
              **December
                  31,**
                **2006****LIABILITIES
                  AND STOCKHOLDERS' DEFICIENCY****Current
                  liabilities**Accounts
                  payable
              
              $
              855,402
              
              
              $
              233,707Accrued
                  expenses
              
              
              769,901
              
              
              
              468,413Accrued
                  research and development fees
              
              
              103,347
              
              
              
              95,000Accrued
                  professional fees
              
              
              570,519
              
              
              
              594,945Loans
                  payable to related party
              
              
              81,404
              
              
              
              -Convertible
                  debentures, net
              
              
              1,893,041
              
              
              
              177,926Total
                  current liabilities
              
              
              4,273,614
              
              
              
              1,569,991**Commitments
                  and contingencies****Stockholders’
                  deficiency**Common
                  stock, $.001 par value: 200,000,000 shares authorized, 44,559,702
                  and
                  40,081,758 shares issued and outstanding at September 30, 2007
                  and
                  December 31, 2006, respectively
              
              
              44,560
              
              
              
              40,082Common
                  stock to be issued
              
              
              -
              
              
              
              60,000Additional
                  paid-in capital
              
              
              31,586,808
              
              
              
              29,430,821Deficit
                  accumulated during the development stage
              
              
              (35,487,793
              )
              
              
              (30,427,597
              )Total
                  stockholders’ deficiency
              
              
              (3,856,425
              )
              
              
              (896,694
              )**Total
                  liabilities and stockholders’ deficiency**
              
              $
              417,189
              
              
              $
              673,297
   See
          notes
          to condensed consolidated financial statements.
 2
 **SAVE
        THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**
 
 **For
                  the Three months ended**
                **September
                  30,**
              
              
              **For
                  the Nine months ended**
                **September
                  30,**
              
              
              **For
                  the Period**
                **from
                  February 18, 1998 (Date of Inception) through**
                **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**
              
              
              **2007****Net
                  sales**
              
              $
              -
              
              
              $
              -
              
              
              $
              22,000
              
              
              $
              -
              
              
              $
              52,000Cost
                  of goods sold
              
              
              -
              
              
              
              -
              
              
              
              5,360
              
              
              
              -
              
              
              
              18,760Gross
                  profit
              
              
              -
              
              
              
              -
              
              
              
              16,640
              
              
              
              -
              
              
              
              33,240**Operating
                  expenses**
              
              
              873,971
              
              
              
              1,718,614
              
              
              
              3,177,533
              
              
              
              5,326,222
              
              
              
              26,080,509**Research
                  and development expenses**
              
              
              98,427
              
              
              
              95,608
              
              
              
              539,610
              
              
              
              274,713
              
              
              
              4,745,024**Non-cash
                  patent settlement costs**
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,610,066**Loss
                  before other income (expense)**
              
              
              (972,398
              )
              
              
              (1,814,222
              )
              
              
              (3,700,503
              )
              
              
              (5,600,935
              )
              
              
              (32,402,359
              )**Other
                  income (expense)**Other
                  income
              
              
              2,271
              
              
              
              -
              
              
              
              2,448
              
              
              
              125
              
              
              
              2,573Interest
                  income
              
              
              12
              
              
              
              5,966
              
              
              
              62
              
              
              
              12,942
              
              
              
              16,313Interest
                  expense
              
              
              (499,282
              )
              
              
              (152,769
              )
              
              
              (972,950
              )
              
              
              (2,362,687
              )
              
              
              (3,728,793
              )Financing
                  fee
              
              
              -
              
              
              
              -
              
              
              
              (47,104
              )
              
              
              -
              
              
              
              (47,104
              )Placement
                  fee
              
              
              -
              
              
              
              -
              
              
              
              (48,000
              )
              
              
              -
              
              
              
              (48,000
              )Loss
                  on valuation of warrants
              
              
              (148,455
              )
              
              
              -
              
              
              
              (293,439
              )
              
              
              -
              
              
              
              (293,349
              )Settlement
                  of litigation and debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,017,208Total
                  other income (expense)
              
              
              (645,454
              )
              
              
              (146,803
              )
              
              
              (1,358,893
              )
              
              
              (2,349,620
              )
              
              
              (3,081,152
              )**Loss
                  before provision for income taxes**
              
              
              (1,617,852
              )
              
              
              (1,961,025
              )
              
              
              (5,059,396
              )
              
              
              (7,950,555
              )
              
              
              (35,483,511
              )**Provision
                  for income taxes**
              
              
              -
              
              
              
              -
              
              
              
              800
              
              
              
              800
              
              
              
              4,282**Net
                  loss**
              
              $
              (1,617,852
              )
              
              $
              (1,961,025
              )
              
              $
              (5,060,196
              )
              
              $
              (7,951,355
              )
              
              $
              (35,487,793
              )**Net
                  loss per share, basic and diluted**
              
              $
              (0.04
              )
              
              $
              (0.05
              )
              
              $
              (0.13
              )
              
              $
              (0.23
              )**Weighted
                  average shares outstanding, basic and diluted**
              
              ****
              **40,988,308**
              
              
              ****
              **38,439,668**
              
              
              ****
              **38,265,250**
              
              
              ****
              **34,711,746**
   See
          notes
          to condensed consolidated financial statements.
 3
  **SAVE
          THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
          DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY**
 **FEBRUARY
          18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency****BALANCE,
                      FEBRUARY 18, 1998**(date of inception)
                  
                  
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --Issuance
                      of common stock on April 18, 1998
                  
                  
                  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**
                  **)**
                  
                  ****
                  **2,993**Issuance
                      of common stock on May 18, 1999
                  
                  
                  198,003
                  
                  
                  
                  198
                  
                  
                  
                  --
                  
                  
                  
                  516,738
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  516,936Issuance
                      of common stock for ZEFS on September 14, 1999
                  
                  
                  5,000,000
                  
                  
                  
                  5,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  5,000Stock
                      issued for professional services on May 18, 1999
                  
                  
                  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
                  
                  
                  20,000
                  
                  
                  
                  20
                  
                  
                  
                  --
                  
                  
                  
                  20,580
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  20,600Stock
                      issued for consulting services on February 8, 2000
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  --
                  
                  
                  
                  102,900
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  103,000Stock
                      issued for professional services on April 18, 2000
                  
                  
                  27,000
                  
                  
                  
                  27
                  
                  
                  
                  --
                  
                  
                  
                  91,233
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  91,260Stock
                      issued for directors fees on April 18, 2000
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  --
                  
                  
                  
                  168,950
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  169,000Stock
                      issued for professional services on May 19, 2000
                  
                  
                  5,000
                  
                  
                  
                  5
                  
                  
                  
                  --
                  
                  
                  
                  20,295
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  20,300Stock
                      issued for directors fees on June 20, 2000
                  
                  
                  6,000
                  
                  
                  
                  6
                  
                  
                  
                  --
                  
                  
                  
                  26,634
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  26,640Stock
                      issued for professional services on June 20, 2000
                  
                  
                  1,633
                  
                  
                  
                  2
                  
                  
                  
                  --
                  
                  
                  
                  7,249
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  7,251Stock
                      issued for professional services on June 26, 2000
                  
                  
                  1,257
                  
                  
                  
                  1
                  
                  
                  
                  --
                  
                  
                  
                  6,674
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  6,675Stock
                      issued for employee compensation on June 26, 2000
                  
                  
                  22,000
                  
                  
                  
                  22
                  
                  
                  
                  --
                  
                  
                  
                  116,798
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  116,820Stock
                      issued for consulting services on June 26, 2000
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  52,203
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  52,213Stock
                      issued for promotional services on July 28, 2000
                  
                  
                  9,675
                  
                  
                  
                  9
                  
                  
                  
                  --
                  
                  
                  
                  47,205
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  47,214Stock
                      issued for consulting services on July 28, 2000
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  47,975
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  47,985Stock
                      issued for consulting services on August 4, 2000
                  
                  
                  35,033
                  
                  
                  
                  35
                  
                  
                  
                  --
                  
                  
                  
                  74,585
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  74,620Stock
                      issued for promotional services on August 16, 2000
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  56,225
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  56,250Stock
                      issued for consulting services on September 5, 2000
                  
                  
                  12,833
                  
                  
                  
                  13
                  
                  
                  
                  --
                  
                  
                  
                  28,861
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  28,874Stock
                      issued for consulting services on September 10, 2000
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  14,740
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  14,750Stock
                      issued for consulting services on November 2, 2000
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  8,643
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  8,653
 
 
 4
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY -
              CONTINUED**
 **FEBRUARY
              18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30,
              2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency**Stock
                      issued for consulting services on November 4, 2000
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  8,643
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  8,653Stock
                      issued for consulting services on December 20, 2000
                  
                  
                  19,082
                  
                  
                  
                  19
                  
                  
                  
                  --
                  
                  
                  
                  9,522
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  9,541Stock
                      issued for filing services on December 20, 2000
                  
                  
                  5,172
                  
                  
                  
                  5
                  
                  
                  
                  --
                  
                  
                  
                  2,581
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,586Stock
                      issued for professional services on December 26, 2000
                  
                  
                  12,960
                  
                  
                  
                  13
                  
                  
                  
                  --
                  
                  
                  
                  4,912
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  4,925Other
                      stock issuance on August 24, 2000
                  
                  
                  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
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  3,038
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  3,048Stock
                      issued for consulting services on February 1, 2001
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  3,235
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  3,245Stock
                      issued for consulting services on March 1, 2001
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  2,743
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,753Stock
                      issued for legal services on March 13, 2001
                  
                  
                  150,000
                  
                  
                  
                  150
                  
                  
                  
                  --
                  
                  
                  
                  47,850
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  48,000Stock
                      issued for consulting services on April 3, 2001
                  
                  
                  9,833
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  2,448
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,458Stock
                      issued for legal services on April 4, 2001
                  
                  
                  30,918
                  
                  
                  
                  31
                  
                  
                  
                  --
                  
                  
                  
                  7,699
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  7,730Stock
                      issued for professional services on April 4, 2001
                  
                  
                  7,040
                  
                  
                  
                  7
                  
                  
                  
                  --
                  
                  
                  
                  1,753
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1,760Stock
                      issued for consulting services on April 5, 2001
                  
                  
                  132,600
                  
                  
                  
                  132
                  
                  
                  
                  --
                  
                  
                  
                  33,018
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  33,150Stock
                      issued for filing fees on April 30, 2001
                  
                  
                  1,233
                  
                  
                  
                  1
                  
                  
                  
                  --
                  
                  
                  
                  2,033
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,034Stock
                      issued for filing fees on September 19, 2001
                  
                  
                  2,678
                  
                  
                  
                  2
                  
                  
                  
                  --
                  
                  
                  
                  2,274
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,276Stock
                      issued for professional services on September 28, 2001
                  
                  
                  150,000
                  
                  
                  
                  150
                  
                  
                  
                  --
                  
                  
                  
                  92,850
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  93,000Stock
                      issued for directors services on October 5, 2001
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  --
                  
                  
                  
                  59,900
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  60,000Stock
                      issued for legal services on October 17, 2001
                  
                  
                  11,111
                  
                  
                  
                  11
                  
                  
                  
                  --
                  
                  
                  
                  6,655
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  6,666Stock
                      issued for consulting services on October 18, 2001
                  
                  
                  400,000
                  
                  
                  
                  400
                  
                  
                  
                  --
                  
                  
                  
                  379,600
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  380,000Stock
                      issued for consulting services on October 19, 2001
                  
                  
                  150,000
                  
                  
                  
                  150
                  
                  
                  
                  --
                  
                  
                  
                  187,350
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  187,500Stock
                      issued for exhibit fees on October 22, 2001
                  
                  
                  5,000
                  
                  
                  
                  6
                  
                  
                  
                  --
                  
                  
                  
                  6,745
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  6,751Stock
                      issued for directors services on November 2, 2001
                  
                  
                  1,000,000
                  
                  
                  
                  1,000
                  
                  
                  
                  --
                  
                  
                  
                  949,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  950,000Stock
                      issued for consulting services on November 7, 2001
                  
                  
                  20,000
                  
                  
                  
                  20
                  
                  
                  
                  --
                  
                  
                  
                  16,980
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  17,000
 
 
 5
  **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY -
              CONTINUED**
 **FEBRUARY
              18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30,
              2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency**Stock
                      issued for consulting services on November 20, 2001
                  
                  
                  43,000
                  
                  
                  
                  43
                  
                  
                  
                  --
                  
                  
                  
                  42,097
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  42,140Stock
                      issued for consulting services on November 27, 2001
                  
                  
                  10,000
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  9,790
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  9,800Stock
                      issued for consulting services on November 28, 2001
                  
                  
                  187,000
                  
                  
                  
                  187
                  
                  
                  
                  --
                  
                  
                  
                  183,073
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  183,260Intrinsic
                      value of options issued to employees
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,600,000
                  
                  
                  
                  (2,600,000
                  )
                  
                  
                  --
                  
                  
                  
                  --Fair
                      value of options issued to non-employees for services
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  142,318
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  142,318Amortization
                      of deferred compensation
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  191,667
                  
                  
                  
                  --
                  
                  
                  
                  191,667Net
                      loss
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (2,735,013
                  )
                  
                  
                  (2,735,013
                  )**BALANCE,
                      DECEMBER 31, 2001**
                  
                  ****
                  **18,085,847**
                  
                  
                  ****
                  **18,086**
                  
                  
                  ****
                  **--**
                  
                  
                  ****
                  **6,220,322**
                  
                  
                  ****
                  **(2,408,333**
                  **)**
                  
                  ****
                  **(5,102,346**
                  **)**
                  
                  ****
                  **(1,272,271**
                  **)**Stock
                      issued for directors services on December 10, 2002
                  
                  
                  2,150,000
                  
                  
                  
                  2,150
                  
                  
                  
                  --
                  
                  
                  
                  857,850
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  860,000Common
                      stock paid for, but not issued (2,305,000 shares)
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  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
                  
                  
                  1,425,000
                  
                  
                  
                  1,425
                  
                  
                  
                  (213,750
                  )
                  
                  
                  212,325
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Common
                      stock issued, previously paid for
                  
                  
                  880,000
                  
                  
                  
                  880
                  
                  
                  
                  (220,000
                  )
                  
                  
                  219,120
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Stock
                      issued for cash on March 20, 2003
                  
                  
                  670,000
                  
                  
                  
                  670
                  
                  
                  
                  --
                  
                  
                  
                  166,830
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  167,500Stock
                      issued for cash on April 4, 2003
                  
                  
                  900,000
                  
                  
                  
                  900
                  
                  
                  
                  --
                  
                  
                  
                  224,062
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  224,962Stock
                      issued for cash on April 8, 2003
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  --
                  
                  
                  
                  24,900
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  25,000Stock
                      issued for cash on May 8, 2003
                  
                  
                  1,150,000
                  
                  
                  
                  1,150
                  
                  
                  
                  --
                  
                  
                  
                  286,330
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  287,480Stock
                      issued for cash on June 16, 2003
                  
                  
                  475,000
                  
                  
                  
                  475
                  
                  
                  
                  --
                  
                  
                  
                  118,275
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  118,750Stock
                      issued for legal services on June 27, 2003
                  
                  
                  83,414
                  
                  
                  
                  83
                  
                  
                  
                  --
                  
                  
                  
                  45,794
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  45,877Debt
                      converted to stock on June 27, 2003
                  
                  
                  2,000,000
                  
                  
                  
                  2,000
                  
                  
                  
                  --
                  
                  
                  
                  498,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  500,000Stock
                      and warrants issued for cash on July 11, 2003
                  
                  
                  519,000
                  
                  
                  
                  519
                  
                  
                  
                  --
                  
                  
                  
                  129,231
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  129,750Stock
                      and warrants issued for cash on September 29, 2003
                  
                  
                  1,775,000
                  
                  
                  
                  1,775
                  
                  
                  
                  --
                  
                  
                  
                  441,976
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  443,751Stock
                      and warrants issued for cash on October 21, 2003
                  
                  
                  1,845,000
                  
                  
                  
                  1,845
                  
                  
                  
                  --
                  
                  
                  
                  459,405
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  461,250Stock
                      and warrants issued for cash on October 28, 2003
                  
                  
                  1,570,000
                  
                  
                  
                  1,570
                  
                  
                  
                  --
                  
                  
                  
                  390,930
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  392,500Stock
                      and warrants issued for cash on November 19, 2003
                  
                  
                  500,000
                  
                  
                  
                  500
                  
                  
                  
                  --
                  
                  
                  
                  124,500
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  125,000
  
 6
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY -
              CONTINUED**
 **FEBRUARY
              18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30,
              2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency**Finders'
                      fees related to stock issuances
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  43,875
                  
                  
                  
                  (312,582
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (268,707
                  )Common
                      stock paid for, but not issued (25,000 shares)
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  6,250
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  6,250Amortization
                      of deferred comp
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  863,727
                  
                  
                  
                  --
                  
                  
                  
                  863,727Net
                      loss for year ended December 31, 2003
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (2,476,063
                  )
                  
                  
                  (2,476,063
                  )**BALANCE,
                      DECEMBER 31, 2003**
                  
                  ****
                  **34,128,261**
                  
                  
                  ****
                  **34,128**
                  
                  
                  ****
                  **6,250**
                  
                  
                  ****
                  **10,162,177**
                  
                  
                  ****
                  **(708,333**
                  **)**
                  
                  ****
                  **(10,327,608**
                  **)**
                  
                  ****
                  **(833,386**
                  **)**Common
                      stock issued, previously paid for
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  (6,250
                  )
                  
                  
                  6,225
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Stock
                      issued for director services on March 31, 2004
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  --
                  
                  
                  
                  74,950
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  75,000Stock
                      issued for finders fees on March 31, 2004
                  
                  
                  82,500
                  
                  
                  
                  82
                  
                  
                  
                  --
                  
                  
                  
                  12,293
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  12,375Stock
                      issued for finders fees on March 31, 2004
                  
                  
                  406,060
                  
                  
                  
                  407
                  
                  
                  
                  --
                  
                  
                  
                  101,199
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  101,606Stock
                      issued for services on April 2, 2004
                  
                  
                  65,000
                  
                  
                  
                  65
                  
                  
                  
                  --
                  
                  
                  
                  99,385
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  99,450Debt
                      converted to stock on April 2, 2004
                  
                  
                  60,000
                  
                  
                  
                  60
                  
                  
                  
                  --
                  
                  
                  
                  91,740
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  91,800Stock
                      issued upon exercise of warrants on May 21, 2004
                  
                  
                  950,000
                  
                  
                  
                  950
                  
                  
                  
                  --
                  
                  
                  
                  189,050
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  190,000Stock
                      issued for directors services on June 8, 2004
                  
                  
                  600,000
                  
                  
                  
                  600
                  
                  
                  
                  --
                  
                  
                  
                  1,019,400
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1,020,000Stock
                      issued for cash on August 25, 2004
                  
                  
                  550,000
                  
                  
                  
                  550
                  
                  
                  
                  --
                  
                  
                  
                  549,450
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  550,000Stock
                      issued upon exercise of options on August 30, 2004
                  
                  
                  4,000
                  
                  
                  
                  4
                  
                  
                  
                  --
                  
                  
                  
                  1,596
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1,600Stock
                      issued for cash on September 8, 2004
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  24,975
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  25,000Stock
                      issued for consulting services on September 15, 2004
                  
                  
                  50,000
                  
                  
                  
                  49
                  
                  
                  
                  --
                  
                  
                  
                  65,451
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  65,500Stock
                      issued for patent settlement on September 22, 2004
                  
                  
                  20,000
                  
                  
                  
                  20
                  
                  
                  
                  --
                  
                  
                  
                  24,780
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  24,800Stock
                      issued for research and development on October 6, 2004
                  
                  
                  65,000
                  
                  
                  
                  65
                  
                  
                  
                  --
                  
                  
                  
                  90,935
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  91,000Stock
                      issued for cash on October 6, 2004
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  24,975
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  25,000Stock
                      issued for cash on October 15, 2004
                  
                  
                  150,000
                  
                  
                  
                  150
                  
                  
                  
                  --
                  
                  
                  
                  149,850
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  150,000Stock
                      issued upon exercise of stock options on October 21, 2004
                  
                  
                  6,500
                  
                  
                  
                  6
                  
                  
                  
                  --
                  
                  
                  
                  2,594
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,600Stock
                      issued for cash on November 3, 2004
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  24,975
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  25,000Stock
                      issued for cash on November 18, 2004
                  
                  
                  172,500
                  
                  
                  
                  173
                  
                  
                  
                  --
                  
                  
                  
                  172,327
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  172,500Stock
                      issued for cash on December 9, 2004
                  
                  
                  75,000
                  
                  
                  
                  75
                  
                  
                  
                  --
                  
                  
                  
                  74,925
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  75,000Stock
                      issued for cash on December 23, 2004
                  
                  
                  250,000
                  
                  
                  
                  250
                  
                  
                  
                  --
                  
                  
                  
                  249,750
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  250,000Finders
                      fees related to stock issuances
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (88,384
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (88,384
                  )Common
                      stock paid for, but not issued (119,000 shares)
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  119,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  119,000Intrinsic
                      value of options issued to employees
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  248,891
                  
                  
                  
                  (248,891
                  )
                  
                  
                  --
                  
                  
                  
                  --
   7
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY -
              CONTINUED**
 **FEBRUARY
              18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency**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
                  
                  
                  69,000
                  
                  
                  
                  69
                  
                  
                  
                  (69,000
                  )
                  
                  
                  68,931
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Stock
                      issued upon exercise of warrants, previously paid for
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  (50,000
                  )
                  
                  
                  49,950
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Stock
                      issued for cash on January 20, 2005
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  24,975
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  25,000Stock
                      issued upon exercise of warrants on January 31, 2005
                  
                  
                  500
                  
                  
                  
                  1
                  
                  
                  
                  --
                  
                  
                  
                  199
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  200Stock
                      issued for cash on February 17, 2005
                  
                  
                  325,000
                  
                  
                  
                  325
                  
                  
                  
                  --
                  
                  
                  
                  324,675
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  325,000Stock
                      issued for cash on March 31, 2005
                  
                  
                  215,000
                  
                  
                  
                  215
                  
                  
                  
                  --
                  
                  
                  
                  214,785
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  215,000Stock
                      issued for cash on May 17, 2005
                  
                  
                  5,000
                  
                  
                  
                  5
                  
                  
                  
                  --
                  
                  
                  
                  4,995
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  5,000Stock
                      issued for cash on June 7, 2005
                  
                  
                  300,000
                  
                  
                  
                  300
                  
                  
                  
                  --
                  
                  
                  
                  299,700
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  300,000Stock
                      issued for cash on August 5, 2005
                  
                  
                  480,500
                  
                  
                  
                  480
                  
                  
                  
                  --
                  
                  
                  
                  480,020
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  480,500Stock
                      issued for cash on August 9, 2005
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  --
                  
                  
                  
                  99,900
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  100,000Stock
                      issued for cash on October 27, 2005
                  
                  
                  80,000
                  
                  
                  
                  80
                  
                  
                  
                  --
                  
                  
                  
                  79,920
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  80,000Common
                      stock cancelled on December 7, 2005
                  
                  
                  (8,047,403
                  )
                  
                  
                  (8,047
                  )
                  
                  
                  --
                  
                  
                  
                  8,047
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Stock
                      issued for settlement of payables on December 21, 2005
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  57,092
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  57,092Stock
                      issued for settlement of payables on December 31, 2005
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  555,429
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  555,429Finders
                      fees related to stock issuances
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (109,840
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (109,840
                  )Intrinsic
                      value of options issued to employees
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  243,750
                  
                  
                  
                  (243,750
                  )
                  
                  
                  --
                  
                  
                  
                  --Fair
                      value of options issued for settlement costs
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  31,500
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  31,500Fair
                      value of warrants issued for settlement costs
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  4,957
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  4,957Fair
                      value of warrants issued to non-employees for services
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  13,505
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  13,505Amortization
                      of deferred compensation
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  177,631
                  
                  
                  
                  --
                  
                  
                  
                  177,631Warrants
                      issued with convertible notes
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  756,768
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  756,768Intrinsic
                      value of beneficial conversion associated with convertible
                      notes
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  696,413
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  696,413
 
  8
  **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY -
              CONTINUED**
 **FEBRUARY
              18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency**Net
                      loss for year ended December 31, 2005
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (3,115,186
                  )
                  
                  
                  (3,115,186
                  )**BALANCE,
                      DECEMBER 31, 2005**
                  
                  ****
                  **31,387,418**
                  
                  
                  **$**
                  **31,387**
                  
                  
                  **$**
                  **612,521**
                  
                  
                  **$**
                  **18,336,178**
                  
                  
                  **$**
                  **(142,187**
                  **)**
                  
                  **$**
                  **(20,246,074**
                  **)**
                  
                  **$**
                  **(1,408,175**
                  **)**Stock
                      issued, for previously settled payables
                  
                  
                  846,549
                  
                  
                  
                  847
                  
                  
                  
                  (612,521
                  )
                  
                  
                  611,674
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Stock
                      issued upon exercise of warrants on March 23, 2006
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  37,475
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  37,500Stock
                      issued upon exercise of warrants on March 27, 2006
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  --
                  
                  
                  
                  74,950
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  75,000Stock
                      issued upon exercise of warrants on March 27, 2006
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  12,475
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  12,500Stock
                      issued upon exercise of warrants on March 30, 2006
                  
                  
                  10,000
                  
                  
                  
                  10
                  
                  
                  
                  --
                  
                  
                  
                  9,990
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  10,000Stock
                      issued upon exercise of warrants on April 10, 2006
                  
                  
                  36,250
                  
                  
                  
                  36
                  
                  
                  
                  --
                  
                  
                  
                  18,089
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  18,125Common
                      stock issued for convertible debt on April 10, 2006
                  
                  
                  269,600
                  
                  
                  
                  270
                  
                  
                  
                  --
                  
                  
                  
                  188,450
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  188,720Stock
                      issued for cash on April 24, 2006
                  
                  
                  473,000
                  
                  
                  
                  473
                  
                  
                  
                  --
                  
                  
                  
                  737,408
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  737,881Stock
                      issued upon exercise of warrants on April 26, 2006
                  
                  
                  125,000
                  
                  
                  
                  125
                  
                  
                  
                  --
                  
                  
                  
                  62,375
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  62,500Stock
                      issued upon exercise of warrants on April 26, 2006
                  
                  
                  100,000
                  
                  
                  
                  100
                  
                  
                  
                  --
                  
                  
                  
                  149,900
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  150,000Common
                      stock issued for convertible debt on April 26, 2006
                  
                  
                  35,714
                  
                  
                  
                  36
                  
                  
                  
                  --
                  
                  
                  
                  24,964
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  25,000Stock
                      issued upon exercise of warrants on May 6, 2006
                  
                  
                  200,000
                  
                  
                  
                  200
                  
                  
                  
                  --
                  
                  
                  
                  99,800
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  100,000Stock
                      issued upon exercise of warrants on May 15, 2006
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  37,475
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  37,500Stock
                      issued upon exercise of warrants on May 15, 2006
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  --
                  
                  
                  
                  24,950
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  25,000Stock
                      issued for cash on June 7, 2006
                  
                  
                  873,018
                  
                  
                  
                  872
                  
                  
                  
                  --
                  
                  
                  
                  1,649,136
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1,650,008Common
                      stock issued for convertible debt on June 7, 2006
                  
                  
                  1,535,716
                  
                  
                  
                  1,536
                  
                  
                  
                  --
                  
                  
                  
                  1,073,464
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1,075,000Stock
                      issued upon exercise of warrants on June 8, 2006
                  
                  
                  900,000
                  
                  
                  
                  900
                  
                  
                  
                  --
                  
                  
                  
                  449,100
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  450,000Stock
                      issued upon exercise of warrants on June 9, 2006
                  
                  
                  9,000
                  
                  
                  
                  9
                  
                  
                  
                  --
                  
                  
                  
                  4,491
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  4,500Stock
                      issued upon exercise of warrants on June 23, 2006
                  
                  
                  150,000
                  
                  
                  
                  150
                  
                  
                  
                  --
                  
                  
                  
                  74,850
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  75,000Stock
                      issued upon exercise of warrants on June 23, 2006
                  
                  
                  15,000
                  
                  
                  
                  15
                  
                  
                  
                  --
                  
                  
                  
                  22,485
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  22,500Common
                      stock issued for convertible debt on June 30, 2006
                  
                  
                  219,104
                  
                  
                  
                  219
                  
                  
                  
                  --
                  
                  
                  
                  153,155
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  153,374Common
                      stock issued for convertible debt on July 11, 2006
                  
                  
                  14,603
                  
                  
                  
                  15
                  
                  
                  
                  --
                  
                  
                  
                  10,207
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  10,222Common
                      stock issued for convertible debt on August 7, 2006
                  
                  
                  1,540,160
                  
                  
                  
                  1,540
                  
                  
                  
                  --
                  
                  
                  
                  1,076,572
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1,078,112
   9
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY -
              CONTINUED**
 **FEBRUARY
              18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency**Common
                      stock issued upon exercise of warrants on August 7, 2006
                  
                  
                  175,000
                  
                  
                  
                  175
                  
                  
                  
                  --
                  
                  
                  
                  262,325
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  262,500Common
                      stock issued upon exercise of warrants on August 21, 2006
                  
                  
                  50,000
                  
                  
                  
                  50
                  
                  
                  
                  --
                  
                  
                  
                  74,950
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  75,000Common
                      stock issued for cash on August 22, 2006
                  
                  
                  14,519
                  
                  
                  
                  15
                  
                  
                  
                  --
                  
                  
                  
                  14,504
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  14,519Common
                      stock issued upon exercise of warrants on August 23, 2006
                  
                  
                  3,683
                  
                  
                  
                  4
                  
                  
                  
                  --
                  
                  
                  
                  3,679
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  3,683Common
                      stock issued upon exercise of warrants on August 28, 2006
                  
                  
                  5,000
                  
                  
                  
                  5
                  
                  
                  
                  --
                  
                  
                  
                  7,495
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  7,500Common
                      stock issued for convertible debt on September 13, 2006
                  
                  
                  4,286
                  
                  
                  
                  4
                  
                  
                  
                  --
                  
                  
                  
                  2,996
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  3,000Common
                      stock issued upon exercise of warrants on September 13,
                      2006
                  
                  
                  150,000
                  
                  
                  
                  150
                  
                  
                  
                  --
                  
                  
                  
                  74,850
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  75,000Common
                      stock issued for convertible debt on October 16, 2006
                  
                  
                  66,654
                  
                  
                  
                  67
                  
                  
                  
                  --
                  
                  
                  
                  46,591
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  46,658Common
                      stock issued upon exercise of warrants on November 3, 2006
                  
                  
                  210,000
                  
                  
                  
                  210
                  
                  
                  
                  --
                  
                  
                  
                  104,790
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  105,000Common
                      stock issued for put on equity line of credit on November 7,
                      2006
                  
                  
                  94,470
                  
                  
                  
                  94
                  
                  
                  
                  --
                  
                  
                  
                  115,368
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  115,462Common
                      stock issued for put on equity line of credit on November 14,
                      2006
                  
                  
                  7,300
                  
                  
                  
                  7
                  
                  
                  
                  --
                  
                  
                  
                  8,349
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  8,356Common
                      stock issued for put on equity line of credit on November 27,
                      2006
                  
                  
                  27,500
                  
                  
                  
                  28
                  
                  
                  
                  --
                  
                  
                  
                  22,913
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  22,941Common
                      stock issued for put on equity line of credit on November 28,
                      2006
                  
                  
                  36,500
                  
                  
                  
                  36
                  
                  
                  
                  --
                  
                  
                  
                  30,059
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  30,095Common
                      stock issued for put on equity line of credit on December 6,
                      2006
                  
                  
                  73,863
                  
                  
                  
                  74
                  
                  
                  
                  --
                  
                  
                  
                  57,244
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  57,318Common
                      stock issued for put on equity line of credit on December 26,
                      2006
                  
                  
                  18,800
                  
                  
                  
                  19
                  
                  
                  
                  --
                  
                  
                  
                  10,377
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  10,396Common
                      stock issued for put on equity line of credit on December 31,
                      2006
                  
                  
                  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
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,253,263Fair
                      value of warrants issued for services
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  401,130
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  401,130Write
                      off of deferred compensation
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (142,187
                  )
                  
                  
                  142,187
                  
                  
                  
                  --
                  
                  
                  
                  --Warrants
                      issued for consulting services
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  62,497
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  62,497Warrants
                      issued with convertible notes
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  408,596
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  408,596
   10
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY -
              CONTINUED**
 **FEBRUARY
              18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency**Intrinsic
                      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
                  
                  
                  63,000
                  
                  
                  
                  63
                  
                  
                  
                  --
                  
                  
                  
                  39,659
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  39,722Common
                      stock issued for put on equity line of credit on January 22,
                      2007
                  
                  
                  58,150
                  
                  
                  
                  58
                  
                  
                  
                  --
                  
                  
                  
                  42,246
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  42,304Common
                      stock issued for put on equity line of credit on February 9,
                      2007
                  
                  
                  35,800
                  
                  
                  
                  36
                  
                  
                  
                  --
                  
                  
                  
                  26,009
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  26,045Common
                      stock issued for put on equity line of credit on February 16,
                      2007
                  
                  
                  162,000
                  
                  
                  
                  162
                  
                  
                  
                  --
                  
                  
                  
                  112,979
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  113,141Common
                      stock issued for put on equity line of credit on February 26,
                      2007
                  
                  
                  71,000
                  
                  
                  
                  71
                  
                  
                  
                  --
                  
                  
                  
                  46,761
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  46,832Common
                      stock issued for put on equity line of credit on March 5,
                      2007
                  
                  
                  42,600
                  
                  
                  
                  43
                  
                  
                  
                  --
                  
                  
                  
                  28,056
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  28,099Common
                      stock issued for put on equity line of credit on March 12,
                      2007
                  
                  
                  92,900
                  
                  
                  
                  93
                  
                  
                  
                  --
                  
                  
                  
                  62,085
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  62,178Common
                      stock issued for put on equity line of credit on March 19,
                      2007
                  
                  
                  47,500
                  
                  
                  
                  48
                  
                  
                  
                  --
                  
                  
                  
                  30,362
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  30,410Common
                      stock issued for put on equity line of credit on March 26,
                      2007
                  
                  
                  7,500
                  
                  
                  
                  7
                  
                  
                  
                  --
                  
                  
                  
                  4,722
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  4,729Common
                      stock issued for put on equity line of credit on March 31,
                      2007
                  
                  
                  25,500
                  
                  
                  
                  25
                  
                  
                  
                  --
                  
                  
                  
                  15,558
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  15,583Fees
                      paid on equity line of credit
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (32,723
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (32,723
                  )Warrants
                      issued with convertible notes
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  291,936
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  291,936Intrinsic
                      value of beneficial conversion associated with convertible
                      notes
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  274,312
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  274,312Fair
                      value of warrants issued to non-employee for services
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  47,104
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  47,104Fair
                      value of options issued to an officer
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  16,302
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  16,302Common
                      stock issued for put on equity line of credit on April 9,
                      2007
                  
                  
                  56,300
                  
                  
                  
                  56
                  
                  
                  
                  --
                  
                  
                  
                  35,441
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  35,497Common
                      stock issued for put on equity line of credit on April 17,
                      2007
                  
                  
                  73,835
                  
                  
                  
                  74
                  
                  
                  
                  --
                  
                  
                  
                  41,466
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  41,540Common
                      stock issued for put on equity line of credit on April 24,
                      2007
                  
                  
                  122,857
                  
                  
                  
                  123
                  
                  
                  
                  --
                  
                  
                  
                  68,996
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  69,119
   11
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY -
              CONTINUED**
 **FEBRUARY
              18, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 2007**
 **Common
                      Stock**
                  
                  
                  **Common
                      stock**
                  
                  
                  **Additional**
                    **paid-in**
                  
                  
                  **Deferred**
                  
                  
                  **Deficit
                      accumulated during the development**
                  
                  
                  **Total
                      stockholders' development stage****Shares**
                  
                  
                  **Amount**
                  
                  
                  **to
                      be issued**
                  
                  
                  **capital**
                  
                  
                  **compensation**
                  
                  
                  **stage**
                  
                  
                  **deficiency**Common
                      stock issued for put on equity line of credit on May 1,
                      2007
                  
                  
                  226,081
                  
                  
                  
                  226
                  
                  
                  
                  --
                  
                  
                  
                  124,774
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  125,000Common
                      stock issued for put on equity line of credit on May 8,
                      2007
                  
                  
                  29,400
                  
                  
                  
                  29
                  
                  
                  
                  --
                  
                  
                  
                  19,363
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  19,392Common
                      stock issued for put on equity line of credit on May 15,
                      2007
                  
                  
                  403,502
                  
                  
                  
                  404
                  
                  
                  
                  --
                  
                  
                  
                  171,811
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  172,215Common
                      stock issued for put on equity line of credit on May 22,
                      2007
                  
                  
                  119,800
                  
                  
                  
                  120
                  
                  
                  
                  --
                  
                  
                  
                  46,362
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  46,482Common
                      stock issued for put on equity line of credit on May 30,
                      2007
                  
                  
                  80,996
                  
                  
                  
                  81
                  
                  
                  
                  --
                  
                  
                  
                  26,631
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  26,712Common
                      stock issued for put on equity line of credit on June 6,
                      2007
                  
                  
                  54,700
                  
                  
                  
                  55
                  
                  
                  
                  --
                  
                  
                  
                  17,454
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  17,509Common
                      stock issued for put on equity line of credit on June 15,
                      2007
                  
                  
                  94,500
                  
                  
                  
                  95
                  
                  
                  
                  --
                  
                  
                  
                  25,571
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  25,666Common
                      stock issued for put on equity line of credit on June 21,
                      2007
                  
                  
                  12,500
                  
                  
                  
                  12
                  
                  
                  
                  --
                  
                  
                  
                  3,868
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  3,880Fees
                      paid on equity line of credit
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (46,641
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (46,641
                  )Warrants
                      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
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  267,930Net
                      loss for nine months ended September 30, 2007
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (5,060,196
                  )
                  
                  
                  (5,060,196
                  )**BALANCE,
                      SEPTEMBER 30, 2007 (UNAUDITED)**
                  
                  ****
                  **44,559,702**
                  
                  
                  **$**
                  **44,560**
                  
                  
                  **$**
                  **--**
                  
                  
                  **$**
                  **31,586,808**
                  
                  
                  **$**
                  **--**
                  
                  
                  **$**
                  **(35,487,793**
                  **)**
                  
                  **$**
                  **(3,856,425**
                  **)**
  12
 
 **SAVE
        THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**
 
 **For
                  the Nine months ended Sept. 30,**
              
              
              **For
                  the Period**
                **From
                  February 18, 1998 (Date of Inception) through Sept. 30,****2007**
              
              
              **2006**
              
              
              **2007****Cash
                  flows from operating activities**Net
                  loss
              
              $
              (5,060,196
              )
              
              $
              (7,951,355
              )
              
              $
              (35,487,793
              )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
              
              
              45,774
              
              
              
              2,273,121
              
              
              
              2,947,358Issuance
                  of common stock for services
              
              
              -
              
              
              
              -
              
              
              
              4,668,102Issuance
                  of options for legal settlement
              
              
              -
              
              
              
              -
              
              
              
              31,500Issuance
                  of warrants for legal settlement
              
              
              -
              
              
              
              -
              
              
              
              4,957Issuance
                  of warrants for financing fees
              
              
              47,104
              
              
              
              -
              
              
              
              47,104Loss
                  on valuation of warrants
              
              
              293,349
              
              
              
              -
              
              
              
              293,349Patent
                  acquisition cost
              
              
              -
              
              
              
              -
              
              
              
              1,610,066Amortization
                  of interest on debt discount
              
              
              11,750
              
              
              
              -
              
              
              
              11,750Amortization
                  of issuance costs and original issue debt
              
              
              939,362
              
              
              
              2,257,620
              
              
              
              3,738,667Amortization
                  of deferred compensation
              
              
              -
              
              
              
              -
              
              
              
              3,060,744Depreciation
              
              
              155,483
              
              
              
              101,328
              
              
              
              343,702Changes
                  in operating assets and liabilities:Inventory
              
              
              (20,147
              )
              
              
              (3,719
              )
              
              
              (41,461
              )Prepaid
                  expenses and other
              
              
              24,436
              
              
              
              (101,072
              )
              
              
              (56,796
              )Other
                  assets
              
              
              -
              
              
              
              -
              
              
              
              (4,500
              )Accounts
                  payable and accrued expenses
              
              
              907,104
              
              
              
              (582,680
              )
              
              
              3,139,218Net
                  cash used in operating activities
              
              
              (2,655,981
              )
              
              
              (4,006,757
              )
              
              
              (16,206,241
              )**Cash
                  flows from investing activities**Purchase
                  of property and equipment
              
              
              (45,713
              )
              
              
              (167,973
              )
              
              
              (552,405
              )Net
                  cash used in investing activities
              
              
              (45,713
              )
              
              
              (167,973
              )
              
              
              (552,405
              )**Cash
                  flows from financing activities**Net
                  proceeds under equity line of credit
              
              
              912,691
              
              
              
              -
              
              
              
              1,262,386Increase
                  (decrease) in payables to related parties and shareholder
              
              
              81,404
              
              
              
              (158,733
              )
              
              
              592,854Advances
                  from founding executive officer
              
              
              -
              
              
              
              -
              
              
              
              517,208Net
                  proceeds from issuance of convertible notes and warrants
              
              
              1,591,800
              
              
              
              865,500
              
              
              
              4,259,678Repayment
                  of convertible notes
              
              
              (26,250
              )
              
              
              -
              
              
              
              (26,250
              )Net
                  proceeds from issuance of common stock and common stock
                  issuable
              
              
              -
              
              
              
              3,621,638
              
              
              
              10,254,949Net
                  cash provided by financing activities
              
              
              2,559,645
              
              
              
              4,328,405
              
              
              
              16,860,825**Net
                  increase (decrease) in cash**
              
              
              (142,049
              )
              
              
              153,675
              
              
              
              102,179**Cash**,
                  beginning of period
              
              
              244,228
              
              
              
              279,821
              
              
              
              -**Cash**,
                  end of period
              
              $
              102,179
              
              
              $
              433,496
              
              
              $
              102,179
 
  See
          notes
          to condensed consolidated financial statements.
 13
 **SAVE
        THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE ENTERPRISE)**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**
 
 **For
                  the Nine months ended Sept 30,**
              
              
              **For
                  the Period From February 18, 1998 (Date of Inception)
                  through**
                **Sept
                  30,****2007**
              
              
              **2006**
              
              
              **2007****Supplemental
                  disclosures of cash flow information**Cash
                  paid during the period forInterest
              
              $
              7,674
              
              
              $
              128,045
              
              
              $
              149,153Income
                  taxes
              
              $
              800
              
              
              $
              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
              
              
              -
              
              
              
              -
              
              
              
              113,981Value
                  of warrants and beneficial conversion feature of convertible
                  notes
              
              
              -
              
              
              
              910,500
              
              
              
              -Cancellation
                  of stock
              
              
              -
              
              
              
              -
              
              
              
              8,047Conversion
                  of accounts payable and accrued expenses to common stock
                  issued
              
              
              -
              
              
              
              612,521
              
              
              
              612,521Conversion
                  of related party debt to convertible debentures
              
              
              -
              
              
              
              45,000
              
              
              
              45,000Conversion
                  of convertible debentures to common stock
              
              
              -
              
              
              
              2,576,379
              
              
              
              2,580,086Conversion
                  of interest on convertible debentures to common stock
              
              
              -
              
              
              
              3,707
              
              
              
              3,707Write
                  off of deferred compensation
              
              
              -
              
              
              
              142,187
              
              
              
              142,187Consulting
                  fee for issuance of stock options
              
              
              25,200
              
              
              
              -
              
              
              
              25,200Financing
                  fee for issuance of warrants
              
              
              47,104
              
              
              
              -
              
              
              
              47,104






See
        notes
        to condensed consolidated financial statements.


14




**SAVE
        THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
        DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **NINE
        MONTHS ENDED SEPTEMBER 30, 2007 (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 September 30, 2007, the results
        of
        operations for the three months and nine months ended September 30, 2007
        and
        2006, and cash flows for the nine months ended September 30, 2007 and 2006.
        The
        balance sheet as of December 31, 2006 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, 2006, 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 consolidated results of operations
        for
        the nine months ended September 30, 2007 are not necessarily indicative of
        the
        consolidated results of operations to be expected for the full fiscal year
        ending December 31, 2007.
 
 **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 $5,060,196 and a negative cash flow from operations
        of
        $2,655,981 for the nine months ended September 30, 2007, and had a working
        capital deficiency of $4,073,178 and a stockholders’ deficiency of $3,856,425 at
        September 30, 2007. 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.
   15
 **SAVE
          THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
          DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
          MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 
 **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.
 
 The
        Company has obtained licenses 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 the
        Company’s ZEFS and MK IV technologies, ELEKTRA incorporates a uniform electrical
        field principle.  Based on the Company’s early research and product
        development, the Company believes that ELEKTRA carries certain advantages
        over
        the Company’s 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. When it is developed,
        the
        Company intends to market ELEKTRA products primarily to the transportation
        industry, oil refineries and pipelines, and OEMs.
 
 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 September 30, 2007, the subsidiary held $4,358 in cash and
        had operating expenses of $11,312. Intercompany transactions and balances
        have been eliminated in consolidation.
  16
 **SAVE
          THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
          DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
          MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
  **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.
 
 
 **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 occurred or services have been
                  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.
  17
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 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 (“SAB 107”) 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 nine months ended September 30, 2007 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 nine months ended September 30, 2007 was $45,774.
 
 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 uses 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.
  18
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 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.
 
 
 **4.**
              **Recent
                  Accounting Pronouncements**
 
 Statement
        No. 157
 
 In
        September 2006, the Financial Accounting Standards Board (the “FASB”) issued
        Statement No. 157, “Fair Value Measurements” (“SFAS 157”), SFAS 157 establishes
        a formal framework for measuring fair value under GAAP.  It 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 157
        applies to and amends the provisions of existing FASB and AICPA pronouncements,
        it does not, of itself, require any new fair value measurements, nor does
        it
        establish valuation standards.  SFAS 157 applies to all other
        accounting pronouncements requiring or permitting fair value measurements,
        except for; SFAS 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.  This statement is
        effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal
        years.  Management is currently evaluating the effect of this
        pronouncement on the Company’s financial statements.
 
 Statement
        No. 159
 
 In
        February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
        Financial Assets and Liabilities”. This Statement permits entities to choose to
        measure many financial instruments and certain other items at fair value.
        The
        objective is to improve financial reporting by providing entities with the
        opportunity to mitigate volatility in reported earnings caused by measuring
        related assets and liabilities differently without having to apply complex
        hedge
        accounting provisions.  The fair value option established by this
        Statement permits all entities to choose to measure eligible items at fair
        value
        at specified election dates. A business entity shall report unrealized gains
        and
        losses on items for which the fair value option has been elected in earnings
        (or
        another performance indicator if the business entity does not report earnings)
        at each subsequent reporting date. This Statement is effective as of the
        beginning of an entity’s first fiscal year that begins after November 15, 2007.
        We do not believe that the adoption of SFAS 159 will have a material affect
        on
        our financial statements.
   19
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 Interpretation
        No. 48
  Effective
        January 1, 2007, the Company adopted Financial Accounting Standards Board
        Interpretation No 48, “Accounting for Uncertainty in Income Taxes — an
        interpretation of FASB Statement No 109, “Accounting for Income Taxes (“FIN
        48”).” FIN 48 addresses the determination of whether tax benefits claimed or
        expected to be claimed on a tax return should be recorded in the financial
        statements. Under FIN 48, the Company may recognize the tax benefit from
        an
        uncertain tax position only if it is more likely than not that the tax position
        will be sustained on examination by the taxing authorities, based on the
        technical merits of the position. The tax benefits recognized in the financial
        statements from such a position should be measured based on the largest benefit
        that has a greater than 50% likelihood of being realized upon ultimate
        settlement. FIN 48 also provides guidance on de-recognition,
        classification, interest and penalties on income taxes, accounting in interim
        periods and requires increased disclosures. At the date of adoption, and
        as of
        September 30, 2007, the Company does not have a liability for unrecognized
        tax
        benefits.
  The
        Company files income tax returns in the U.S. federal jurisdiction and the
        state
        of California. The Company is subject to U.S. federal or state income tax
        examinations by tax authorities for years after 2002. During the periods
        open to
        examination, the Company has net operating loss and tax credit carry forwards
        for U.S. federal and state tax purposes that have attributes from closed
        periods. Since these net operating losses and tax credit carry forwards may
        be
        utilized in future periods, they remain subject to examination. The Company’s
        policy is to record interest and penalties on uncertain tax provisions as
        income
        tax expense. As of September 30, 2007, The Company has no accrued interest
        or
        penalties related to uncertain tax positions. The Company believes that it
        has
        not taken any uncertain tax positions that would impact its condensed
        consolidated financial statements as of September 30, 2007. Also as of the
        date
        of adoption, and as of September 30, 2007, the Company does not have a liability
        for unrecognized tax benefits.
  EITF
        00-19-2
  Effective
        in the first quarter of 2007 the Company adopted FASB Staff Position No.
        EITF
        00-19-2, “Accounting for Registration Payment Arrangements” issued on December
        21, 2006 (“FSP 00-19-2”). FSP 00-19-2 specifies that the contingent obligation
        to make future payments or otherwise transfer consideration under a registration
        payment, whether issued as a separate agreement or included as a provision
        of a
        financial instrument or other agreement, should be separately recognized
        and
        measured in accordance with FASB Statement No. 5, “Accounting for
        Contingencies.” For registration payment arrangements and financial instruments
        subject to those arrangements that were entered into prior to the issuance
        of
        EITF 00-19-2, this guidance is effective for financial statements issued
        for
        fiscal years beginning after December 15, 2006 and interim periods within
        those
        fiscal years.
  20
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 Management
        does not believe that there are any other recently-issued, but not yet effective
        accounting pronouncements, which could have a material effect on the
        accompanying condensed consolidated financial statements.
 
 
 **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 nine months ended September 30, 2007 and 2006, the dilutive impact
        of
        outstanding stock options of 4,203,238 and 7,328,299 respectively, and
        outstanding warrants of 18,798,227 and 21,183,517 have been excluded because
        their impact on the loss per share is anti-dilutive.
 
 
 **6.**
              
              **Certain
                  relationships and related
                  transactions**
 
 Advances
        from founding executive officer
 
 All
        of
        the marketing and manufacturing rights for the ZEFS were acquired from founding
        officer Jeffery A. Muller, for 5,000,000 shares of common stock, $500,000
        and a
        $10 royalty for each unit sold (see discussion below), pursuant to the Agreement
        entered into in December 1998, by and between the Company and
        Mr. Muller. Working capital advances in the amount of $517,208 and payment
        in the amount of $500,000 for marketing and distribution rights of the ZEFS
        are
        due to Mr. Muller. Such amounts are interest free and do not have any due
        dates for payment.
 
 In
        January 2000, the Company entered into an agreement offering
        Mr. Muller and Lynne Muller, Mr. Muller’s wife, the option to purchase
        5,000,000 shares each at $0.10 per share as consideration for work performed
        for
        the Company. Mrs. Muller subsequently transferred her option to
        Mr. Muller.
 
 In
        connection with the Company’s legal proceedings against Mr. Muller (see
        Note 11), the Company has canceled (i) the 8,047,403 shares of its common
        stock held by Mr. Muller and/or his affiliates, (ii) the options to
        acquire an additional 10,000,000 shares of the Company’s common stock held by
        Mr. Muller personally and (iii) the $1,017,208 of debt which
        Mr. Muller claimed was owed to him by the Company.
  21
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 Loans
        from related parties
 
 In
        May of
        2007, a former officer and incumbent 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
        will
        be repaid in the future.
 
 Lease
        agreement with related party
 
 During
        2003, the Company entered into a sublease agreement with an entity to lease
        office space in North Hollywood, California for its principal executive offices.
        Bruce H. McKinnon, the former Chief Executive Officer and a director of the
        Company, is an 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.
 
 During
        the three months ended September 30, 2007 and 2006, rent expense under the
        sublease was $10,272 and $18,624, respectively. The amount for the three
        months
        ended September 30, 2007 includes $3,100 with respect to a late penalty of
        $100
        per day since April 1, 2007, in addition to amounts previously accrued and
        discussed in the next paragraph. The Company does not admit that it owes
        this
        amount.
 
 During
        the nine months ended September 30, 2007 and 2006, rent expense under the
        sublease was $107,902 and $55,872, respectively.  The amount for the
        nine months ended September 30, 2007 includes $57,700 with respect to a late
        penalty of $100 per day since January 1, 2006.  The Company does not
        admit that it owes this amount.
  On
        July
        12, 2007, KZ Golf, Inc. “(“KZG”), the Company’s landlord, presented to the
        Company a Three-Day Notice to Pay or Quit, demanding payment of unpaid rent,
        additional rent and penalties, in the aggregate amount of $104,413 as of
        such
        date.  In addition to the unpaid rent during 2007, it is apparently
        KZG’s position that there is a discrepancy in the calculation of base rent as
        far back as April 1, 2004 and that a penalty of $100 per day should be imposed
        continuously since January 1, 2006 under the terms of a certain provision
        of the
        sublease between the Company and KZG (the “2006 Sublease”).  As of
        September 30, 2007, the Company recorded a contingent liability in the amount
        of
        $101,696. The Company does not admit that it owes either the entire amount
        claimed by KZG or the entire amount recorded by it as a contingent
        liability.  The Company did not exercise its option to renew the 2006
        Sublease.
  22
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 On
        July
        25, 2007, the Company vacated the offices in North Hollywood, California,
        and
        temporarily relocated its corporate offices to the Company’s existing facility
        located at 235 Tennant Avenue, Morgan Hill, California 95037.
 
 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 September 30,
        2007.  SS Sales is owned by Nathan Shelton, who has served as one of
        the directors of the Company since February 12, 2007.
 
 
 **7.**
              
              **Equity
                  line of credit**
 
 In
        September 2006, the Company entered into what is sometimes termed an equity
        line of credit arrangement. Under the line of credit the Company may, but
        is not
        obligated to, 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 under the line of credit. Because
        the
        price of the common stock fluctuates and the number of shares of common stock,
        if any, that the Company may issue, should exercise the put rights under
        the
        equity line of credit, will vary, the Company does not know how many shares,
        if
        any, will actually issue under the equity line of credit. As of September
        30,
        2007 the Company has registered and made available 7,000,000 shares of common
        stock for possible future draws under the line of credit.
 
 As
        of
        September 30, 2007 the Company has drawn down $1,372,150 ($1,262,384 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
        line
        of credit.
  23
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 **8.**
              
              **Convertible
                  debentures**
 
 During
        the year ended December 31, 2006, the Company issued notes (the “Notes”)
        totaling $1,000,000, which included the conversion of $45,000 of debt owed
        to
        the Company’s Chief Financial Officer.  The Company paid related
        transaction fees of $89,500 resulting in net proceeds to the Company of
        $865,500.  In addition to the cash paid for transaction fees, 117,857
        warrants (the “Warrants”) were issued to certain placement agents. The Warrants
        expire between August 31, 2007 and February 9, 2008 and are exercisable at
        a
        price of $1.00 per share.
 
 The
        aggregate value of the Warrants issued in connection with the offering and
        to
        the placement agent were valued at $620,252 using the Black-Scholes option
        valuation model with the following assumptions; risk-free interest rate of
        4.35%
        to 4.66%; dividend yield of 0%; volatility factors of the expected market
        price
        of common stock of 130.61%; and an expected life of two years (statutory
        term).  The company also determined that the notes contained a
        beneficial conversion feature of $290,248.
 
 The
        value
        of the Warrants of $620,252, the conversion option of $290,248, and the
        transaction fees of $89,500 are considered as debt discount and are being
        amortized over the life of the Notes.
 
 During
        the year ended December 31, 2006, convertible notes in the amount of $2,576,379
        of the Notes were converted to 3,680,540 shares of stock at $0.70 per
        share.  In addition, $3,707 of accrued interest was converted to 5,296
        shares at $0.70 per share. For the year ended December 31, 2006, $2,257,620
        of
        the total discount has been amortized and included in the accompanying
        consolidated statement of operations.
 
 On
        December 5, 2006, the Company entered into a Note Purchase Agreement (the
        “Agreement”) with Morale Orchards, LLC, a limited liability company formed under
        the laws of the State of Oregon (“Morale”). The entire equity interest in Morale
        is beneficially owned by Leodis Matthews who provides legal services to the
        Company. The 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 the Company’s common stock (the “Common Stock”). The aggregate
        purchase price for the Notes and Warrants is $1,000,000. Therefore, while
        the
        stated interest on the Notes is 0%, the effective interest rate is 22.5%
        because
        the Notes are being purchased at a discount from their face amount.
 
 Each
        of
        the Morale Notes is convertible into shares of the Company’s Common Stock at a
        per share conversion price initially equal to the closing price of a share
        of
        the Company’s Common Stock on the trading day prior to the date of issuance of
        such Note.  The conversion right is exercisable during the period
        commencing 90 days prior to the maturity of each Note. Concurrently with
        the
        issuance of a Note, for no additional consideration, Morale will acquire
        Warrants to purchase a number of shares of Common Stock equal to 50% of the
        number of shares of Common Stock initially issuable on conversion of the
        associated Note. The Morale Warrants become exercisable 180 days after the
        date
        of their issuance. The Note purchased by Morale on December 5, 2006 is
        convertible at the rate of $0.85 per share into 720,588 shares of the Company’s
        Common Stock and the Morale Warrants are exercisable at the same per share
        price
        for 360,294 shares of the Company’s Common Stock.
   24
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 Repayment
        of each Note is to be made monthly, at an amount equal to at least $3,750
        for
        each Note. Additional payments may be made prior to maturity with no prepayment
        penalties. In the event the Company has not repaid each Note in full by the
        anniversary date of its issuance, the remaining balance shall be increased
        by
        10% as an initial penalty, and the Company shall pay additional interest
        of 2.5%
        per month, compounded daily, for each month until such Note is paid in
        full.
 
 Morale
        has piggyback 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, subject to
        the
        right of the Company and/or its underwriters to reduce the number of shares
        to
        be included in such a registration in good faith based on market or other
        conditions.
 
 During
        the year ended December 31, 2006, the Company issued Morale Notes totaling
        $612,500 discounted by $112,500, resulting in net proceeds to the Company
        of
        $500,000. In addition to the discount, 360,264 additional warrants were issued
        to Morale. These warrants expire December 5, 2011 and are exercisable at
        a price
        of $0.85 per share.
 
 The
        aggregate value of the Morale Warrants issued in connection with the offering
        and to the finder were valued at $118,348 using the Black-Scholes option
        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 110.21%; 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 $230,848.
 
 The
        value
        of the Morale Warrants of $118,348, the conversion option of $230,848, and
        the
        transaction fees of $112,500 are considered as debt discount and are being
        amortized over the life of the Note.
 
 During
        the nine months ended September 30, 2007, the Company issued Morale Notes
        totaling $612,500 discounted by $112,500, resulting in net proceeds to the
        Company of $500,000. In addition to the discount, 437,500 warrants were issued
        to Morale. These warrants expire January 10, 2011 and are exercisable at
        $0.70
        per share. The note is convertible at the rate of $0.70 per share into 875,000
        shares of the Company’s Common Stock.
 
 The
        aggregate value of the Morale Warrants issued in connection with the offering
        were valued at $118,955 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.
  25
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 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 being amortized
        over the life of the note.
 
 During
        the nine months ended September 30, 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”).
 
 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 received, for no additional consideration, 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.
 
 During
        the nine months ended September 30, 2007, the Company issued $400,000 of
        the
        PIPE Notes and 2007 PIPE Warrants to purchase 857,144 shares of the Company’s
        common stock. 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 75,000 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, 2010 and are exercisable at a price
        of
        $1.00 per share.
  26
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 The
        aggregate value of the 2007 PIPE Warrants issued in connection with the
        offerings 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
        value
        of the 2007 PIPE Warrants of $256,533, the conversion option of $62,857 and
        the
        transaction fees of $48,000 are considered as debt discount and are being
        amortized over the life of the 2007 PIPE Notes.
 
 During
        the nine months ended September 30, 2007, no 2007 PIPE Notes were converted
        to
        shares of stock.
 
 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 (the "Registration Statement")
        to
        register the shares of the Company's common stock into which the PIPE Notes
        are
        convertible (the "Conversion Shares") and for which the PIPE Warrants may
        be
        exercised (the "Warrant Shares").
 
 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. The Additional Warrants 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.
 27
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
  ·
                  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.
 
 Investors
        in the 2007 PIPE Offering received, for no additional consideration, a PIPE
        Warrant, entitling the holder to purchase a number of Warrant Shares of the
        Company's common stock equal to 150% of the number of shares of common stock
        into which the PIPE Notes are convertible. The PIPE Warrant is exercisable
        on a
        cash basis only and has registration rights. The 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.
 
 The
        aggregate value of the additional warrants (“Delay Warrants”) issued in
        connection with the modification agreement of the 2007 PIPE Offering were
        valued
        at $138,197 using Black Scholes option valuation model with the following
        assumptions: risk-free interest rate of 4.43%; dividend yield of 0%; volatility
        factor of the expected market price of common stock of 113.55%; and an expected
        life of 5 years.
 
 The
        value
        of the additional 2007 PIPE warrants of $138,197 are considered as debt discount
        and are being amortized over the life of the 2007 PIPE notes.
 
 Promptly,
        but no later than 90 days following the closing date of the PIPE Offering,
        the
        Company was required to file a registration statement with the SEC to register
        the Conversion Shares and the Warrant Shares. The Company was further required
        to use its best efforts to ensure that the Registration Statement was declared
        effective within 120 days after filing.
 
 The
        Company's continuing cash flow and liquidity difficulties led to its inability
        to file all of its reports with the SEC in a timely manner, and therefore
        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, which
        has
        been clarified in the Modification Agreement as on or before July 2, 2007.
        The
        Company had begun 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.
  28
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 Pursuant
        to the terms of the PIPE Notes, 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.
 
 There
        is
        some uncertainty as to when the Company first learned of the Notice. On or
        about
        August 23, 2007, the Company and Spencer Clarke commenced discussions about
        the
        Notice. As a result of these discussions, the Modification Agreement was
        entered
        into as of August 29, 2007.
 
 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.  Therefore, while the stated interest rate on the Spring
        2007 Notes is 0%, the actual 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 noteholder, 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”).  Up to 1,210,489 Conversion Shares are initially issuable at
        Conversion Prices of either $0.34 or $0.53 per share, depending upon which
        of
        the two closing dates of the Spring 2007 Offering the Spring 2007 Notes were
        sold.
 
 Each
        of
        the investors in the Spring 2007 Offering received, for no additional
        consideration, 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.  Up to 605,242 Warrant Shares are initially issuable on
        exercise of the Spring 2007 Warrants.
  The
        Company received $410,000 gross and net proceeds in the Spring 2007
        Offering.  The proceeds of the Spring 2007 Offering were used for
        general corporate purposes and working capital.
  29
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 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.
        While
        the stated interest rate on the Summer 2007 Notes is 0%, the actual interest
        rate on the Summer 2007 Notes is 10%. The Summer 2007 Notes mature on the
        first
        anniversary of their date of issuance, i.e. September 28, 2007. 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 received, for no additional
        consideration, 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, i.e. September 28, 2007. Up to 418,892
        Warrant Shares are initially issuable on exercise of the Summer 2007
        Warrants.
  The
        Company received $281,800 gross and net proceeds in the 2007 Summer Offering.
        The proceeds of the Summer 2007 Offering will be used for general corporate
        purposes and working capital.
 
 
 **9.**
              
              **Capital
                  stock**
 
 As
        of
        September 30, 2007, the Company has authorized 200,000,000 shares of its
        common
        stock, of which 44,559,702 shares were issued and outstanding.
 
 During
        the year ended December 31, 2005, the Company issued 1,599,500 shares of
        common stock and 1,599,500 warrants, each warrant to acquire a share of common
        stock at an exercise price of $1.50 per share, for net proceeds of $1,490,660.
        The 1,599,500 warrants were issued to investors as part of an equity agreement
        and were not ascribed any value in the accompanying financial statements.
        Of the
        1,599,500 shares of common stock issued, the Company issued 69,000 shares
        of
        common stock for which payment was previously received. The Company also
        issued
        50,500 shares of common stock for the exercise of warrants, 50,000 of which
        payment was previously received.
 
 The
        warrants issued above were part of a private offering of 2,872,000 shares
        of
        common stock and warrants that began July 29, 2004 and concluded on
        July 22, 2005. The expiration date of each of the warrants was previously
        extended by one hundred eighty (180) days from its original expiration
        date. On February 6, 2006, the Company extended the expiration date for
        each of the warrants by an additional one hundred eighty-five (185) days,
        for a total extension of one year from its original expiration
        date.
   30
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 During
        the year ended December 31, 2005, the Company agreed to issue 846,548
        shares of common stock in settlement of accrued expenses of $612,521. These
        shares were reflected as common stock to be issued in the accompanying
        December 31, 2005 financial statements, and were subsequently issued in
        2006.
 
 In
        late
        2005 and early 2006, the Company conducted an offering (the “Bridge Offering”)
        and sold an aggregate $1,075,000 principal amount of its 9% convertible
        subordinated notes (the “Bridge Notes”) and issued warrants (“Bridge Warrants”)
        to purchase up to 2,303,568 shares of the Company’s common stock at $1.00 per
        share, to certain investors. Net proceeds to the Company from the sale of
        the
        Bridge Notes were $935,250. All of the Bridge Notes were converted voluntarily
        by the holders of the Bridge Notes into 1,535,715 shares of the Company’s common
        stock (the “Bridge Shares”), at a conversion price of $0.70 per share, on or
        prior to the maturity date of the Bridge Notes on May 31,
        2006.
 
 In
        April
        2006, the Company conducted an offering (the “Overseas Offering”) and sold
        473,000 shares of the Company’s common stock at $1.56 per share and issued
        warrants to purchase up to 118,250 shares of our common stock at an exercise
        price of $2.60 per share, to two overseas investors. The Company raised $737,881
        gross proceeds ($667,803 net proceeds) in this offering.
 
 In
        May 2006, the Company conducted an offering (the “2006 PIPE Offering”) and
        sold 873,018 shares of the Company’s common stock (the “2006 PIPE Shares”) at
        $1.89 per share and issued warrants (the “2006 PIPE Warrants”) to purchase up to
        436,511 shares of the Company’s common stock at $2.70 per share, through the
        Company’s exclusive placement agent, Spencer Clarke LLC (“Spencer Clarke”). The
        Company raised $1,650,009 gross proceeds ($1,435,508 net proceeds) in the
        2006
        PIPE Offering.
 
 On
        June 28, 2006, the Company filed a registration statement to register the
        Bridge Shares and the 2006 PIPE Shares, and the shares of the Company’s common
        stock issuable upon exercise of the Bridge Warrants, the 2006 PIPE Warrants
        and
        warrants issued to Spencer Clarke for various investment banking and other
        related services, including services in connection with the Bridge Offering,
        the
        Overseas Offering and the 2006 PIPE Offering. The registration statement
        was
        declared effective by the SEC on July 24, 2006.
 
 During
        the year ended December 31, 2006, convertible notes in the amount of $2,576,379
        of the Company’s previously issued and outstanding Investor Notes were converted
        to 3,680,540 shares of common stock, at a conversion rate of $0.70 per
        share.  In addition, $3,707 of accrued interest was converted to 5,296
        shares of common stock, at a conversion rate of $0.70 per share.  The
        Company did not receive any proceeds in connection with the conversion of
        the
        Investor Notes.
 
 During
        the year ended December 31, 2006, individuals exercised outstanding warrants
        to
        purchase 2,328,452 shares of common stock for gross and net proceeds of
        $1,623,327.
  31
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 On
        August
        17, 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 nine months ended September 30, 2007 the Company issued 1,880,421 shares
        of
        common stock in connection with its equity line of credit (see note
        7).
 
 
 **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 September 30, 2007, 3,046,762****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
        shares
        of common stock, which options are still outstanding.
 
 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 September 30, 2007 and December 31, 2006 was 7.36 years
        and 5.53 years, respectively. Stock option activity for the nine months
        ended September 30, 2007 and the year ended December 31, 2006 was as
        follows, which includes 3,250,000 options granted outside the Plan:
  **Weighted
                  Avg.**
              
              
              **Weighted
                  Avg.****Options**
              
              
              **Exercise
                  Price**Options,
                  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 (unaudited)
              
              
              238,679
              
              
              
              0.55Options
                  exercised (unaudited)
              
              
              —
              
              
              
              —Options
                  forfeited (unaudited)
              
              
              (35,000
              )
              
              
              2.08Options
                  cancelled (unaudited)
              
              
              —
              
              
              
              —Options,
                  September 30, 2007 (unaudited)
              
              
              4,203,238
              
              
              $
              0.96
  32
 **SAVE
            THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
            DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
            MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 During
        the nine months ended September 30, 2007, the Company granted an option for
        50,000 shares to an officer. The options were valued at $29,411, using the
        Black-Scholes pricing model, with the following average
        assumptions:****
 
 Expected
                  life (years)
              
              
              5.00Risk
                  free interest rate
              
              
              4.43
              %Volatility
              
              
              113.55
              %Expected
                  dividend yield
              
              
              0.00
              %
 
 During
        the nine months ended September 30, 2007, the Company also granted an option
        for
        188,679 shares to an officer. The options were valued at $87,270, using the
        Black-Scholes pricing model, of which $16,363 were expensed during this period
        with the following average assumptions:****
 
 Expected
                  life (years)
              
              
              5.50Risk
                  free interest rate
              
              
              4.42
              %Volatility
              
              
              124.57
              %Expected
                  dividend yield
              
              
              0.00
              %
  Options
        outstanding at September 30, 2007 and the related weighted average exercise
        price and remaining life information is as follows: (unaudited)
  **Total**
              
              
              
              
              
              
              **Exercisable****Weighted**
              
              
              **weighted**
              
              
              
              
              
              
              **weighted****average**
              
              
              **average**
              
              
              
              
              
              
              **Average****Exercise**
              
              **Total
                  options**
              
              
              **remaining**
              
              
              **exercise**
              
              
              
              
              
              
              **exercise****prices**
              
              **outstanding**
              
              
              **life
                  in years**
              
              
              **price**
              
              
              **Options
                  exercisable**
              
              
              **Price**$    0.35
              
              
              5,000
              
              
              
              9.71
              
              
              $
              0.35
              
              
              
              5,000
              
              
              $
              0.350.40
              
              
              250,000
              
              
              
              4.55
              
              
              
              0.40
              
              
              
              250,000
              
              
              
              0.400.42
              
              
              5,000
              
              
              
              9.87
              
              
              
              0.42
              
              
              
              5,000
              
              
              
              0.420.45
              
              
              5,000
              
              
              
              9.62
              
              
              
              0.45
              
              
              
              5,000
              
              
              
              0.450.53
              
              
              188,679
              
              
              
              9.82
              
              
              
              0.53
              
              
              
              -
              
              
              
              -0.61
              
              
              5,000
              
              
              
              9.79
              
              
              
              0.61
              
              
              
              5,000
              
              
              
              0.610.67
              
              
              10,000
              
              
              
              9.54
              
              
              
              0.67
              
              
              
              10,000
              
              
              
              0.670.72
              
              
              10,000
              
              
              
              9.45
              
              
              
              0.72
              
              
              
              10,000
              
              
              
              0.720.85
              
              
              2,085,000
              
              
              
              8.07
              
              
              
              0.85
              
              
              
              2,085,000
              
              
              
              0.850.98
              
              
              650,000
              
              
              
              5.66
              
              
              
              0.98
              
              
              
              650,000
              
              
              
              0.981.00
              
              
              365,000
              
              
              
              7.83
              
              
              
              1.00
              
              
              
              365,000
              
              
              
              1.001.15
              
              
              193,912
              
              
              
              6.42
              
              
              
              1.15
              
              
              
              193,912
              
              
              
              1.151.69
              
              
              310,647
              
              
              
              8.40
              
              
              
              1.69
              
              
              
              310,647
              
              
              
              1.692.26
              
              
              120,000
              
              
              
              3.86
              
              
              
              2.26
              
              
              
              120,000
              
              
              
              2.26$   0.35-$  2.26
              
              
              4,203,238
              
              
              
              7.36
              
              
              $
              0.96
              
              
              
              4,014,559
              
              
              $
              0.98
 
  33
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
  *Black-Scholes
        value of employee options*
 
 During
        the nine-month period ended September 30, 2007, the Company valued employee
        options at the grant date using the Black-Scholes pricing model with the
        following average assumptions:
 
 Expected
                  life (years)
              
              
              5.50Risk
                  free interest rate
              
              
              4.42
              %Volatility
              
              
              124.57
              %Expected
                  dividend yield
              
              
              0.00
              %
 
 Stock-based
        compensation during the nine-month period ended September 30, 2007 was $45,774,
        compared to $2,273,121 for the nine-month period ended September 30,
        2006.
 
 *Warrants*
 
 The
        following table summarizes certain information about the Company’s stock
        purchase warrants:
  **Weighted
                  Avg.****Warrants**
              
              
              **Exercise
                  Price**Warrants
                  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 (unaudited)
              
              
              2,822,353
              
              
              
              0.69Warrants
                  exercised (unaudited)Warrants
                  cancelled (unaudited)
              
              
              (4,921,437
              )
              
              
              1.14Warrants
                  outstanding, September 30, 2007 (unaudited)
              
              
              18,798,227
              
              
              $
              0.69
 
 During
        February 2006, the Company issued 250,000 performance based warrants to an
        outside consultant. These warrants are to be exercisable at $.40 per share,
        are fully vested and exercisable immediately. These warrants were valued
        at
        $401,130 using the Black-Scholes option valuation model with the following
        assumptions: risk-free interest rate of 4.59%, dividends yield of 0%, volatility
        factors of the expected market price common of 130.61%, and an expected life
        of
        five years.
 
 In
        April
        2006, the Company entered into a one-year agreement with an outside consultant
        to provide public relations services. The terms of the agreement calls for
        monthly payments of $7,000. Additionally, the Company issued a five-year
        warrant
        to the consultant. The warrant is exercisable for up to 100,000 shares of
        common
        stock at an exercise price of $2.30 per share and vests as to 8,333 shares
        per
        month commencing April 30, 2006. The shares issuable upon exercise of the
        warrant have piggyback registration rights.  In August 2006 the
        Company terminated the agreement.  The consultant earned warrants to
        purchase 41,665 shares and the remaining balance of the warrants to purchase
        58,335 shares was forfeited.
  34
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 
 During
        the nine months ended September 30, 2007, the Company did not issue any warrants
        for services other than what is stated in Note 8.
   **11.**
              
              **Research
                  and development**
 
 The
        Company has a research and development facility in Morgan Hill, California.
        The
        Company has expanded research and development to include application of the
        ZEFS, MK IV and CAT-MATE 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 spent $539,610 and $274,713 for the nine months ended September 30,
        2007
        and 2006, respectively.
 
 
 **12.**
              
              **Commitments
                  and contingencies**
 
 Legal
        matters
 
 *Litigation
        Involving Jeffrey A. Muller*
 
 On
        December 19, 2001, the SEC filed civil charges in the United States Federal
        District Court, Southern District of New York, against us, the Company’s former
        President and then sole director Jeffrey A. Muller, and others, alleging
        that
        the Company and the other defendants were engaged in a fraudulent scheme
        to
        promote our stock. The SEC complaint alleged the existence of a promotional
        campaign using press releases, Internet postings, an elaborate website, and
        televised media events to disseminate false and materially misleading
        information as part of a fraudulent scheme to manipulate the market for stock
        in
        the corporation, which was then controlled by Mr. Muller. On March 22,
        2002, the Company signed a consent to final judgment of permanent injunction
        and
        other relief in settlement of this action as against the corporation only,
        which
        the court approved on July 2, 2002. Under this settlement, the Company was
        not required to admit fault and did not pay any fines or restitution. The
        SEC’s
        charges of fraud and stock manipulation continue against Mr. Muller and
        others.
   35
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 On
        July 2, 2002, after an investigation by the Company’s newly constituted
        board of directors, the Company filed a cross-complaint in the SEC action
        against Mr. Muller and others seeking injunctive relief, disgorgement of
        monies and stock and financial restitution for a variety of acts and omissions
        in connection with sales of our stock and other transactions occurring between
        1998 and 2002. Among other things, the Company alleged that Mr. Muller and
        certain others sold Company stock without providing adequate consideration
        to
        the Company; sold insider shares without making proper disclosures and failed
        to
        make necessary filing required under federal securities laws; engaged in
        self-dealing and entered into various undisclosed related-party transactions;
        misappropriated for their own use proceeds from sales of the Company’s stock;
        and entered into various undisclosed arrangement regarding the control, voting
        and disposition of their stock. On July 30, 2002, the U.S. Federal District
        Court, Southern District of New York, granted the Company’s application for a
        preliminary injunction against Mr. Muller and others, which prevented
        Mr. Muller and other cross-defendants from selling, transferring, or
        encumbering any assets and property previously acquired from the Company,
        from
        selling or transferring any of the Company’s stock that they may own or control,
        or from taking any action to injure the Company or the Company’s business and
        from having any direct contact with the Company’s shareholders. The injunctive
        order also prevents Mr. Muller from engaging in any effort to exercise control
        over the Company’s corporation and from serving as an officer or director of the
        Company. While the Company believes that the Company has valid claims, there
        can
        be no assurance that an adverse result or settlement would not have a material
        adverse effect on the Company’s financial position or cash flow..
 
 In
        the
        course of the litigation, the Company has obtained ownership control over
        Mr. Muller’s claimed patent rights to the ZEFS device. Under a Buy-Sell
        Agreement between Mr. Muller and the Company dated December 29, 1998,
        Mr. Muller, who was listed on the ZEFS devise patent application as the
        inventor of the ZEFS device, purported to grant us all international marketing,
        manufacturing and distribution rights to the ZEFS device. Those rights were
        disputed because an original inventor of the ZEFS device contested
        Mr. Muller’s legal ability to have conveyed those rights.
 
 In
        Australia, Mr. Muller entered into a bankruptcy action seeking to overcome
        the Company’s claims for ownership of the ZEFS device. In conjunction with these
        litigation proceedings, a settlement agreement was reached whereby the
        $10 per unit royalty previously due to Mr. Muller under his contested
        Buy-Sell Agreement was terminated and replaced with a $.20 per unit royalty
        payable to the bankruptcy trustee. On November 7, 2002, under a settlement
        agreement executed with the Mr. Muller’s bankruptcy trustee, the trustee
        transferred to the Company all ownership and legal rights to this international
        patent application for the ZEFS device.
 
 Both
        the
        SEC and the Company have filed Motions for Summary Judgment contending that
        there are no material issues of fact in contention and as a matter of law,
        the
        Court should grant a judgment against Mr. Muller and the
        cross-defendants.
  36
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 
 Mr. Muller
        and several of the defendants filed a Motion to Dismiss the complaint filed
        by
        the Company and moved for summary judgment in their favor. On December 28,
        2004, Judge George B. Daniels denied the cross-defendants’ motion to dismiss the
        Company’s cross-complaint, denied the request to vacate the July 2, 2002
        preliminary injunction and denied the request for damages against the Company.
        The court also refused to grant a summary judgment in favor of the
        cross-defendants and dismissed Mr. Muller’s claims against the Company for
        indemnification for his legal costs and for damages resulting from the
        litigation. Neither Mr. Muller nor any of the cross-defendants have filed
        any cross-claims against the Company and the Company is not exposed to any
        liability as a result of the litigation, except for possibly incurring legal
        fees and expenses should the Company lose the litigation.
 
 On
        November 16, 2005, the Court granted the SEC’s motion for summary judgment.
        In granting the motion, the Court has barred Mr. Muller from serving as an
        officer or director of a public company for a period of 20 years, ordered
        Mr. Muller to disgorge any shares of our stock that he still owns and
        directed the Company to cancel any issued and outstanding shares of our stock
        still owned by Mr. Muller. Mr. Muller was also ordered to disgorge to
        the SEC unlawful profits in the amount of $7.5 million and pay a civil
        penalty in the amount of $100,000. Acting in accordance with the Court’s order,
        the Company has canceled (i) 8,047,403 shares of its common stock held
        by Mr. Muller and/or his affiliates, (ii) options to acquire an
        additional 10,000,000 shares of the Company’s common stock held by
        Mr. Muller personally and (iii) $1,017,208 of debt which
        Mr. Muller claimed was owed to him by the Company.
 
 Mr.
        Muller subsequently filed a Notice of Appeal from the Judgment resulting
        from
        this decision to the Second Circuit Court of Appeals in New York.  The
        clerk of the Court recently issued an Order dismissing this appeal.
 
 In
        response to the November 16, 2005 decision by the Court, Muller filed a
        motion seeking to set aside the decision and order of the Court. On
        March 31, 2006, the Court issued a decision and order denying Muller’s
        motion to set aside the decision on summary judgment issued against Muller
        on
        November 16, 2005.
 
 On
        October 27, 2006, Magistrate Judge Frank Maas, Federal District Court of
        the Southern District of New York, issued an order granting summary judgment
        in
        favor of the Company. The ruling provided that all shares, options and any
        other
        obligations allegedly owed by the Company to Jeffrey A. Muller, its former
        Chairman, were to be disgorged. The ruling also confirmed an earlier decision
        issued on November 16, 2005 in favor of the SEC holding Mr. Muller
        liable for $7.5 million in actual damages, imposing a $100,000 fine and
        barring Muller from any involvement with a publicly traded company for
        20 years. With prejudgment interest, this ruling brings the actual damages
        against Muller to over $9 million. Additionally, the Court further
        clarified that the scope of its previous disgorgement order required the
        disgorgement of any shares of the Company’s stock that Mr. Muller or any of
        his nominees directly or indirectly own or control. The Company has taken
        action
        to cancel over 3.6 million shares which had been issued to the offshore
        companies.
  37
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 
 The
        Court
        also confirmed the appropriateness of an action previously taken by the Company
        to acquire the patent rights and to consolidate the manufacturing, marketing
        and
        distribution rights with its ownership of all rights to the existing
        patents.
 
 Finally,
        the Court ruled that Mr. Muller had no claim to an alleged $500,000 debt
        owed to him while the damages of over $9 million remain unpaid. The Court
        also ruled that other assets that were transferred by Mr. Muller to members
        of his family through various offshore corporations were also to be
        disgorged.   Because the Court left unresolved an issue
        concerning claims against one Muller family member, the Company sought a
        modification of the Order.  On February 8, 2007, Judge Maas issued an
        Amended Order, which concluded that all of the STWA shares of Muller or any
        of
        his nominees directly or indirectly owned or controlled were to be recaptured
        by
        STWA and were subject to disgorgement and forfeiture.  With this
        modification of the October 27, 2007 ruling, this order provides the complete
        relief requested by the Company in its motion for summary judgment.
 
 In
        April
        2005, Jeffrey A. Muller, the Company’s former sole director and executive
        officer, filed a lawsuit 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 arises out of the same claims that are the
        subject of ongoing litigation in the Federal District Court for the Southern
        District of New York, in which the Company has previously obtained a preliminary
        injunction against Mr. Muller barring him from any involvement with the
        Company and preventing Mr. Muller, his agents or assigns, from exercising
        any claimed rights to the Company’s assets or stock. Mr. Muller previously filed
        the same complaint in the Federal District Court for the Southern District
        of
        New York, which claim is pending dismissal. On December 28, 2004, Federal
        District Court Judge George B. Daniels issued a decision dismissing motions
        filed by Mr. Muller against the Company’s cross-claims. The dismissal of
        those motions involved similar causes of action as those contained in
        Mr. Muller’s recent lawsuit commenced in the Federal District Court for the
        Central District of California. Since the case in New York is still pending,
        the
        filing of the new lawsuit in California is subject to various defenses, which
        should result in the dismissal of the new lawsuit.
 
 On
        January 25, 2006, Mr. Muller’s complaint, filed in the California
        District Court and transferred to the Federal Court in the Southern District
        of
        New York, was assigned to Judge George B. Daniels.  That Complaint is
        currently pending, however, the issues raised in this Complaint arise from
        the
        same claims already decided by the Court in its February 8, 2007 Amended
        Order.  The Company plans to file a request to dismiss the pending
        Complaint on several grounds, including that the claims sought to be litigated
        in this latter complaint has been included within the Summary Judgment Motions
        decided against Muller, his nominees and assignees. 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 our financial position or cash
        flow.
  38
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
  *Litigation
        Involving Sublessor of Former Corporate Offices*
  On
        July 19, 2007, Scottish Glen Golf Company, Inc. doing business as KZG
        (“KZG”) 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. In its complaint, KZG also
        seeks
        attorney fees. The Company believes that Bruce H. McKinnon, the Company’s former
        President and Chief Executive Officer, and an incumbent director, is a
        beneficial owner of KZG. Mr. McKinnon’s wife is also a beneficial owner of
        KZG.
  On
        July
        25, 2007, the parties entered into an agreement pursuant to which KZG would
        dismiss the eviction action. However, KZG reserved the right to amend their
        complaint to include a demand for past due rent and penalties.  The
        Company agreed to vacate the premises and KZG agreed not to further prosecute
        its eviction action.  The Company vacated the premises on July 25,
        2007.  On August 30, 2007, KZG filed an amended complaint which was
        answered by the Company on October 5, 2007.
  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.
 
 Employment
        agreements
 
 In
        July
        2005, the Company entered into an employment agreement with John Bautista
        to
        serve as a Vice President of Operations for the Company. The agreement
        expired December 31, 2005, with an automatic one-year extension and
        provided for annual base salary of not less than $120,000 per
        year.  Effective February 21, 2006, the individual was promoted to
        Executive Vice President, his annual base salary was increased from $120,000
        per
        year to $150,000 per year and the term of his employment agreement was extended
        to December 31, 2007.  Effective August 8, 2006, the individual was
        promoted to Chief Operating Officer and his annual base salary was increased
        from $150,000 per year to $200,000 per year.  During the employment
        term, the individual is eligible to participate in certain incentive plans,
        stock option plans and similar arrangements in accordance with the Company’s
        recommendations at award levels consistent and commensurate with the position
        and duties hereunder.
 
 On
        November 9, 2006, Eugene Eichler, who served as the Company’s Chief Executive
        Officer and Chief Financial Officer, resigned due to a medical disability.
        His
        resignation as Chief Executive Officer took effect on November 20, 2006 and
        his
        resignation as Chief Financial Officer took effect on January 8, 2007. He
        will
        continue to serve as a director of the Company.
  39
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 
 Under
        the
        terms of the separation agreement as an officer of the Company, he is entitled
        to be paid out the remainder of the cash portion of his employment agreement,
        at
        a rate of $300,000 per annum, through December 31, 2007, in accordance with
        the
        Company’s normal pay policies. Options granted to him in February 2006 have been
        accelerated, fully vested on November 20, 2006 and were recalculated under
        123R.
        Additionally, the former officer will have until November 20, 2007 to exercise
        such options. He is also entitled to receive a stock option grant in 2007
        equal
        to the lesser of (i) the number of stock options he was granted in 2006 or
        (ii)
        the highest number of options granted to any of the then Chief Executive
        Officer, President or Chief Financial Officer on an annualized basis, on
        terms
        no less favorable as granted to such person; provided, however, that such
        options to be granted to the former officer shall be fully vested upon grant
        and
        shall be exercisable for one year from the date of grant. The Company and
        the
        former officer have waived any claims they may have against each other and
        have
        agreed to mutual indemnification.  The Company expensed $345,000 for
        the remaining term of his employment agreement and benefits for the year
        ended
        December 31, 2006.
 
 On
        June 15, 2007, the Company and Bruce H. McKinnon agreed and entered into an
        agreement that Mr. McKinnon would resign as Chief Executive Officer of the
        Company effective on the first to occur of (i) the appointment of a new
        Chief Executive Officer by the Board of Directors and (ii) July 31,
        2007.  At the time of the filing of the Current Report on Form 8-K
        announcing such matter (the “Form 8-K”), and as stated therein, it was intended
        that Mr. McKinnon would continue to serve as President of the Company and
        would continue to receive the compensation provided for in accordance with
        the
        provisions of the employment agreement dated as of October 5, 2005 between
        the Company and Mr. McKinnon, through December 31, 2007, the end of
        the term of that agreement. Additionally, as stated in the Form 8-K,
        Mr. McKinnon will continue to serve as a director of the Company, until he
        has resigned, been removed by the stockholders or not been re-elected to
        the
        Board. The Company and Mr. McKinnon have waived any claims they may have
        against each other and have agreed to mutual indemnification.
  On
        July
        18, 2007, Bruce H. McKinnon was removed by the Board of Directors as President
        and Chief Executive Officer of the Company and its wholly-owned subsidiary,
        STWA
        Asia, effective immediately.  Mr. McKinnon also was removed by the
        Board of Directors****as a director of STWA Asia, effective
        immediately.  Mr. McKinnon will continue to serve as a director
        of the Company, until he has resigned, been removed by the stockholders or
        not
        been re-elected to the Board. The Company expensed $111,381 for the remaining
        term of his employment agreement and benefits for the year ended December
        31,
        2007.
 
 As
        an
        interim matter, on July 18, 2007, the Board of Directors appointed incumbent
        director and former President and Chief Executive Officer of the Company,
        Eugene
        E. Eichler, as Interim President and Chief Executive Officer of the
        Company.  Mr. Eichler served without cash compensation and resigned on
        July 25, 2007 (see Note 13) at which time Charles Blum assumed the positions
        of
        President and Chief Executive Officer.
   40
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 Effective****July 18,
        2007, the Company entered into an employment agreement with Mr. Blum to serve
        as
        the Company’s President and Chief Executive Officer.  Pursuant to the
        Employment Agreement, his 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, he will receive an automobile allowance of $900 per month and four
        weeks of paid vacation annually.  Also, he is entitled to participate
        in all employee benefit plans that the Company makes available to its employees
        generally; provided that if Mr. Blum elects not to participate in the Company’s
        group medical insurance plan, he will be reimbursed in an amount equal to
        the
        lesser of (i) the premium the Company would have paid to include him as a
        participant in that group health insurance plan and (ii) the sums paid by
        him in
        connection with maintaining his private health insurance.  The Company
        will also reimburse him the reasonable costs paid by him for maintaining
        DSL
        Internet access and other direct costs of maintaining an office at his home,
        but
        only until such time as the Company shall provide him with an office at a
        location reasonably acceptable to him.
 
 Minimum
        guaranteed compensation, including those agreements entered into prior to
        2006,
        payments under employment agreements, as amended, amounts to approximately
        $699,000 for the balance of the year 2007.  Previously, $10,000 was
        shown for the year 2008 in respect of an officer of the Company and has been
        eliminated in this Report due to the resignation of that officer.
 
 During
        the nine months ended September 30, 2007, approximately $212,000 was paid
        for
        employment agreements.
 
 Consulting
        agreements
 
 We
        entered into a consulting agreement dated January 4, 2007 with Spencer
        Clarke (the “Consulting Agreement”), pursuant to which Spencer Clarke has agreed
        that for a twelve-month period beginning January 15, 2007, Spencer Clarke
        will provide us with financial consulting services (including but not limited
        to
        executive search, strategic partnerships, research on new markets, strategic
        visibility, etc) to help further develop our strategic business
        plan.
 
 For
        Spencer Clarke’s services, we have agreed to pay Spencer Clarke a non-refundable
        fee of $20,000 per month, payable in advance. The first payment, in the amount
        of $60,000 and covering three months, was payable by us on March 15, 2007.
        We will also reimburse Spencer Clarke for expenses they incur in connection
        with
        the performance of their services under the Consulting Agreement, provided
        that
        expenses in excess of $2,000 require our prior approval before they may be
        incurred by Spencer Clarke. To date, we have not made any payments under
        the
        Consulting Agreement and have accrued $180,000 through September 30, 2007
        with
        respect to this obligation.
  41
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
  We
        have
        agreed to indemnify Spencer Clarke against any losses, claims, damages or
        liabilities to which Spencer Clarke may become subject arising out of or
        in
        connection with the services they render under the Consulting Agreement,
        unless
        it is finally judicially determined that such losses, claims, damages or
        liabilities arose primarily out of the gross negligence or bad faith of Spencer
        Clarke. We have also agreed to reimburse Spencer Clarke immediately for any
        legal or other expenses they reasonably incur in connection with investigating,
        preparing to defend or defending any lawsuits or other proceedings arising
        out
        of or in connection with their rendering of services under the Consulting
        Agreement; provided, however, that in the event of a final judicial
        determination that the alleged losses, claims, damages or liabilities arose
        primarily out of the gross negligence or bad faith of Spencer Clarke, Spencer
        Clarke will remit to us any amounts reimbursed, but the amount which Spencer
        Clarke must remit in such event is limited to the fee payable by us to Spencer
        Clarke under the Consulting Agreement.
 
 In
        April
        2006, the Company entered into a one-year agreement with an outside consultant
        to provide public relations services. The terms of the agreement calls for
        monthly payments of $7,000. Additionally, the Company issued a five-year
        warrant
        to the consultant. The warrant is exercisable for up to 100,000 shares of
        common
        stock at an exercise price of $2.30 per share and vests as to 8,333 shares
        per
        month commencing April 30, 2006. The shares issuable upon exercise of the
        warrant have piggyback registration rights.  In August 2006 the
        Company terminated the agreement.  The consultant earned warrants to
        purchase 41,665 shares of common stock and warrants to purchase the balance
        of
        58,335 shares of common stock were forfeited.
 
 Leases
  During
        2003, the Company entered into a sublease agreement with an entity to lease
        office space in North Hollywood, California for its principal executive offices.
        Bruce H. McKinnon, the Company’s former President and Chief Executive Officer,
        and an incumbent director, is an owner of the sublessor. Mr. McKinnon’s
        wife is the President of the sublessor and the Company believes that Mr.
        McKinnon is presently the Chairman of the sublessor.
 
 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 carried an option to renew for
        two additional years with a 10 percent increase in the rental rate. Monthly
        rent was $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 the sublease
        and vacated the premises on July 25, 2007.
  42
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
  In
        November 2003, the Company entered into a lease for a research and development
        facility located in Queensland, Australia. The term of the lease is from
        November 15, 2003 through March 15, 2006 and carries an option to
        renew for two additional years each with an increase of the greater of 5%
        or the
        increase in the then current Australian Consumer Price Index. Monthly rent
        is
        AUD $1,292 (approximately US $1,000) per month under this lease. In March
        2006, the Company entered into a new lease for this facility for a term of
        two
        years commencing March 15, 2006. Monthly rent is AUD $1,462 (approximately
        US $1,100) per month. In April 2007, the Company vacated the premises and
        mutually terminated the lease with the landlord.
 
 In
        September 2005, the Company entered into a lease for a testing facility located
        in Morgan Hill, California. The term of the lease is from September 1, 2005
        through August 31, 2007 and carries an option to renew for two additional
        years at the then prevailing market rate. Monthly rent is $2,240 per month
        under this lease. The lease was amended in February 2006 for additional space.
        Monthly rate under the amended lease is $4,640 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 18 months of
        the
        new term of the lease.
 
 Total
        rent expense under these leases for the nine-month periods ended September
        30,
        2007 and 2006, is $161,938 and $107,798, respectively. The amount for the
        nine
        months ended September 30, 2007 includes $57,700 with respect to a late penalty
        of $100 per day since January 1, 2006.  The Company does not admit
        that it owes this amount.
  The
        following is a schedule by years of future minimum rental payments required
        under the non-cancelable operating leases as of June 30, 2007.
 
 Years
                  Ending December 31,2007
              
              $
              13,9202008
              
              
              65,2802009
              
              
              44,800Total
              
              $
              124,000
 
 
 **13.**
              
              **Subsequent
                  events**
 
 On
        October 1, 2007, the Company retained the law firm of Gartenberg Gelfand
        Wasson
& Selden, LLP as new Corporate and Securities Counsel located in Los
        Angeles.
 
 On
        October 19, 2007, John Brown resigned from the Company’s Board of Directors due
        to other responsibilities which make it impossible for him to devote the
        necessary time and attention to perform the duties as a director of the
        Company.
 
 On
        October 30, 2007, the Company received a loan in the amount of $20,000 from
        Morale Orchards, LLC, and a current Convertible Noteholder of the
        Company.  The loan bears interest at the rate of 10% per annum and is
        payable upon demand.
 
 On
        November 5, 2007, Mr. Charles Dargan resigned as Chief Financial Officer
        of the
        Company and Mr. Eugene Eichler was appointed Interim Chief Financial
        Officer.
  43
 **SAVE
              THE WORLD AIR, INC. AND SUBSIDIARY**
 **(A
              DEVELOPMENT STAGE ENTERPRISE)**
  **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 **NINE
              MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)**
 
 In
        return
        for his services, the Board of Directors, on October 18, 2007, extended the
        expiration date of Mr. Eichler’s options to November 20, 2008.  As an
        interim matter, on July 18, 2007, the Board of Directors appointed incumbent
        director and former President and Chief Executive Officer of the Company,
        Eugene
        E. Eichler, as Interim President and Chief Executive Officer of the
        Company.  Mr. Eichler served without cash compensation and resigned on
        July 25, 2007 at which time Charles Blum assumed the positions of President
        and
        Chief Executive Officer.
 
 On
        November 13, 2007, the Company filed its 2007 Proxy Statement with the SEC
        which
        established the 2007 Annual Meeting to be held on December 13,
        2007.  Shareholders of record on October 25, 2007 are eligible to
        vote.
 
 On
        November 14, 2007, the Company initiated a Fall Offering of Convertible Notes
        to
        raise a minimum of $25,000 and a maximum of $1,000,000 of net
        proceeds.  The Notes are offered at a discount of 10% and are
        convertible into shares of the Company’s Common Stock at a price equal to the
        average closing bid price of the Company’s Common Stock for the five trading
        days prior to the Closing Date.  Noteholders will receive Warrants to
        purchase a number of shares of the Company’s Common Stock equal to 50% of the
        number of shares of Common Stock initially issuable on conversion of the
        associated Note. The Closing Date will be on or before December 31,
        2007.  As of November 16, 2007, the Company has raised $125,000 in net
        proceeds.


44


**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, 2006. 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 consolidated financial condition and
      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 consolidated financial
      statements and notes thereto contained in our Annual Report on Form 10-KSB
      for
      the fiscal year ended December 31, 2006.




We
      are a development stage company that generated our first revenues in the fourth
      quarter of 2006. Our focus is on research and development, and initial sales
      and
      marketing, of products incorporating our proprietary and patented technology,
      which is designed to reduce harmful emissions, and/or improve fuel efficiency
      and engine performance on equipment and vehicles driven by internal combustion
      engines. We have devoted the bulk of our efforts to the completion of the
      design, the development of our production models, testing of devices and the
      promotion of our products in the marketplace. We anticipate that these efforts
      will continue during 2007, subject to our ability to finance such
      efforts.




We
      face significant challenges in generating revenue and maintaining adequate
      working capital during the remainder of 2007 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. Additionally, certain long-term financing transactions that we
      were
      negotiating earlier this year have not materialized. In turn, this lack of
      adequate working capital has put additional pressures on our ability to meet
      our
      obligations as they come due, including without limitation, being able to order
      and pay for the tooling and manufacture of products from third parties for
      sale
      to our distributors, being able to pay for shipment and freight duties in
      connection with such sales and being able to pay our trade creditors,
      professional advisors and others in a timely manner. We will require significant
      additional outside capital during the remainder of 2007 in order to meet all
      of
      our obligations, produce products for sale and ship such products.




45


Given
      our current circumstances, we anticipate that revenue will remain nominal for
      at
      least the next few quarters, and unless and until we can simultaneously raise
      capital, reduce our expenses and generate more meaningful revenue from the
      sale
      of our products. See “Results of Operations” and “Liquidity and Capital
      Resources” below.




We
      are in the process of reviewing certain terms of our distribution agreement
      with
      Golden Allied Enterprises (Group) Co., Ltd. (“GAE”), our distributor in
      China.  Among other things, we currently expect that we will again
      defer certain of GAE’s order deadlines, including GAE’s revised obligation to
      order 100,000 units by July 31, 2007 (previously extended from
      July 31, 2006), by up to one additional year until July 31, 2008, and
      we would like GAE to become a non-exclusive distributor (rather than an
      exclusive distributor) for our ECO ChargR, MAG ChargR and ELEKTRA products
      in
      China, while maintaining its exclusivity for the distribution of ZEFS and
      CAT-MATE products in China. These negotiations have not concluded and therefore
      are subject to change. Additionally, we have informally modified the terms
      of
      our distribution agreements with each of our distributors in China, Indonesia
      and Vietnam, so that none of these distributors is required to post letters
      of
      credit prior to or at the time that they place any further orders with us.
      These
      modifications may increase somewhat our exposure in terms of being paid in
      a
      timely fashion for products we ship to these distributors.




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 the three-month period ended September 30, 2007
      and subsequent to the end of the three-month period ended September 30, 2007,
      and we will need to raise substantial additional capital during 2007, and
      possibly beyond, to fund our sales and marketing efforts, the manufacture of
      products to our distributors, continuing research and development, and certain
      other expenses, unless and until our revenue base grows
      sufficiently.




On
      July 25, 2007, the Company made a significant advancement when it appointed
      Charles R. Blum as a Director and President and Chief Executive
      Officer.  Mr. Blum spent 22 years as the President and Chief Executive
      Officer of the Specialty Equipment Market Association (SEMA).  SEMA is
      a trade group representing 6,500 business members who are actively engaged
      in
      the manufacture and distribution of automotive parts and
      accessories.  SEMA produces the world’s largest automotive aftermarket
      Trade Show which is held annually in Las Vegas, Nevada.  Mr. Blum led
      the association as its members grew from a handful of small entrepreneurial
      companies into an industry membership that sells over 31 billion dollars of
      product at the retail level annually.  Mr. Blum has a proven record of
      accomplishment as a senior executive and brings a broad knowledge of the
      automotive aftermarket to the Company.




**Results
      of Operations**




We
      did not generate any revenue for the three-month periods ended September 30,
      2007 and 2006.  We generated revenue of $22,000 and incurred cost of
      goods sold of $5,360 for the nine-month period ended September 30, 2007,
      compared to $-0- and $-0-, respectively, for the nine-month period ended
      September 30, 2006.




Operating
      expenses were $873,971 for the three-month period ended September 30, 2007,
      compared to $1,718,614 for the three-month period ended September 30, 2006,
      a
      decrease of $844,643. This decrease is attributable to decreases in non-cash
      expenses of $591,646 and cash expenses of $252,997. Specifically, the non-cash
      decrease is attributable to the revaluation of options and warrants given to
      employees and consultants ($592,982), partially offset by an increase in
      depreciation ($1,336). Decreases in cash expenses are attributable to decreases
      in travel expenses ($89,591), consulting and professional fees ($80,367), office
      and other expenses ($43,783), exhibits and trade shows ($39,595), and corporate
      expenses ($22,999), partially offset by an increase salaries and benefits
      ($23,338).




46


Operating
      expenses were $3,177,533 for the nine-month period ended September 30, 2007,
      compared to $5,326,222 for the nine-month period ended September 30, 2006,
      a
      decrease of $2,148,689.  This decrease is attributable to a decrease
      in non-cash expenses of $2,173,192, offset by an increase in cash expenses
      of
      $24,503. Specifically, the non-cash decrease is attributable to the revaluation
      of options and warrants given to employees and consultant ($2,227,346),
      partially offset by an increase in depreciation ($54,154). Increases in cash
      expenses are attributable to increases in consulting and professional fees
      ($108,540), and salaries and benefits ($54,197), office and other expenses
      ($31,709), partially offset by decreases in travel expenses ($121,198) and
      corporate expenses ($42,378) exhibits and trade shows ($6,367).




Research
      and development expenses were $98,427 for the three-month period ended September
      30, 2007, compared to $95,608 for the three-month period ended September 30,
      2006, an increase of $2,819. This increase is attributable to an increase in
      product testing, research and supplies ($41,737) partially offset by decreases
      in consulting fees ($23,597), and travel and related expenses
      ($15,321).




Research
      and development expenses were $539,610 for the nine-month period ended September
      30, 2007, compared to $274,713 for the nine-month period ended September 30,
      2006, an increase of $264,897. This increase is attributable to an increase
      in
      product testing, research and supplies ($392,945), partially offset by decreases
      in consulting fees ($86,784) and travel and related expenses
      ($41,264).




Other
      expense for the three-month period ended September 30, 2007 were $645,454,
      compared to $146,803 for the three-month period ended September 30, 2006, an
      increase of $498,651. This increase is attributable to increases in non-cash
      interest expense ($331,573), cash interest expense
      ($14,940),  financing costs ($148,455) and a decrease in interest
      income ($5,954), offset by an increase in other income ($2,271).




Other
      expense for the nine-month period ended September 30, 2007 were $1,358,893,
      compared to $2,349,620 for the nine-month period ended September 30, 2006,
      a
      decrease of $990,727. This decrease is attributable to decreases in non-cash
      interest expense ($1,318,258), cash interest expense ($71,479), and an increase
      in other income ($2,323), partially offset by an increase in financing cost
      ($388,453), and a decrease in interest income ($12,880).




We
      had a net loss of $1,617,852, or $0.04 per share, for the three-month period
      ended September 30, 2007, compared to a net loss of $1,961,025, or $0.05 per
      share, for the three-month period ended September 30, 2006. We had a net loss
      of
      $5,060,196, or $0.13 per share, for the nine-month period ended September 30,
      2007, compared to a net loss of $7,951,355, or $0.23 per share, for the
      nine-month period ended September 30, 2006. We expect to incur additional net
      loss in the fiscal year ending December 31, 2007, 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 September 30, 2007, we had cash of $102,179
      and an accumulated deficit of $35,487,793. Our negative operating cash flow
      in
      the nine-month period ended September 30, 2007 was funded primarily through
      the
      sale of convertible notes, as well as sales of our stock by Dutchess Private
      Equity Fund, LLP (“Dutchess”) under our equity line of credit.




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 $1,617,852 for the three-month period
      ended September 30, 2007, a net loss of $5,060,196 and a negative cash flow
      from
      operations of $2,655,981 for the nine-month period ended September 30, 2007
      and
      a stockholders’ deficiency of $3,856,425 as of September 30, 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.




47


Our
      current liabilities greatly exceed our assets and we are unable to meet our
      obligations as they become due. Additionally, we have been unable to make
      certain payments to various parties for amounts currently owed to
      them.




We
      face significant challenges in generating revenue and maintaining adequate
      working capital during the remainder of 2007 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. Additionally, certain long-term financing transactions that we
      were
      negotiating earlier this year have not materialized. In turn, this lack of
      adequate working capital has put additional pressures on our ability to meet
      our
      obligations as they come due, including without limitation, being able to order
      and pay for the tooling and manufacture of products from third parties for
      sale
      to our distributors, being able to pay for shipment and freight duties in
      connection with such sales and being able to pay our professional advisors
      and
      outside consultants in a timely manner. We will require significant additional
      outside capital during 2007 in order to meet all of our obligations, produce
      products for sale and ship such products.




During
      the three-month period ended September 30, 2007, we raised gross and net
      proceeds of $281,800 net proceeds from the issuance of convertible notes and
      related warrants in a private offering (the ”Summer 2007
      Offering”).




In August 2007, Eugene E. Eichler, our former Chief Executive Officer and an
      incumbent director, personally loaned the Company $50,000 to meet certain
      expenses.




Subsequent
      to end of the three-month period ended September 30, 2007, a noteholder loaned
      the Company an additional $20,000 in order to meet certain
      expenses.  This loan is outstanding as of the date of the filing of
      this Report.




**Details
      of Recent Financing Transactions**




***Equity
      Line of Credit*****.** In September 2006, to
      address our longer-term capital needs, we entered into what is sometimes
      referred to as an equity line of credit arrangement with Dutchess. Specifically,
      we entered into an investment agreement, pursuant to which Dutchess is committed
      to purchase up to $10,000,000 of our common stock over the 36-month term of
      the
      investment agreement. We are not obligated to request any portion of the
      $10,000,000.




In
      connection with the equity line of credit, we filed a Registration Statement
      with the SEC (the “Dutchess Registration Statement”) on October 6, 2006 to
      register 7,000,000 shares of Common Stock that we may issue under the equity
      line of credit and the Dutchess Registration Statement was declared effective
      by
      the SEC on October 30, 2006.




Under
      the line of credit we may, but are not obligated to, put shares of our stock
      to
      Dutchess from time to time over a 36-month period, at a purchase price
      calculated at 97% of the lowest best closing bid for our common stock for the
      five trading days following our put notice to Dutchess. Because the price of
      our
      common stock fluctuates and the number of shares of our common stock, if any,
      that we may issue, should we exercise our put rights under the equity line
      of
      credit, will vary, we do not know how many shares, if any, we will actually
      issue under the equity line of credit. If we put more than the amount that
      would
      require us to issue the 7,000,000 shares that we have registered with the SEC,
      we would be required to file a new registration statement with regard to the
      excess number of shares and have it declared effective by the SEC, before we
      could make further puts under the equity line of credit.




The
      actual number of shares that we may issue pursuant to the equity line of credit
      is not determinable as it is based on the market price of our common stock
      from
      time to time and the number of shares we desire to put to Dutchess. Under the
      terms of the equity line of credit, Dutchess may not own more than 4.99% of
      our
      issued and outstanding stock at any one time.




As
      we draw down on the equity line of credit, more shares will be sold into the
      market by Dutchess. These additional shares could cause our stock price to
      drop.
      In turn, if the stock price drops and we make more drawdown’s on the equity line
      of credit, more shares will come into the market, which could cause a further
      drop in the stock price. You should be aware that there is an inverse
      relationship between our stock price and the number of shares to be issued
      pursuant to the equity line of credit. If our stock price declines, we will
      be
      required to issue a greater number of shares under the equity line of credit.
      We
      have no obligation to utilize the full amount available under the equity line
      of
      credit.




48


For
      purposes of the Dutchess Registration Statement, we assumed that we would put
      $9,913,400, or all 7,000,000 shares, based on a closing price of our common
      stock on September 20, 2006 of $1.46 per share, less the 3% discount
      applicable to the price per share that Dutchess would pay under the terms of
      the
      equity line of credit. However, this may not in fact be the case. We would
      only
      be able to put a total of approximately $5,908,000 for the same 7,000,000
      shares, based on a more current closing price of our Common Stock on
      January 11, 2007 of $0.87 per share, less the 3% discount applicable to the
      price per share that Dutchess would pay under the terms of the equity line
      of
      credit.




In
      part, because of the drop of our stock price since the establishment of the
      equity line of credit, we have not used the maximum amount of the equity line
      of
      credit to date that we could have used. Additionally, our capital requirements
      are expected to increase for various reasons discussed in this report and other
      filings we make from time to time with the SEC.




***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, 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 Notes are convertible into shares of Common
      Stock at an initial conversion price of $0.70 per share (the “Conversion
      Shares”). The Company raised $400,000 gross proceeds ($352,000 net proceeds) in
      the 2007 PIPE Offering.  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 $0.58 to a high bid price (intraday) of $1.03.




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 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 and only up to a maximum of UK £15,000,000 in the aggregate,
      are exempt from this provision to redeem the 2007 PIPE Notes in whole or in
      part.




Investors
      in the 2007 PIPE Offering received, for no additional consideration, 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 PIPE Offering,
      the
      Company was required to file a registration statement with the SEC to register
      the Conversion Shares and the Warrant Shares. The Company was further required
      to use its best efforts to ensure that the Registration Statement was declared
      effective within 120 days after filing.





Pursuant
      to the terms of the PIPE Notes, 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.





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.





49




There
      is some uncertainty as to when the Company first learned of the Notice. On
      or
      about August 23, 2007, the Company and Spencer Clarke commenced discussions
      about the Notice. As a result of these discussions, a Modification Agreement
      was
      entered into as of August 29, 2007.




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 (the "Registration Statement")
      to
      register the shares of the Company's common stock into which the PIPE Notes
      are
      convertible (the "Conversion Shares") and for which the PIPE Warrants may be
      exercised (the "Warrant Shares").





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. The Additional Warrants 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.




***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. Therefore, while the stated interest
      rate
      on the Spring 2007 Notes is 0%, the actual 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”). Up to
      1,210,489 Conversion Shares are initially issuable at Conversion Prices of
      either $0.34 or $0.53 per share, depending upon which of the two closing dates
      of the Spring 2007 Offering the Spring 2007 Notes were sold.  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.




50


Each
      of the investors in the Spring 2007 Offering received, for no additional
      consideration, 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. Up to 605,242 Warrant Shares are initially issuable on exercise of
      the
      Spring 2007 Warrants.




The
      Company received $410,000 gross and net proceeds in the 2007 Spring Offering.
      The proceeds of the Spring 2007 Offering were used for general corporate
      purposes and working capital and have been exhausted.





***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. While
      the stated interest rate on the Summer 2007 Notes is 0%, the actual interest
      rate on the Summer 2007 Notes is 10%. The Summer 2007 Notes mature on the first
      anniversary of their date of issuance, i.e. September 28, 2007. 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 received, for no additional
      consideration, 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, i.e. September 28, 2007. Up to 418,892
      Warrant Shares are initially issuable on exercise of the Summer 2007
      Warrants.




The
      Company received $281,800 gross and net proceeds in the 2007 Summer Offering.
      The proceeds of the Summer 2007 Offering will be used for general corporate
      purposes and working capital.




***2007
      Fall Offering******.*** On November 14, 2007, the
      Company initiated a Fall Offering of Convertible Notes to raise a minimum of
      $25,000 and a maximum of $1,000,000 of net proceeds.  The Notes are
      offered at a discount of 10% and are convertible into shares of the Company’s
      Common Stock at a price equal to the average closing bid price of the Company’s
      Common Stock for the five trading days prior to the Closing
      Date.  Noteholders will receive Warrants to purchase a number of
      shares of the Company’s Common Stock equal to 50% of the number of shares of
      Common Stock initially issuable on conversion of the associated Note. The
      Closing Date will be on or before December 31, 2007.  As of November
      16, 2007, the Company has raised $125,000 in net proceeds.




***Summary***.  We
      have cash on hand to meet expenses only for a short period of
      time.  In order to fund the repayment of our outstanding notes, we
      must raise additional funds.  These notes include a series of 2007
      Pipe Notes due by the end of 2007; the Morale Orchard Notes due in December
      2007
      and January 2008; the Spring 2007 Notes due in June 2008 and the Summer 2007
      Notes due in September 2008.  In addition to the funds required to
      continue to operate our business, including without limitation the expenses
      we
      will incur 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 officer and consulting fees, during the remainder of 2007
      and beyond.




51


In
      light of the Company’s financial commitments over the next several months and
      its liquidity constraints, we are implementing 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
      may continue to use our equity line of credit for some of our additional
      requirements for 2007.  However, even if we continued to use our
      equity line of credit, it will not be sufficient to meet all of our current
      liabilities and other obligations in 2007. Among other things, the thin trading
      of our common stock may limit our ability to use the equity line of credit
      without adversely affecting the price of our common stock. Therefore, in
      addition to the completed 2007 Spring Offering and the 2007 Summer 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
                Payments**2007
            
            $
            125,030
            (1)
            
            $
            1,474,948
            (3)2008
            
            $
            65,280
            
            
            $
            410,683
            (4)2009
            
            $
            44,800
            (2)
            
            $
            75,000
            (5)Total
            
            $
            235,110
            
            
            $
            1,960,631





(1)
            This
                amount includes, with respect to the North Hollywood facility: (i)
                unpaid
                rent from January 2007 through July 2007, in the aggregate
                amount of $43,995; and (ii) a $100 per day penalty from
                January 1, 2006 through July 31, 2007, totaling $57,700,
                resulting in an aggregate amount of $101,695 for unpaid rent and/or
                unpaid
                late fees claimed by the landlord, for which the landlord claims
                we are
                liable pursuant to a certain provision of the sublease. We believe
                that
                there are numerous reasons why we should not be liable for most,
                or all,
                of any such penalties; however, no assurance can be given that we
                would
                not be liable for any or all of such penalties. We did not renew
                the
                sublease for our corporate offices at North Hollywood, California,
                and
                vacated the premises prior to the expiration of the sublease on
                July 31, 2007. See Notes 6 and 12 to Notes to Condensed Consolidated
                Financial Statements, for additional information regarding this matter.
                We
                have renewed the lease for our engineering, production and testing
                facility at Morgan Hill, California, which facility now also serves
                as our
                corporate offices, for an additional two-year period, expiring on
                August
                15, 2009.(2)
            Consist
                of rent for our engineering, production and testing facility at Morgan
                Hill, California through August 31,
                2009.




52




(3)
            Consists
                of an aggregate $698,851 in total compensation, including base salary
                and
                certain contractually-provided benefits to one present and two former
                executive officers pursuant to employment agreements that expire
                on
                December 31, 2007 and to one new executive officer pursuant to an
                employment agreement that expires on July 17, 2008; $385,000 in licensing
                fees to Temple University; $240,000 in consulting fees to Spencer
                Clarke;
                $103,347 to RAND Corporation; and $47,750 in fees to a
                consultant.(4)
            Consists
                of licensing fees in the amount of $290,000 due to Temple University
                and
                base salary and certain contractually-provided benefits in the amount
                of
                $120,683 to an officer pursuant to an employment agreement that expires
                on
                July 17, 2008.(5)
            Consists
                of licensing fees due to Temple
                University.




***Licensing
      Fees to Temple University.***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.




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 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 Temple University (i) license fees in the aggregate amount
      of $250,000.00, payable in three installments of $100,000.00, the first
      installment of which was paid in March 2007, and $75,000.00 on each of
      February 2, 2008 and February 2, 2009, respectively; and
      (ii) annual maintenance fees of $125,000 annually commencing
      January 1, 2008. 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.




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) flow in pipelines. Pursuant to the R&D
      Agreement, we will make payments to Temple University in the aggregate amount
      of
      $500,000.00, payable in eight non-refundable installments commencing with
      $123,750, which was paid in March 2007, and $53,750 every three months
      thereafter until paid in full. 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.




Payments
      of $53,750 with respect to the R&D Agreement, which were due in June and
      September 2007, have not yet been made to Temple University.




***Severance
      Payments to Former Officers.***On November 9, 2006, Eugene E.
      Eichler resigned as our Chief Executive Officer and Chief Financial Officer,
      due
      to a medical disability. Mr. Eichler’s resignation as Chief Executive
      Officer took effect on November 20, 2006 and his resignation as Chief
      Financial Officer took effect on the appointment of his successor on
      January 8, 2007.




53


Under
      the terms of Mr. Eichler’s separation as an officer of the Company, he is
      entitled to be paid out the remainder of the cash portion of his employment
      agreement, at a rate of $300,000 per annum, through December 31, 2007, in
      accordance with the Company’s normal pay policies. Options granted to him in
      February 2006 have been accelerated and fully vested on November 20,
      2006; additionally, Mr. Eichler will have until November 20, 2007 to
      exercise such options. Mr. Eichler is also entitled to receive a stock
      option grant in 2007 equal to the lesser of (i) the number of stock options
      Mr. Eichler was granted in 2006 or (ii) the highest number of options
      granted to any of the then Chief Executive Officer, President or Chief Financial
      Officer on an annualized basis, on terms no less favorable as granted to such
      person; provided, however, that such options to be granted to Mr. Eichler
      shall be fully vested upon grant and shall be exercisable for one year from
      the
      date of grant. The Company and Mr. Eichler have waived any claims they may
      have against each other and have agreed to mutual indemnification.




Of
      the payments we are required to make under this arrangement, we have paid
      $25,000 for January 2007 and have accrued but not yet paid $200,000 through
      September 30, 2007, by agreement between the Company and
      Mr. Eichler.




On
      June 15, 2007, the Company and Bruce H. McKinnon entered into an agreement
      (the “McKinnon Separation Agreement”) which provided that Mr. McKinnon
      would resign as Chief Executive Officer of the Company effective on the first
      to
      occur of (i) the appointment of a new Chief Executive Officer by the Board
      of Directors and (ii) July 31, 2007. Under the terms of the McKinnon
      Separation Agreement, Mr. McKinnon would have continued to serve as
      President of the Company and receive the compensation provided for in accordance
      with the provisions of the Employment Agreement between Mr. McKinnon and the
      Company dated as of October 5, 2005 (the “McKinnon Employment Agreement”)
      through December 31, 2007, the end of the term of that
      agreement.  In addition Mr. McKinnon will continue to serve as a
      Director of the Company, until he has resigned, been removed by the stockholders
      or not been re-elected to the Board. The Company and Mr. McKinnon have
      waived any claims they may have against each other and have agreed to mutual
      indemnification.




On
      July 18, 2007, Bruce H. McKinnon was removed by the Board of Directors as
      President and Chief Executive Officer of the Company and its wholly-owned
      subsidiary, STWA Asia Pte. Limited (“STWA Asia”), effective immediately. The
      Company is currently reviewing its rights and responsibilities with respect
      to
      the McKinnon Employment Agreement, the McKinnon Separation Agreement and other
      matters pertaining to Mr. McKinnon’s tenure as President and Chief Executive
      Officer of the Company.****See Part II, Item 1, “Legal
      Proceedings” and Item 5, “Other Information”.




Of
      the payments provided for under the McKinnon Employment Agreement, we have
      paid
      $20,000 for January 2007 and have accrued but not yet paid $160,000 through
      September 30, 2007. We have not made any payments to Mr. McKinnon under the
      McKinnon Separation Agreement.




***Appointment
      of new President and Chief Executive Officer.***On July
      25, 2007, the
      Company appointed Charles R. Blum to serve as the Company’s President and Chief
      Executive Officer.  Pursuant to the Employment Agreement, his
      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, he will receive an automobile
      allowance of $900 per month and four weeks of paid vacation
      annually.  Also, he is entitled to participate in all employee benefit
      plans that the Company makes available to its employees generally; provided
      that
      if Mr. Blum elects not to participate in the Company’s group medical insurance
      plan, he will be reimbursed in an amount equal to the lesser of (i) the premium
      the Company would have paid to include him as a participant in that group health
      insurance plan and (ii) the sums paid by him in connection with maintaining
      his
      private health insurance.  The Company will also reimburse him the
      reasonable costs paid by him for maintaining DSL Internet access and other
      direct costs of maintaining an office at his home, but only until such time
      as
      the Company shall provide him with an office at a location reasonably acceptable
      to him.




54




***Transactions
      with Spencer Clarke.***Spencer Clarke has served as our exclusive
      placement agent in recent offerings of our securities. We also have retained
      Spencer Clarke as a consultant to the Company, for which it will be separately
      compensated.




We
      entered into a consulting agreement dated January 4, 2007 with Spencer
      Clarke (the “Consulting Agreement”), pursuant to which Spencer Clarke has agreed
      that for a twelve-month period beginning January 15, 2007, Spencer Clarke
      will provide us with financial consulting services (including but not limited
      to
      executive search, strategic partnerships, research on new markets, strategic
      visibility, etc) to help further develop our strategic business
      plan.




For
      Spencer Clarke’s services, we have agreed to pay Spencer Clarke a non-refundable
      fee of $20,000 per month, payable in advance. The first payment, in the amount
      of $60,000 and covering three months, was payable by us on March 15, 2007.
      We will also reimburse Spencer Clarke for expenses they incur in connection
      with
      the performance of their services under the Consulting Agreement, provided
      that
      expenses in excess of $2,000 require our prior approval before they may be
      incurred by Spencer Clarke. To date, we have not made any payments under the
      Consulting Agreement and have accrued $180,000 through September 30, 2007 with
      respect to this obligation.




We
      have agreed to indemnify Spencer Clarke against any losses, claims, damages
      or
      liabilities to which Spencer Clarke may become subject arising out of or in
      connection with the services they render under the Consulting Agreement, unless
      it is finally judicially determined that such losses, claims, damages or
      liabilities arose primarily out of the gross negligence or bad faith of Spencer
      Clarke. We have also agreed to reimburse Spencer Clarke immediately for any
      legal or other expenses they reasonably incur in connection with investigating,
      preparing to defend or defending any lawsuits or other proceedings arising
      out
      of or in connection with their rendering of services under the Consulting
      Agreement; provided, however, that in the event of a final judicial
      determination that the alleged losses, claims, damages or liabilities arose
      primarily out of the gross negligence or bad faith of Spencer Clarke, Spencer
      Clarke will remit to us any amounts reimbursed, but the amount which Spencer
      Clarke must remit in such event is limited to the fee payable by us to Spencer
      Clarke under the Consulting Agreement.




**Critical
      Accounting Policies and Estimates**




Our
      discussion and analysis of our 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 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 2 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:




55


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.




**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 year ended
      December 31, 2006. The Company recorded an impairment of approximately
      $505,000 during the period from inception (February 18, 1998) through
      December 31, 2006.




**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
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees”, 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, 2006 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 December 31, 2006 was $2,253,263. Basic and diluted loss per
      share for the year ended December 31, 2006 would have been ($0.21) per
      share, if the Company had not adopted SFAS 123R, compared to reported basic
      and
      diluted loss per share of ($0.28) per share.




SFAS
      123R requires companies to estimate the fair value of share-based payment awards
      to employees and directors on the date of grant using an option-pricing model.
      The value of the portion of the award that is ultimately expected to vest is
      recognized as expense over the requisite service periods in the Company’s
      Statements of Operations. Stock-based compensation expense recognized in the
      Statements of Operations for the year ended December 31, 2006 included
      compensation expense for share-based payment awards granted prior to, but not
      yet vested as of January 1, 2006 based on the grant date fair value
      estimated in accordance with the pro-forma provisions of Statements of Financial
      Accounting Standards No. 123, “Share-Based Payment” (“SFAS 123”) and
      compensation expense for the share-based payment awards granted subsequent
      to
      January 1, 2006 based on the grant date fair value estimated in accordance
      with the provisions of SFAS 123R. For stock-based awards issued to employees
      and
      directors, stock-based compensation is attributed to expense using the
      straight-line single option method, which is consistent with how the
      prior-period pro formas were provided. As stock-based compensation expense
      recognized in the Statements of Operations for the second quarter of fiscal
      2006
      is based on awards ultimately expected to vest, it has been reduced for
      estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the
      time of grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. In our pro-forma information required
      under SFAS 123 for the periods prior to fiscal 2006, the Company accounted
      for
      forfeitures as they occurred.




56


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-Merton option-pricing
      formula (“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**




**Statement
      No. 157**




In
      September 2006, the FASB issued Statement No. 157, “Fair Value
      Measurements” (“SFAS 157”), SFAS 157 establishes a formal framework for
      measuring fair value under GAAP. It 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 157 applies to and amends the provisions of existing
      FASB and AICPA pronouncements, it does not, of itself, require any new fair
      value measurements, nor does it establish valuation standards. SFAS 157 applies
      to all other accounting pronouncements requiring or permitting fair value
      measurements, except for; SFAS 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. This
      statement is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years.




**Statement
      No. 159**





In
      February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
      Financial Assets and Liabilities”. This Statement permits entities to choose to
      measure many financial instruments and certain other items at fair value. The
      objective is to improve financial reporting by providing entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions.  The fair value option established by this
      Statement permits all entities to choose to measure eligible items at fair
      value
      at specified election dates. A business entity shall report unrealized gains
      and
      losses on items for which the fair value option has been elected in earnings
      (or
      another performance indicator if the business entity does not report earnings)
      at each subsequent reporting date. This Statement is effective as of the
      beginning of an entity’s first fiscal year that begins after November 15, 2007.
      We do not believe that the adoption of SFAS 159 will have a material affect
      on
      our financial statements.




57


**Interpretation
      No. 48**




Effective
      January 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation No 48, “Accounting for Uncertainty in Income Taxes — an
      interpretation of FASB Statement No 109, “Accounting for Income Taxes (“FIN
      48”).” FIN 48 addresses the determination of whether tax benefits claimed or
      expected to be claimed on a tax return should be recorded in the financial
      statements. Under FIN 48, the Company may recognize the tax benefit from an
      uncertain tax position only if it is more likely than not that the tax position
      will be sustained on examination by the taxing authorities, based on the
      technical merits of the position. The tax benefits recognized in the financial
      statements from such a position should be measured based on the largest benefit
      that has a greater than 50% likelihood of being realized upon ultimate
      settlement. FIN 48 also provides guidance on de-recognition,
      classification, interest and penalties on income taxes, accounting in interim
      periods and requires increased disclosures. At the date of adoption, and as
      of
      June 30, 2007, the Company does not have a liability for unrecognized tax
      benefits.




The
      Company files income tax returns in the U.S. federal jurisdiction and the state
      of California. The Company is subject to U.S. federal or state income tax
      examinations by tax authorities for years after 2002. During the periods open
      to
      examination, the Company has net operating loss and tax credit carry forwards
      for U.S. federal and state tax purposes that have attributes from closed
      periods. Since these net operating losses and tax credit carry forwards may
      be
      utilized in future periods, they remain subject to examination. The Company’s
      policy is to record interest and penalties on uncertain tax provisions as income
      tax expense. As of June 30, 2007, The Company has no accrued interest or
      penalties related to uncertain tax positions. The Company believes that it
      has
      not taken any uncertain tax positions that would impact its condensed
      consolidated financial statements as of June 30, 2007. Also as of the date
      of
      adoption, and as of June 30, 2007, the Company does not have a liability for
      unrecognized tax benefits.




**EITF
      00-19-2**




Effective
      in the first quarter of 2007 the Company adopted FASB Staff Position No. EITF
      00-19-2, “Accounting for Registration Payment Arrangements” issued on December
      21, 2006 (“FSP 00-19-2”). FSP 00-19-2 specifies that the contingent obligation
      to make future payments or otherwise transfer consideration under a registration
      payment, whether issued as a separate agreement or included as a provision
      of a
      financial instrument or other agreement, should be separately recognized and
      measured in accordance with FASB Statement No. 5, “Accounting for
      Contingencies.” For registration payment arrangements and financial instruments
      subject to those arrangements that were entered into prior to the issuance
      of
      EITF 00-19-2, this guidance is effective for financial statements issued for
      fiscal years beginning after December 15, 2006 and interim periods within those
      fiscal years.




**Item 3.
      Controls and Procedures**




*a)
      Evaluation of disclosure controls and procedures.*Our management evaluated,
      with the participation of our Chief Executive Officer and Chief Financial
      Officer, the effectiveness of our disclosure controls and procedures as of
      the
      end of the period covered by this Quarterly Report on Form 10-QSB. Based on
      this
      evaluation, our Chief Executive Officer and Chief Financial Officer have
      concluded that our disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
      (the “Exchange Act”)) are 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. These matters persist despite our having developed
      and
      partially implemented a plan to ensure that all information will be recorded
      accurately, processed effectively, summarized promptly and reported on a timely
      basis. Our plan to date has involved, in part, reallocation of responsibilities
      among officers, various other personnel and some of our directors, and hiring
      additional personnel. We began to implement this plan during 2005, including
      the
      hiring in August 2005 of a Controller who is a Certified Public Accountant.
      However, 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 a new
      part-time Chief Financial Officer and a full-time Controller, although the
      latter is not a Certified Public Accountant. One of several specific additional
      steps that the Company believes it must undertake is to retain a consulting
      firm
      to, among other things, design and implement adequate systems of accounting
      and
      financial statement disclosure controls during the current fiscal year to comply
      with the requirements of the SEC. We believe that the ultimate success of our
      plan to improve our disclosure controls and procedures 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.




*(b)**Changes
      in internal control over financial reporting.*There was no change in our
      internal control over financial reporting that occurred during the period
      covered by this Quarterly Report on Form 10-QSB that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.


58


**PART
      II**




**Item 1.
      Legal Proceedings**




*Litigation
      Involving Jeffrey A. Muller*




On
      December 19, 2001, the SEC filed civil charges in the United States Federal
      District Court, Southern District of New York, against us, our former President
      and then sole director Jeffrey A. Muller, and others, alleging that we and
      the
      other defendants were engaged in a fraudulent scheme to promote our stock.
      The
      SEC complaint alleged the existence of a promotional campaign using press
      releases, Internet postings, an elaborate website, and televised media events
      to
      disseminate false and materially misleading information as part of a fraudulent
      scheme to manipulate the market for stock in our corporation, which was then
      controlled by Mr. Muller. On March 22, 2002, we signed a Consent to
      Final Judgment of Permanent Injunction and Other Relief in settlement of this
      action as against the corporation only, which the court approved on July 2,
      2002. Under this settlement, we were not required to admit fault and did not
      pay
      any fines or restitution. The SEC’s charges of fraud and stock manipulation
      continue against Mr. Muller and others.




On
      July 2, 2002, after an investigation by our newly constituted board of
      directors, we filed a cross-complaint in the SEC action against Mr. Muller
      and others seeking injunctive relief, disgorgement of monies and stock and
      financial restitution for a variety of acts and omissions in connection with
      sales of our stock and other transactions occurring between 1998 and 2002.
      Among
      other things, we alleged that Mr. Muller and certain others sold Company
      stock without providing adequate consideration to us; sold insider shares
      without making proper disclosures and failed to make necessary filing required
      under federal securities laws; engaged in self-dealing and entered into various
      undisclosed related-party transactions; misappropriated for their own use
      proceeds from sales of our stock; and entered into various undisclosed
      arrangement regarding the control, voting and disposition of their stock. On
      July 30, 2002, the U.S. Federal District Court, Southern District of New
      York, granted our application for a preliminary injunction against
      Mr. Muller and others, which prevented Mr. Muller and other
      cross-defendants from selling, transferring, or encumbering any assets and
      property previously acquired from us, from selling or transferring any of our
      stock that they may own or control, or from taking any action to injure us
      or
      our business and from having any direct contact with our shareholders. The
      injunctive order also prevents Mr. Muller from engaging in any effort to
      exercise control over our corporation and from serving as an officer or director
      of our company. While we believe that we have valid claims, there can be no
      assurance that an adverse result or settlement would not have a material adverse
      effect on our financial position or cash flow.




In
      the course of the litigation, we have obtained ownership control over
      Mr. Muller’s claimed patent rights to the ZEFS device. Under a Buy-Sell
      Agreement between Mr. Muller and dated December 29, 1998, Mr. Muller,
      who was listed on the ZEFS devise patent application as the inventor of the
      ZEFS
      device, purported to grant us all international marketing, manufacturing and
      distribution rights to the ZEFS device. Those rights were disputed because
      an
      original inventor of the ZEFS device contested Mr. Muller’s legal ability
      to have conveyed those rights.




In
      Australia, Mr. Muller entered into a bankruptcy action seeking to overcome
      our claims for ownership of the ZEFS device. In conjunction with these
      litigation proceedings, a settlement agreement was reached with the bankruptcy
      trustee whereby the $10 per unit royalty previously due to Mr. Muller under
      his contested Buy-Sell Agreement was terminated and replaced with a $.20 per
      unit royalty payable to the bankruptcy trustee. On November 7, 2002, under
      a settlement agreement executed with Mr. Muller’s bankruptcy trustee, the
      trustee transferred to us all ownership and legal rights to this international
      patent application for the ZEFS device.




Both
      the SEC and we filed Motions for Summary Judgment contending that there are
      no
      material issues of fact in contention and as a matter of law, the Court should
      grant a judgment against Mr. Muller and the cross-defendants.




Mr. Muller
      and several of the defendants filed a Motion to Dismiss the complaint filed
      by
      us and moved for summary judgment in their favor. On December 28, 2004,
      Judge George B. Daniels, denied the cross-defendants’ motion to dismiss our
      cross-complaint, denied the defendants’ request to vacate the July 2, 2002
      preliminary injunction and denied their request for damages against us. The
      court also refused to grant a summary judgment in favor of the cross-defendants
      and dismissed Mr. Muller’s claims against us for indemnification for his
      legal costs and for damages resulting from the litigation. Neither
      Mr. Muller nor any of the cross-defendants have filed any cross-claims
      against us and we are not exposed to any liability as a result of the
      litigation, except for possibly incurring legal fees and expenses should we
      lose
      the litigation.




59


On
      November 16, 2005, the Court granted the SEC’s motion for summary judgment.
      In granting the motion, the Court has barred Mr. Muller from serving as an
      officer or director of a public company for a period of 20 years, ordered
      Mr. Muller to disgorge any shares of our stock that he still owns and
      directed the Company to cancel any issued and outstanding shares of our stock
      still owned by Mr. Muller. Mr. Muller was also ordered to disgorge to
      the SEC unlawful profits in the amount of $7.5 million and a pay a civil
      penalty in the amount of $100,000. Acting in accordance with the ruling and
      decision of the Court, we have canceled (i) 8,047,403 shares of its common
      stock held by Mr. Muller and/or his affiliates, (ii) options to
      acquire an additional 10,000,000 shares of our common stock held by
      Mr. Muller personally and (iii) $1,017,208 of debt which Mr. Muller
      claimed was owed to him by the Company.




Muller
      subsequently filed a Notice of Appeal from the Judgment resulting from this
      decision to the Second Circuit Court of Appeals in New York. The clerk of the
      Court recently issued an Order dismissing this appeal.




In
      response to the November 16, 2005 decision by the Court, Muller filed a
      motion seeking to set aside the Decision and Order of the Court. On
      March 31, 2006, the Court issued a Decision and Order denying Muller’s
      Motion to set aside the Decision on Summary Judgment issued against Muller
      on
      November 16, 2005.




On
      October 27, 2006, Magistrate Judge Frank Maas, Federal District Court of
      the Southern District of New York, issued an order granting summary judgment
      in
      favor of the Company. The ruling provided that all shares, options and any
      other
      obligations allegedly owed by the Company to Jeffrey A. Muller, its former
      Chairman, were to be disgorged. The ruling also confirmed an earlier decision
      issued on November 16, 2005 in favor of the SEC holding Mr. Muller
      liable for $7.5 million in actual damages, imposing a $100,000 fine and
      barring Muller from any involvement with a publicly traded company for
      20 years. With prejudgment interest, this ruling brings the actual damages
      against Muller to over $9 million. Additionally, the Court further
      clarified that the scope of its previous disgorgement order required the
      disgorgement of any shares of the Company’s stock that Mr. Muller or any of his
      nominees directly or indirectly own or control. The Company has taken action
      to
      cancel over 3.6 million shares which had been issued to the offshore
      companies.




The
      Court also confirmed the appropriateness of an action previously taken by the
      Company to acquire the patent rights and to consolidate the manufacturing,
      marketing and distribution rights with its ownership of all rights to the
      existing patents.




Finally,
      the Court ruled that Mr. Muller had no claim to an alleged $500,000 debt
      owed to him while the damages of over $9 million remain unpaid. The Court
      also ruled that other assets that were transferred by Mr. Muller to members
      of his family through various offshore corporations were also to be disgorged.
      Because the Court left unresolved an issue concerning claims against one Muller
      family member, the Company sought a modification of the Order. On
      February 8, 2007, Judge Maas issued an Amended Order, which concluded that
      all of the STWA shares of Muller or any of his nominees directly or indirectly
      owned or controlled were to be recaptured by STWA and were subject to
      disgorgement and forfeiture. With this modification of the October 27, 2007
      ruling, this order provides the complete relief requested by the Company in
      its
      motion for summary judgment.




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 are the
      subject of ongoing litigation in the Federal District Court for the Southern
      District of New York, in which we have previously obtained a preliminary
      injunction against Mr. Muller barring him from any involvement with the
      Company and preventing Mr. Muller, his agents or assigns, from exercising
      any claimed rights to our assets or stock. Mr. Muller previously filed the
      same complaint in the Federal District Court for the Southern District of New
      York, which claim is still pending. On December 28, 2004, Federal District
      Court Judge George B. Daniels issued a decision dismissing motions filed by
      Mr. Muller against our cross-claims. The dismissal of those motions
      involved similar causes of action as those contained in Mr. Muller’s recent
      lawsuit commenced in the Federal District Court for the Central District of
      California. Since the case in New York is still pending, we believe that the
      filing of the new lawsuit in California is subject to various defenses which
      should result in the dismissal of the new lawsuit.




60


On
      January 25, 2006, Mr. Muller’s complaint, filed in the California
      District Court and transferred to the Federal Court in the Southern District
      of
      New York, was assigned to Judge George B. Daniels. That Complaint is currently
      pending, however, the issues raised in this Complaint arise from the same claims
      already decided by the Court in its February 8, 2007 Amended Order. The
      Company plans to file a request to dismiss the pending Complaint on several
      grounds, including that the claims sought to be litigated in this latter
      complaint has been included within the Summary Judgment Motions decided against
      Muller, his nominees and assignees. 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 Sublessor of Former Corporate Offices*




On
      July 19, 2007, Scottish Glen Golf Company, Inc. doing business as KZG
      (“KZG”) sued us in Los Angeles Superior Court, alleging unlawful detainer by us
      of our 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. In its complaint, KZG also seeks attorney fees.
      Bruce H. McKinnon, the Company’s former President and Chief Executive Officer,
      and an incumbent director, is, we believe, the Chairman and an owner of KZG.
      Mr. McKinnon’s wife is the President of KZG.




****On
      July 25, 2007, the parties entered into an agreement pursuant to which KZG
      would
      dismiss the eviction action. However, KZG reserved the right to amend its
      complaint to include a demand for past due rent and penalties.  We
      agreed to vacate the premises and KZG agreed not to further prosecute their
      eviction action.  We vacated the premises on July 25,
      2007.  On August 30, 2007, KZG filed an amended complaint which was
      answered by the Company on October 5, 2007.




We
      strongly disagree with the apparent position of KZG that there is a discrepancy
      in the calculation of base rent as far back as April 1, 2004 and that a
      penalty of $100 per day should be imposed continuously since January 1,
      2006 under the terms of a certain provision of the current sublease with KZG.
      There may also be other aspects of KZG’s positions or apparent positions with
      which we strongly disagree. We may also have counterclaims against KZG and
      its
      officers and directors.





While
      we believe that we have valid claims and defenses, given the inherent
      uncertainties of litigation, we 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 our financial position or
      cash flow.  See Note 12 of the Notes to Condensed Consolidated
      Financial Statements for additional information regarding this
      matter.




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





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. While
      the stated interest rate on the Summer 2007 Notes is 0%, the actual interest
      rate on the Summer 2007 Notes is 10%. The Summer 2007 Notes mature on the first
      anniversary of their date of issuance, i.e. September 28, 2007. 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.





61


Each
      of the investors in the Summer 2007 Offering received, for no additional
      consideration, 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, i.e. September 28, 2007. Up to 418,892
      Warrant Shares are initially issuable on exercise of the Summer 2007
      Warrants.




The
      Company received $281,800 gross and net proceeds in the 2007 Summer Offering.
      The proceeds of the Summer 2007 Offering will be used for general corporate
      purposes and working capital.




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.




**Item 3.
      Defaults Upon Senior Securities**




See
      item 2. Details of Recent Financing Transactions - 2007 PIPE Offering for
      detailed information.




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




None




**Item 5.
      Other Information**




Due
        to
        inadvertent problems occurring during the Edgarization process, certain
        information contained in our 10QSB filed on November 19, 2007, was not properly
        organized and formatted.  This amendment presents the information
        properly and does not reflect any material changes.





On
      October 1, 2007, the Company retained the law firm of Gartenberg Gelfand Wasson
      & Selden LLP as new Corporate and Securities Counsel located in Los Angeles,
      California.




On
      November 5, 2007, Mr. Charles Dargan resigned as Chief Executive Officer of
      the
      Company and Mr. Eugene E. Eichler was appointed Interim Chief Financial
      Officer.  Mr. Eichler has been working full time since June 15, 2007
      without cash compensation and will continue as Interim Chief Financial Officer
      without cash compensation.  In return for these services, the Board of
      Directors, on October 18, 2007, extended the expiration date of Mr. Eichler’s
      options to November 20, 2008




**Item 6.
      Exhibits**


**Exhibit
                No.**
            
            **Description**10.1
            
            
            Modification
                Agreement dated August 29, 200731.1
            
            
            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)





62


**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:
                November 20, 2007
            By:
            /s/
                EUGENE E. EICHLEREugene
                E. EichlerInterim
                Chief Financial Officer




63


**EXHIBIT
      INDEX**


**Exhibit
                No.**
            
            **Description**10.1
            
            
            Modification
                Agreement dated August 29, 200731.1
            
            
            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)