##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended June 30, 2004. or o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period fromto Commission File Number 0-29185 SAVE THE WORLD AIR, INC. (Exact name of registrant as specified in its charter)
 Nevada
    
    52-2088326(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5125 Lankershim Boulevard
North Hollywood, California 91601(Address, including zip code, of principal executive offices)(818) 487-8000(Registrants telephone number, including area code)Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par
value. 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 þ No o The number of shares of the Registrants Common Stock outstanding as of
June 30, 2004 was 36,366,821 shares. DOCUMENTS INCORPORATED BY REFERENCE Transitional Small Business Disclosure Format (Check one): Yes
o No þ




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SAVE THE WORLD AIR, INC.
FORM 10-QSB
INDEX PagePART IITEM 1
    
    Financial Statements
    
    1ITEM 2
    
    Management's Discussion and Analysis
    
    21ITEM 3
    
    Controls and Procedures
    
    24PART IIITEM 1
    
    Legal Proceedings
    
    25ITEM 2
    
    Changes in Securities
    
    26ITEM 3
    
    Defaults Upon Senior Securities
    
    26ITEM 4
    
    Submission of Matters to a Vote of Security Holders
    
    26ITEM 5
    
    Other Information
    
    27ITEM 6
    
    Exhibits and Reports on Form 8-K
    
    27SIGNATURES
    
    
    
    29EXHIBIT INDEX
    
    30EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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##### Table of Contents



PART I 
 Item 1. Financial Statements SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) SIX MONTHS ENDED JUNE 30, 2004  CONTENTS PageFinancial statementsBalance sheets
    
    
    1-2Statements of operations
    
    
    3Statements of stockholders deficiency
    
    
    4-7Statements of cash flows
    
    
    7-9Notes to financial statements
    
    
    10-20




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 BALANCE SHEETS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003  June 30, 2004
    
    December 31,(unaudited)
    
    2003ASSETSCurrent assetsCash
    
    $
    138,815
    
    
    $
    926,052Total current assets
    
    
    138,815
    
    
    
    926,052Property and equipment, net of accumulated depreciation
    
    
    37,739
    
    
    
    35,244$
    176,554
    
    
    $
    961,296
 See notes to condensed financial statements. 1




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS  Continued
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003  June 30, 2004
    
    December 31,(unaudited)
    
    2003LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilitiesIncome taxes payable
    
    $
    6,991
    
    
    $
    5,991Payables to related parties
    
    
    21,478
    
    
    
    57,903Accrued expenses
    
    
    771,840
    
    
    
    713,580Total current liabilities
    
    
    800,309
    
    
    
    777,474Due to founding executive officer
    
    
    1,017,208
    
    
    
    1,017,208Commitments and contingenciesStockholders deficiencyCommon stock, $.001 par value: 200,000,000
shares authorized, 36,366,821 and
34,128,261 shares issued and outstanding
at June 30, 2004 and December 31, 2003,
respectively
    
    
    36,367
    
    
    
    34,128Common stock to be issued
    
    
    
    
    
    
    6,250Additional paid-in capital
    
    
    11,083,621
    
    
    
    10,162,177Deferred compensation
    
    
    (493,185
    )
    
    
    (708,333
    )Deficit accumulated during the development stage
    
    
    (12,267,766
    )
    
    
    (10,327,608
    )Total stockholders deficiency
    
    
    (1,640,963
    )
    
    
    (833,386
    )$
    176,554
    
    
    $
    961,296
 See notes to condensed financial statements. 2




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2004 and 2003 AND FOR THE PERIOD FROM INCEPTION
(FEBRUARY 18, 1998) TO JUNE 30, 2004  Three months ended
    
    Six months endedJune 30,
    
    June 30,
    
    Cumulativesince2004
    
    2003
    
    2004
    
    2003
    
    inceptionNet sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Expenses
    
    
    1,163,702
    
    
    
    440,669
    
    
    
    1,939,672
    
    
    
    1,045,650
    
    
    
    12,261,772Loss before other income
    
    
    (1,163,702
    )
    
    
    (440,669
    )
    
    
    (1,939,672
    )
    
    
    (1,045,650
    )
    
    
    (12,261,772
    )Other incomeInterest income
    
    
    114
    
    
    
    
    
    
    
    514
    
    
    
    
    
    
    
    954Loss before provision for income taxes
    
    
    (1,163,588
    )
    
    
    (440,669
    )
    
    
    (1,939,158
    )
    
    
    (1,045,650
    )
    
    
    (12,260,818
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    1,020
    
    
    
    6,948Net loss
    
    $
    (1,163,588
    )
    
    $
    (440,669
    )
    
    $
    (1,940,158
    )
    
    $
    (1,046,670
    )
    
    $
    (12,267,766
    )Net loss per share, basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )Weighted average shares outstanding, basic and diluted
    
    
    35,230,557
    
    
    
    24,974,036
    
    
    
    34,687,239
    
    
    
    22,796,622
 See notes to condensed financial statements. 3




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 STATEMENTS OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2004  Deficit
    
    Totalaccumulated
    
    stockholdersCommon Stock
    
    
    
    
    
    Additional
    
    
    
    
    
    during the
    
    developmentPrice per
    
    
    
    Common stock
    
    paid-in
    
    Deferred
    
    development
    
    stageshare
    
    Shares
    
    Amount
    
    to be issued
    
    capital
    
    compensation
    
    stage
    
    deficiencyBalance, February 18, 1998(date of inception)
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common stock on April 18, 1998
    
    
    .0015  .01
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270
    
    
    
    
    
    
    
    
    
    
    
    24,300Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,307
    )
    
    
    (21,307
    )Balance, December 31, 1998(as corrected, see Note 1)
    
    
    
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270
    
    
    
    
    
    
    
    (21,307
    )
    
    
    2,993Issuance of common stock on May 18, 1999
    
    
    1.00  6.40
    
    
    
    198,003
    
    
    
    198
    
    
    
    
    
    
    
    516,738
    
    
    
    
    
    
    
    
    
    
    
    516,936Issuance of common stock for ZEFS on September 14, 1999
    
    
    .001
    
    
    
    5,000,000
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Stock issued for professional services on May 18, 1999
    
    
    0.88
    
    
    
    69,122
    
    
    
    69
    
    
    
    
    
    
    
    49,444
    
    
    
    
    
    
    
    
    
    
    
    49,513Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,075,264
    )
    
    
    (1,075,264
    )Balance, December 31, 1999(as corrected, see Note 1)
    
    
    
    
    
    
    15,297,125
    
    
    
    15,297
    
    
    
    
    
    
    
    580,452
    
    
    
    
    
    
    
    (1,096,571
    )
    
    
    (500,822
    )Stock issued for employee compensation on February 8, 2000
    
    
    1.03
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    20,580
    
    
    
    
    
    
    
    
    
    
    
    20,600Stock issued for consulting services on February 8, 2000
    
    
    1.03
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    102,900
    
    
    
    
    
    
    
    
    
    
    
    103,000Stock issued for professional services on April 18, 2000
    
    
    3.38
    
    
    
    27,000
    
    
    
    27
    
    
    
    
    
    
    
    91,233
    
    
    
    
    
    
    
    
    
    
    
    91,260Stock issued for directors fees on April 18, 2000
    
    
    3.38
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    168,950
    
    
    
    
    
    
    
    
    
    
    
    169,000Stock issued for professional services on May 19, 2000
    
    
    4.06
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    20,295
    
    
    
    
    
    
    
    
    
    
    
    20,300Stock issued for directors fees on June 20, 2000
    
    
    4.44
    
    
    
    6,000
    
    
    
    6
    
    
    
    
    
    
    
    26,634
    
    
    
    
    
    
    
    
    
    
    
    26,640Stock issued for professional services on June 20, 2000
    
    
    4.44
    
    
    
    1,633
    
    
    
    2
    
    
    
    
    
    
    
    7,249
    
    
    
    
    
    
    
    
    
    
    
    7,251Stock issued for professional services on June 26, 2000
    
    
    5.31
    
    
    
    1,257
    
    
    
    1
    
    
    
    
    
    
    
    6,674
    
    
    
    
    
    
    
    
    
    
    
    6,675Stock issued for employee compensation on June 26, 2000
    
    
    5.31
    
    
    
    22,000
    
    
    
    22
    
    
    
    
    
    
    
    116,798
    
    
    
    
    
    
    
    
    
    
    
    116,820Stock issued for consulting services on June 26, 2000
    
    
    5.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    52,203
    
    
    
    
    
    
    
    
    
    
    
    52,213Stock issued for promotional services on July 28, 2000
    
    
    4.88
    
    
    
    9,675
    
    
    
    9
    
    
    
    
    
    
    
    47,205
    
    
    
    
    
    
    
    
    
    
    
    47,214Stock issued for consulting services on July 28, 2000
    
    
    4.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    47,975
    
    
    
    
    
    
    
    
    
    
    
    47,985Stock issued for consulting services on August 4, 2000
    
    
    2.13
    
    
    
    35,033
    
    
    
    35
    
    
    
    
    
    
    
    74,585
    
    
    
    
    
    
    
    
    
    
    
    74,620Stock issued for promotional services on August 16, 2000
    
    
    2.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    56,225
    
    
    
    
    
    
    
    
    
    
    
    56,250Stock issued for consulting services on September 5, 2000
    
    
    2.25
    
    
    
    12,833
    
    
    
    13
    
    
    
    
    
    
    
    28,861
    
    
    
    
    
    
    
    
    
    
    
    28,874Stock issued for consulting services on September 10, 2000
    
    
    1.50
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    14,740
    
    
    
    
    
    
    
    
    
    
    
    14,750Stock issued for consulting services on November 2, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on November 4, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on December 20, 2000
    
    
    0.50
    
    
    
    19,082
    
    
    
    19
    
    
    
    
    
    
    
    9,522
    
    
    
    
    
    
    
    
    
    
    
    9,541Stock issued for filing services on December 20, 2000
    
    
    0.50
    
    
    
    5,172
    
    
    
    5
    
    
    
    
    
    
    
    2,581
    
    
    
    
    
    
    
    
    
    
    
    2,586
 See notes to condensed financial statements. 4




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS DEFICIENCY - Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2004  Deficit
    
    Totalaccumulated
    
    stockholders'Common Stock
    
    
    
    
    
    Additional
    
    
    
    
    
    during the
    
    developmentPrice per
    
    
    
    Common stock
    
    paid-in
    
    Deferred
    
    development
    
    stageshare
    
    Shares
    
    Amount
    
    to be issued
    
    capital
    
    compensation
    
    stage
    
    deficiencyStock issued for professional services on December 26, 2000
    
    
    0.38
    
    
    
    12,960
    
    
    
    13
    
    
    
    
    
    
    
    4,912
    
    
    
    
    
    
    
    
    
    
    
    4,925Other stock issuance on August 24, 2000
    
    
    2.13
    
    
    
    2,000
    
    
    
    2
    
    
    
    
    
    
    
    4,258
    
    
    
    
    
    
    
    
    
    
    
    4,260Common shares cancelled
    
    
    
    
    
    
    (55,000
    )
    
    
    (55
    )
    
    
    
    
    
    
    (64,245
    )
    
    
    
    
    
    
    
    
    
    
    (64,300
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,270,762
    )
    
    
    (1,270,762
    )Balance, December 31, 2000(as corrected, see Note 1)
    
    
    
    
    
    
    15,645,935
    
    
    
    15,646
    
    
    
    
    
    
    
    1,437,873
    
    
    
    
    
    
    
    (2,367,333
    )
    
    
    (913,814
    )Stock issued for consulting services on January 8, 2001
    
    
    0.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,038
    
    
    
    
    
    
    
    
    
    
    
    3,048Stock issued for consulting services on February 1, 2001
    
    
    0.33
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,235
    
    
    
    
    
    
    
    
    
    
    
    3,245Stock issued for consulting services on March 1, 2001
    
    
    0.28
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,743
    
    
    
    
    
    
    
    
    
    
    
    2,753Stock issued for legal services on March 13, 2001
    
    
    0.32
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    47,850
    
    
    
    
    
    
    
    
    
    
    
    48,000Stock issued for consulting services on April 3, 2001
    
    
    0.25
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,448
    
    
    
    
    
    
    
    
    
    
    
    2,458Stock issued for legal services on April 4, 2001
    
    
    0.25
    
    
    
    30,918
    
    
    
    31
    
    
    
    
    
    
    
    7,699
    
    
    
    
    
    
    
    
    
    
    
    7,730Stock issued for professional services on April 4, 2001
    
    
    0.25
    
    
    
    7,040
    
    
    
    7
    
    
    
    
    
    
    
    1,753
    
    
    
    
    
    
    
    
    
    
    
    1,760Stock issued for consulting services on April 5, 2001
    
    
    0.25
    
    
    
    132,600
    
    
    
    132
    
    
    
    
    
    
    
    33,018
    
    
    
    
    
    
    
    
    
    
    
    33,150Stock issued for filing fees on April 30, 2001
    
    
    1.65
    
    
    
    1,233
    
    
    
    1
    
    
    
    
    
    
    
    2,033
    
    
    
    
    
    
    
    
    
    
    
    2,034Stock issued for filing fees on September 19, 2001
    
    
    0.85
    
    
    
    2,678
    
    
    
    2
    
    
    
    
    
    
    
    2,274
    
    
    
    
    
    
    
    
    
    
    
    2,276Stock issued for professional services on September 28, 2001
    
    
    0.62
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    92,850
    
    
    
    
    
    
    
    
    
    
    
    93,000Stock issued for directors services on October 5, 2001
    
    
    0.60
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    59,900
    
    
    
    
    
    
    
    
    
    
    
    60,000Stock issued for legal services on October 17, 2001
    
    
    0.60
    
    
    
    11,111
    
    
    
    11
    
    
    
    
    
    
    
    6,655
    
    
    
    
    
    
    
    
    
    
    
    6,666Stock issued for consulting services on October 18, 2001
    
    
    0.95
    
    
    
    400,000
    
    
    
    400
    
    
    
    
    
    
    
    379,600
    
    
    
    
    
    
    
    
    
    
    
    380,000Stock issued for consulting services on October 19, 2001
    
    
    1.25
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    187,350
    
    
    
    
    
    
    
    
    
    
    
    187,500Stock issued for exhibit fees on October 22, 2001
    
    
    1.35
    
    
    
    5,000
    
    
    
    6
    
    
    
    
    
    
    
    6,745
    
    
    
    
    
    
    
    
    
    
    
    6,751Stock issued for directors services on November 2, 2001
    
    
    0.95
    
    
    
    1,000,000
    
    
    
    1,000
    
    
    
    
    
    
    
    949,000
    
    
    
    
    
    
    
    
    
    
    
    950,000Stock issued for consulting services on November 7, 2001
    
    
    0.85
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    16,980
    
    
    
    
    
    
    
    
    
    
    
    17,000Stock issued for consulting services on November 20, 2001
    
    
    0.98
    
    
    
    43,000
    
    
    
    43
    
    
    
    
    
    
    
    42,097
    
    
    
    
    
    
    
    
    
    
    
    42,140Stock issued for consulting services on November 27, 2001
    
    
    0.98
    
    
    
    10,000
    
    
    
    10
    
    
    
    
    
    
    
    9,790
    
    
    
    
    
    
    
    
    
    
    
    9,800Stock issued for consulting services on November 28, 2001
    
    
    0.98
    
    
    
    187,000
    
    
    
    187
    
    
    
    
    
    
    
    183,073
    
    
    
    
    
    
    
    
    
    
    
    183,260Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600,000
    
    
    
    (2,600,000
    )
    
    
    
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,318
    
    
    
    
    
    
    
    
    
    
    
    142,318Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,667
    
    
    
    
    
    
    
    191,667Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,735,013
    )
    
    
    (2,735,013
    )Balance, December 31, 2001
    
    
    
    
    
    
    18,085,847
    
    
    
    18,086
    
    
    
    
    
    
    
    6,220,322
    
    
    
    (2,408,333
    )
    
    
    (5,102,346
    )
    
    
    (1,272,271
    )
 See notes to condensed financial statements. 5




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS DEFICIENCY - Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2004  Deficit
    
    Totalaccumulated
    
    stockholders'Common Stock
    
    
    
    
    
    Additional
    
    
    
    
    
    during the
    
    developmentPrice per
    
    
    
    Common stock
    
    paid-in
    
    Deferred
    
    development
    
    stageshare
    
    Shares
    
    Amount
    
    to be issued
    
    capital
    
    compensation
    
    stage
    
    deficiencyStock issued for directors services on December 10, 2002
    
    
    0.40
    
    
    
    2,150,000
    
    
    
    2,150
    
    
    
    
    
    
    
    857,850
    
    
    
    
    
    
    
    
    
    
    
    860,000Common stock paid for, but not issued (2,305,000 shares)
    
    
    0.15 - 0.25
    
    
    
    
    
    
    
    
    
    
    
    389,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389,875Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,909
    
    
    
    (54,909
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    891,182
    
    
    
    
    
    
    
    891,182Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,749,199
    )
    
    
    (2,749,199
    )Balance, December 31, 2002
    
    
    
    
    
    
    20,235,847
    
    
    
    20,236
    
    
    
    389,875
    
    
    
    7,133,081
    
    
    
    (1,572,060
    )
    
    
    (7,851,545
    )
    
    
    (1,880,413
    )Common stock issued, previously paid for
    
    
    0.15
    
    
    
    1,425,000
    
    
    
    1,425
    
    
    
    (213,750
    )
    
    
    212,325
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued, previously paid for
    
    
    0.25
    
    
    
    880,000
    
    
    
    880
    
    
    
    (220,000
    )
    
    
    219,120
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for cash on March 20, 2003
    
    
    0.25
    
    
    
    670,000
    
    
    
    670
    
    
    
    
    
    
    
    166,830
    
    
    
    
    
    
    
    
    
    
    
    167,500Stock issued for cash on April 4, 2003
    
    
    0.25
    
    
    
    900,000
    
    
    
    900
    
    
    
    
    
    
    
    224,062
    
    
    
    
    
    
    
    
    
    
    
    224,962Stock issued for cash on April 8, 2003
    
    
    0.25
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    24,900
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on May 8, 2003
    
    
    0.25
    
    
    
    1,150,000
    
    
    
    1,150
    
    
    
    
    
    
    
    286,330
    
    
    
    
    
    
    
    
    
    
    
    287,480Stock issued for cash on June 16, 2003
    
    
    0.25
    
    
    
    475,000
    
    
    
    475
    
    
    
    
    
    
    
    118,275
    
    
    
    
    
    
    
    
    
    
    
    118,750Stock issued for legal services on June 27, 2003
    
    
    0.55
    
    
    
    83,414
    
    
    
    83
    
    
    
    
    
    
    
    45,794
    
    
    
    
    
    
    
    
    
    
    
    45,877Debt converted to stock on June 27, 2003
    
    
    0.25
    
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    
    
    
    
    498,000
    
    
    
    
    
    
    
    
    
    
    
    500,000Stock and warrants issued for cash on July 11, 2003
    
    
    0.25
    
    
    
    519,000
    
    
    
    519
    
    
    
    
    
    
    
    129,231
    
    
    
    
    
    
    
    
    
    
    
    129,750Stock and warrants issued for cash on September 29, 2003
    
    
    0.25
    
    
    
    1,775,000
    
    
    
    1,775
    
    
    
    
    
    
    
    441,976
    
    
    
    
    
    
    
    
    
    
    
    443,751Stock and warrants issued for cash on October 21, 2003
    
    
    0.25
    
    
    
    1,845,000
    
    
    
    1,845
    
    
    
    
    
    
    
    459,405
    
    
    
    
    
    
    
    
    
    
    
    461,250Stock and warrants issued for cash on October 28, 2003
    
    
    0.25
    
    
    
    1,570,000
    
    
    
    1,570
    
    
    
    
    
    
    
    390,930
    
    
    
    
    
    
    
    
    
    
    
    392,500Stock and warrants issued for cash on November 19, 2003
    
    
    0.25
    
    
    
    500,000
    
    
    
    500
    
    
    
    
    
    
    
    124,500
    
    
    
    
    
    
    
    
    
    
    
    125,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,875
    
    
    
    (312,582
    )
    
    
    
    
    
    
    
    
    
    
    (268,707
    )Common stock paid for, but not issued (25,000 shares)
    
    
    0.25
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,250Amortization of deferred comp
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    863,727
    
    
    
    
    
    
    
    863,727Net loss for year ended December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,476,063
    )
    
    
    (2,476,063
    )Balance, December 31, 2003
    
    
    
    
    
    
    34,128,261
    
    
    
    34,128
    
    
    
    6,250
    
    
    
    10,162,177
    
    
    
    (708,333
    )
    
    
    (10,327,608
    )
    
    
    (833,386
    )Common stock issued, previously paid for
    
    
    0.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    (6,250
    )
    
    
    6,225
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for director services on March 31, 2004
    
    
    0.25
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    12,450
    
    
    
    
    
    
    
    
    
    
    
    12,500Stock issued for finders fees on March 31, 2004
    
    
    0.15
    
    
    
    82,500
    
    
    
    82
    
    
    
    
    
    
    
    12,293
    
    
    
    
    
    
    
    
    
    
    
    12,375Stock issued for finders fees on March 31, 2004
    
    
    0.25
    
    
    
    406,060
    
    
    
    407
    
    
    
    
    
    
    
    101,199
    
    
    
    
    
    
    
    
    
    
    
    101,606
 See notes to condensed financial statements. 6




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF
STOCKHOLDERS DEFICIENCY  Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2004  Price per
    
    Common Stock
    
    Common stock
    
    Additional
paid-in
    
    Deferred
    
    Deficit
accumulated
during the
development
    
    Total
stockholder
development
stageshare
    
    Shares
    
    Amount
    
    to be issued
    
    capital
    
    compensation
    
    stage
    

deficiencyStock issued for services on April 2, 2004
    
    
    0.25
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    16,185
    
    
    
    
    
    
    
    
    
    
    
    16,250Debt converted to stock on April 2, 2004
    
    
    0.25
    
    
    
    60,000
    
    
    
    60
    
    
    
    
    
    
    
    14,940
    
    
    
    
    
    
    
    
    
    
    
    15,000Stock issued for cash on May 21, 2004
    
    
    0.20
    
    
    
    950,000
    
    
    
    950
    
    
    
    
    
    
    
    189,050
    
    
    
    
    
    
    
    
    
    
    
    190,000Stock issued for directors services on June 8, 2004
    
    
    0.25
    
    
    
    600,000
    
    
    
    600
    
    
    
    
    
    
    
    149,400
    
    
    
    
    
    
    
    
    
    
    
    150,000Options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    359,582
    
    
    
    (359,582
    )
    
    
    
    
    
    
    Options issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,120
    
    
    
    (60,120
    )
    
    
    
    
    
    
    Amortization of deferred comp
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    634,850
    
    
    
    
    
    
    
    634,850Net loss for six months ended June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,940,158
    )
    
    
    (1,940,158
    )Balance, June 30, 2004 (unaudited)
    
    
    
    
    
    
    36,366,821
    
    
    $
    36,367
    
    
    $
    
    
    
    $
    11,083,621
    
    
    $
    (493,185
    )
    
    $
    (12,267,766
    )
    
    $
    (1,640,963
    )
 See notes to condensed financial statements. 7




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO
JUNE 30, 2004  CumulativeJune 30,
    
    June 30,
    
    since2004
    
    2003
    
    inceptionCash flows from operating activitiesNet loss
    
    $
    (1,940,158
    )
    
    $
    (1,046,670
    )
    
    $
    (12,267,766
    )Adjustments to reconcile net loss to
net cash used in operating
activities:Write off of intangible assets
    
    
    
    
    
    
    
    
    
    
    505,000Fair value of options issued for services
    
    
    
    
    
    
    
    
    
    
    142,318Issuance of common stock for services
    
    
    178,750
    
    
    
    45,877
    
    
    
    4,031,624Amortization of deferred compensation
    
    
    634,850
    
    
    
    438,726
    
    
    
    2,581,425Depreciation
    
    
    4,066
    
    
    
    2,446
    
    
    
    9,798Changes in operating liabilities:Income taxes payable
    
    
    1,000
    
    
    
    1,064
    
    
    
    6,991Accrued expenses
    
    
    172,241
    
    
    
    (74,221
    )
    
    
    573,239Net cash used in operating activities
    
    
    (949,251
    )
    
    
    (632,778
    )
    
    
    (4,417,371
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (6,561
    )
    
    
    
    
    
    
    (43,987
    )Net cash used in investing activities
    
    
    (6,561
    )
    
    
    
    
    
    
    (43,987
    )Cash flows from financing activitiesIncrease (decrease) in payables to related parties
    
    
    (21,425
    )
    
    
    119,236
    
    
    
    532,928Advances from founding executive officer
    
    
    
    
    
    
    
    
    
    
    517,208Issuance of common stock for cash
    
    
    190,000
    
    
    
    867,567
    
    
    
    3,550,037Common stock issuable
    
    
    
    
    
    
    150,000
    
    
    
    Net cash provided by financing activities
    
    
    168,575
    
    
    
    1,136,803
    
    
    
    4,600,173Net increase (decrease) in cash
    
    
    (787,237
    )
    
    
    504,025
    
    
    
    138,815Cash, beginning of period
    
    
    926,052
    
    
    
    107,489
    
    
    
    Cash, end of period
    
    $
    138,815
    
    
    $
    611,514
    
    
    $
    138,815
 See notes to condensed financial statements. 8




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS  Continued (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 and 2003 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO
JUNE 30, 2004  CumulativeJune 30,
    
    June 30,
    
    since2004
    
    2003
    
    inceptionSupplemental disclosures of cash flow
informationCash paid during the year forInterest
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    
    
    
    $
    
    
    
    $
    Non-cash investing and financing
activitiesAcquisition of intangible asset
through advance from related
party and issuance of common
stock
    
    $
    
    
    
    $
    
    
    
    $
    505,000Deferred compensation for stock options issued for services
    
    
    419,702
    
    
    
    
    
    
    
    3,074,611Purchase of property and equipment financed by advance from related party
    
    
    
    
    
    
    
    
    
    
    3,550Conversion of related party debt to equity
    
    
    15,000
    
    
    
    500,000
    
    
    
    515,000Issuance of common stock in settlement of payable
    
    
    113,981
    
    
    
    
    
    
    
    113,981Common stock, previously paid for
    
    
    6,250
    
    
    
    
    
    
    
    Fees accrued for issuance of common stock
    
    
    
    
    
    
    153,509
    
    
    
    312,582
 See notes to condensed financial statements. 9




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 NOTES TO FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation  Basis of presentation  The accompanying interim condensed financial statements are unaudited,
but in the opinion of management of Save the World Air, Inc. (the
Company), contain all adjustments, which include normal recurring
adjustments, necessary to present fairly the financial position at June
30, 2004, the results of operations for the three and six months ended
June 30, 2004 and 2003, and cash flows for the six months ended June 30,
2004 and 2003. The balance sheet as of December 31, 2003 is derived
from the Companys audited financial statements.Certain information and footnote disclosures normally included in
financial statements that have been prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, although management of the Company believes that the
disclosures contained in these financial statements are adequate to make
the information presented therein not misleading. For further
information, refer to the financial statements and the notes thereto
included in the Companys Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2003, as filed with the Securities and Exchange
Commission.The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expense
during the reporting period. Actual results could differ from those
estimates.The results of operations for the six months ended June 30, 2004 are not
necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 2004. 10




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation- Continued  Description of business  Save the World Air, Inc. (the Company) was incorporated in Nevada on
February 18, 1998 under the name Mandalay Capital Corp. The Company
changed its name to Save the World Air, Inc. on February 11, 1999
following the signing of an agreement by and between the Company and
Jeffrey Alan Muller, the Companys founding executive officer and
director, with respect to the Companys purchase of the Zero Emission
Fuel-Saving Device (the Agreement). Under the terms of the Agreement,
the Company issued 5,000,000 shares of its common stock to Mr. Muller
and agreed to pay him a total of $500,000 for the marketing and
distribution rights of the device, and a $10 royalty for every unit of
the device sold (see additional discussion in the Significant Matters
section of this note). The Company acquired the worldwide exclusive
manufacturing, marketing and distribution rights for the Zero Emission
Fuel-Saving Device (ZEFS) by entering into the Agreement. The ZEFS is
a product, which is fitted to an internal combustion engine and is
expected to reduce carbon monoxide hydrocarbons and toxic exhaust
emissions. The ZEFS is currently undergoing testing to determine the
achievable levels of reduced emissions and commercial viability.  11




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation- Continued  Significant matters  On December 19, 2001, the SEC filed civil charges in the United States
Federal District Court, Southern District of New York, against us, our former
President and then sole director Jeffrey Muller, and others, alleging that we
and the other defendants were engaged in a fraudulent scheme to promote our
stock. The SEC complaint alleged the existence of a promotional campaign using
press releases, Internet postings, an elaborate website, and televised media
events to disseminate false and materially misleading information as part of a
fraudulent scheme to manipulate the market for stock in our corporation, which
was then controlled by Mr. Muller. On March 22, 2002, we signed a Consent to
Final Judgment of Permanent Injunction and Other Relief in settlement of this
action as against the corporation only, which the court approved on July 2,
2002. Under this settlement, we were not required to pay any fines or
restitution. The SECs action continues against Mr. Muller and others.In October 2001, Edward Masry became the Companys new President and
Chief Executive Officer. Because of the nature and scope of the SECs
allegations regarding the Companys financial statements and SEC
filings, Masry has assembled a new management team and advisory board
for the Company, in addition to selecting new independent auditors and
corporate counsel. 12




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation- Continued  Significant matters  Continued  On July 2, 2002, after an investigation by our newly constituted board of
directors, we filed a cross-complaint in the SEC action against Mr. Muller and
others seeking injunctive relief, disgorgement and financial restitution for a
variety of acts and omissions in connection with sales of our stock and other
transactions occurring between 1998 and 2002. Among other things, we allege
that Mr. Muller and certain others sold stock without consideration and without
registration under federal securities laws; engaged in self-dealing and entered
into various undisclosed related-party transactions; misappropriated for their
own use proceeds from sales of our stock; and entered into various undisclosed
arrangements regarding the control, voting and disposition of their stock. We
contend that we are entitled to a judgment canceling all of the approximately
8,716,710 shares of our common stock which we believe are controlled, directly
or indirectly, by Mr. Muller, divesting Mr. Muller of any right to exercise
options for 10,000,000 shares of our stock, the entry of an existing
preliminary injunction to prevent Mr. Muller from any involvement with the
company and a monetary judgment against Muller and others in the amount of
several million dollars. We are also seeking cancellation of the previous
royalty arrangement with Mr. Muller.On July 30, 2002, the U.S. Federal District Court, Southern District of
New York, granted our application for a preliminary injunction against Mr.
Muller and others, which prevents Mr. Muller and other cross-defendants from
selling, transferring, or encumbering any of our assets and property, from
selling or transferring any of our stock that they may own or control, or from
taking any action to injure us or our business and shareholders. The order also
prevents Mr. Muller from exercising any control over our corporation and
serving as an officer or director of our company. While we believe that we have
valid claims, there can be no assurance that an adverse result or settlement
would not have a material adverse effect on our financial position or cash
flow.In the course of the litigation, we have obtained control over Mr.
Mullers patent rights to the ZEFS device. Under a Buy-Sell Agreement between
Jeffrey Muller and us dated December 29, 1998, Mr. Muller, who was listed on
the ZEFS devise patent application as the inventor of the ZEFS device, granted
us the marketing, manufacturing and distribution rights to the ZEFS device. In
conjunction with these proceedings, a settlement agreement was reached whereby
the $10 per unit royalty previously due to Mr. Muller was terminated and
replaced with a $.20 per unit royalty payable to the bankruptcy trustee. On
November 7, 2002, under our settlement with the Muller bankruptcy trustee, the
trustee transferred all ownership and legal rights to this international patent
application for the ZEFS device to us.The SEC filed a motion for summary judgment on May 28, 2004. Further
proceedings for pretrial motions have been assigned to U.S. Magistrate Frank
Maas. Judge Maas postponed and rescheduled the filing date for the Company to
file its motion for summary judgment. The Company has notified the
court that it will file its motion no later than August 24, 2004. After a period of time during which Mr. Muller will
have an opportunity to respond and the Company and the SEC will have an
opportunity to reply, it is expected that a hearing to resolve the issues
raised in these motions will be calendared during October 2004.Based on the status of current legal proceedings, the Company believes
it will not have to pay $1,017,208 of advances due to Mr. Muller. The
Company also believes that the option Mr. Muller holds to purchase
10,000,000 shares of the Companys stock will be cancelled. 13




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation- Continued  Development stage enterprise  The Company is a development stage enterprise as defined by Statement of
Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting
by Development Stage Enterprises. All losses accumulated since the
inception of the Company have been considered as part of the Companys
development stage activities.A team has been assembled for the research and development of the
technology and potential markets for the ZEFS and to establish
relationships with potential customers. Significant design work has been
completed, and patent applications have been filed in 64 countries.
There is no assurance that any of the filed patents will be granted.
The Company is continuing in its product development efforts and several
studies are underway to evaluate the effectiveness of the ZEFS in
eliminating pollutants and emissions from internal combustion engines.
The Company has had no sales to date. As such, the Company continues to
remain a development stage enterprise. The ability of the Company to
commercialize its products will depend on, among other things, the
Companys ability to demonstrate the merits of the ZEFS and develop
markets and distribution channels.  2.
    
    Net loss per share  Basic earnings (loss) per share is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution, using the treasury stock method, that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. In
computing diluted earnings per share, the treasury stock method assumes
that outstanding options and warrants are exercised and the proceeds are
used to purchase common stock at the average market price during the
period. Options and warrants will have a dilutive effect under the
treasury stock method only when the average market price of the common
stock during the period exceeds the exercise price of the options and
warrants. For the three and six months ended June 30, 2004 and 2003,
the dilutive impact of outstanding stock options of 15,172,652 and
14,000,000, respectively, and 12,417,414 and 7,808,414 warrants have
been excluded because their impact on the loss per share is
antidilutive. 14




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   3.
    
    New accounting pronouncements  In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the
application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, relating to consolidation of certain entities.
In December 2003, the FASB issued a revised FIN 46 46R that replaced
the original FIN 46. FIN 46R requires identification of a companys
participation in variable interest entities (VIEs), which are defined as
entities with a level of invested equity that is not sufficient to fund
future activities to permit it to operate on a standalone basis. For
entities identified as a VIE, FIN 46R sets forth a model to evaluate
potential consolidation based on an assessment of which party to the VIE
(if any) bears a majority of the exposure to its expected losses, or
stands to gain from a majority of its expected returns. FIN 46R also
sets forth certain disclosures regarding interests in VIEs that are
deemed significant, even if consolidation is not required. The Company
is not currently participating in, or invested in any VIEs, as defined
in FIN 46R.In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 establishes accounting standards for how a
company classifies and measures financial instruments that have
characteristics of liabilities and equity. FASB Staff Position No.
150-3 subsequently deferred the effective date for applying the
provisions of SFAS No. 150. For instruments that are mandatorially
redeemable on fixed dates for amounts that are fixed or otherwise
determinable, the provisions of SFAS 150 shall be effective for fiscal
periods beginning after December 15, 2004. For all other instruments
the provisions of SFAS 150 are deferred indefinitely.  4.
    
    Certain relationships and related transactions  Due to founding executive officer  All of the marketing and manufacturing rights for the ZEFS were acquired
from Mr. Muller, for 5,000,000 shares of common stock, $500,000 and a
$10 royalty for each unit sold (see discussion below), pursuant to the
Agreement entered into in December 1998, by and between the Company and
Mr. Muller. Working capital advances in the amount of $517,208 and
payment in the amount of $500,000 for marketing and distribution rights
of the ZEFS are due to Mr. Muller. Such amounts are interest free and
do not have any due dates for payment.In January 2000, the Company entered into an agreement offering Mr.
Muller and Lynne Muller, Mr. Mullers wife, the option to purchase
5,000,000 shares each at $0.10
per share as consideration for work performed for the Company. Mrs.
Muller subsequently transferred her option to Mr. Muller. 15




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   4.
    
    Certain relationships and related transactions- Continued  Due to founding executive officer  Continued  In connection with the Companys legal proceedings against Mr. Muller,
the Company is attempting to obtain a judgment that will relieve the
Company of $1,017,208, which represents all amounts due Mr. Muller.
These amounts include the $500,000 due for the marketing and
distribution rights of the ZEFS and the working capital advances of
$517,208. As described in the Significant Matters section of Note 1,
the Company has already been relieved of the $10 royalty interest that
Mr. Muller held for each unit sold. In addition, the Company is also
attempting to obtain a judgment that will cancel the options to purchase
10,000,000 shares granted to Mr. and Mrs. Muller, collectively. Based
on the status of current legal proceedings, the Company does not believe
that it will have to pay Mr. Muller the $500,000 for the rights to the
ZEFS device and the $517,208 of advances. The Company also believes
that the option Mr. Muller holds to purchase 10,000,000 shares of the
Companys stock will be cancelled and no longer valid.  Due to related parties  Masry & Vititoe, a law firm in which Edward Masry is a partner, has
advanced $21,478 and $57,903 as of June 30, 2004 and December 31, 2003
to the Company for working capital purposes. The advances payable to
Masry & Vititoe were allocations to the Company for shared expenses,
primarily payroll. These advances are unsecured, non-interest bearing,
and are due on demand. In April 2004, $15,000 of debt was converted to
60,000 shares of common stock. 16




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   5.
    
    Stock options and warrants  The Company issues stock options to employees, directors and consultants
under no formal plan. Employee options vest according to the terms of
the specific grant and expire from 5 to 10 years from date of grant.
Non-employee option grants to date are vested upon issuance or up to one
year. The weighted average remaining contractual life of employee
options outstanding at June 30, 2004 was 7.32 years. Stock option
activity for the year ended December 31, 2003 and six months ended June
30, 2004, was as follows: Weighted Avg.Options
    
    Exercise PriceOptions outstanding, January 1, 2003
    
    
    14,000,000
    
    
    $
    0.13Options granted
    
    
    
    
    
    
    1.00Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, December 31, 2003
    
    
    14,000,000
    
    
    
    0.13Options granted
    
    
    1,172,652
    
    
    
    1.03Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, June 30, 2004
    
    
    15,172,652
    
    
    $
    0.20
  Options outstanding at June 30, 2004 and the related weighted average
exercise price and remaining life information is as follows: TotalWeighted
    
    weighted
    
    
    
    
    
    WeightedRange of
    
    Total
    
    average
    
    average
    
    
    
    
    
    averageexercise
    
    options
    
    remaining
    
    exercise
    
    Options
    
    exerciseprices
    
    outstanding
    
    life in years
    
    price
    
    exercisable
    
    price$
    0.10
    
    
    
    10,000,000
    
    
    
    N/A
    
    
    $
    0.10
    
    
    
    10,000,000
    
    
    $
    0.100.10
    
    
    
    3,000,000
    
    
    
    5.35
    
    
    
    0.10
    
    
    
    2,000,000
    
    
    
    0.100.40
    
    
    
    750,000
    
    
    
    7.30
    
    
    
    0.40
    
    
    
    750,000
    
    
    
    0.400.50
    
    
    
    150,000
    
    
    
    2.21
    
    
    
    0.50
    
    
    
    150,000
    
    
    
    0.501.00
    
    
    
    100,000
    
    
    
    2.75
    
    
    
    1.00
    
    
    
    100,000
    
    
    
    1.00.98
    
    
    
    900,000
    
    
    
    4.50
    
    
    
    .98
    
    
    
    
    
    
    
    1.15
    
    
    
    193,912
    
    
    
    4.50
    
    
    
    1.15
    
    
    
    
    
    
    
    1.27
    
    
    
    78,740
    
    
    
    4.50
    
    
    
    1.27
    
    
    
    
    
    
    
    $
    0.10-$1.27
    
    
    
    15,172,652
    
    
    
    5.30
    
    
    $
    0.20
    
    
    
    13,000,000
    
    
    $
    0.19
 17




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   5.
    
    Stock options and warrants- Continued CumulativeJune 30,
    
    June 30,
    
    since2004
    
    2003
    
    inceptionNet loss, as reported
    
    $
    (1,940,158
    )
    
    $
    (1,046,670
    )
    
    $
    (12,267,766
    )Less: total fair value method
stock-based employee
compensation expense
    
    
    (1,147,812
    )
    
    
    (474,898
    )
    
    
    (3,356,094
    )Add: deferred compensation
amortization for below market
employee options
    
    
    604,790
    
    
    
    425,000
    
    
    
    2,496,457Pro forma net loss
    
    $
    (2,483,180
    )
    
    $
    (1,096,658
    )
    
    $
    (13,127,403
    )Pro forma loss per share
    
    $
    (0.07
    )
    
    $
    (0.04
    )
  The 10,000,000 options exercisable at $0.10 per share in the table above
are held by Mr. Muller. The options have been accounted for as employee
stock options under the provisions of APB No. 25. Accordingly, no
compensation expense has been recorded in the statements of operations.
However, the $1,000,000 fair value of the options has been reflected in
the pro forma net loss below. The 10,000,000 options do not have an
expiration date and vested in 1999. For purposes of computing fair value
method stock-based employee compensation expense for the 10,000,000
employee options above, a ten-year life was used in the Black-Scholes
option-pricing model, as ten years is the longest term for other option
grants.Intrinsic value of employee options  Certain employee options were granted with exercise prices less the than
fair market value of the Companys stock at the date of grant. As the
grants were to employees, the intrinsic value method, as allowed under
APB No. 25, was used to calculate the related compensation expense. For
the six months ended June 30, 2004, $302,395 of employee deferred
compensation was amortized and recognized as expense. The remaining
deferred compensation expense will be recognized over the remaining
vesting periods of the employee options through 2004.The Company has elected to account for stock-based compensation using
the intrinsic value method prescribed in APB No. 25 and related
interpretations, and follow the pro forma disclosure requirements of
SFAS No. 123. Accordingly, no compensation expense has been recognized
related to the granting of stock options, except as noted above. The
following table illustrates the effect on net income as if the Company
had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation. 18




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   5.
    
    Stock options and warrants- Continued  The following table summarizes certain information about the companys
stock purchase warrants. Weighted Avg.Warrants
    
    Exercise PriceWarrants outstanding, January 1, 2003
    
    
    1,850,000
    
    
    $
    0.06Warrants granted
    
    
    11,517,414
    
    
    
    0.46Warrants exercised
    
    
    
    
    
    
    Warrants cancelled
    
    
    
    
    
    
    Warrants outstanding, December 31, 2003
    
    
    13,367,414
    
    
    
    0.52Warrants granted
    
    
    
    
    
    
    Warrants exercised
    
    
    (950,000
    )
    
    
    (0.02
    )Warrants cancelled
    
    
    
    
    
    
    Warrants outstanding, June 30, 2004
    
    
    12,417,414
    
    
    $
    0.50
  The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in APB No. 25 and related
interpretations, and follow the pro forma disclosure requirements of SFAS
No. 123. Accordingly, no compensation expense has been recognized
related to the granting of stock options, except as noted above. The
following table illustrates the effect on net income as if the Company
had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation. For the six months ended June 30,
2004, 950,000 warrants were exercised.  6.
    
    Going concern  The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of
business. As reflected in the accompanying financial statements, the
Company has a net loss of $1,940,158, a negative cash flow from
operations of $949,251, a working capital deficiency of $661,494 and a
stockholders deficiency of $1,640,963. These factors raise substantial
doubt about its ability to continue as a going concern. The ability of
the Company to continue as a going concern is dependent on the Companys
ability to raise additional funds and implement its business plan. The
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.  The Company believes that it has sufficient cash to fund its operations
through at least the end of the third quarter of 2004. In order to meet its
operational needs, the Company is raising additional capital in a private
offering (see note 7). However, there can be no assurance that additional
financing will be available or, if it is available, that it will be
available on terms that are favorable to the Company. If the Company is
unable to obtain additional capital, it may be required to delay, reduce the
scope of, or eliminate its research and development programs, or relinquish
rights to technologies that it might otherwise seek to develop or
commercialize. 19




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)   7.
    
    Subsequent event  In July 2004, the Company amended its original license agreement with the
RAND Corporation (Licensee) and executed a License Agreement with Temple
University in Philadelphia, Pennsylvania.In consideration of the license granted to Licensee under the terms of
this Agreement, Licensee shall pay to Temple a royalty of two percent
(2%) of net sales for each calendar quarter during the term of this
Agreement.In further consideration of the license granted to Licensee under the
terms of this Agreement, Licensee shall pay to Temple, on the first
anniversary of the expiration of the option period, a non-refundable
license fee of fifty thousand dollars ($50,000). In further
consideration of the license granted to licensee under the terms of this
Agreement, licensee shall pay to Temple, on the second anniversary of the
expiration of the option period and annually thereafter, a non-refundable
license maintenance fee regardless of or irrespective of actual net
sales. The amount of each license maintenance fee payment shall be as
follows: (i) twenty five thousand dollars ($25,000) for the first through
fourth payment, and (ii) fifty thousand dollars ($50,000) for all
subsequent payments.This undertaking relates to commercialization of myriads of products that
the Company hopes will be widely accepted by the petroleum industry. The
Company has applied for patent protection for this new technology. Use of
these new SWA products may extend the life of world oil reserves and be
beneficial in reducing future damage to the worlds ecology, threatened
by oil exploration.The Company expects that by mid-2005 the feasibility study, including
market assessment and the theoretical and engineering evaluations, will
have been completed. If at that time the Company determines the products
are both practical to engineer and will be accepted by the petroleum
industry, the Company may then proceed with the design of prototypes, a
demonstration program and the commercialization of these products.The Company commenced a private offering in late July 2004. As of the
date of the filing of this report, the Company has raised in excess of
$550,000 in this offering. The Company anticipates additional operating
losses, which may increase, through at least the remainder of 2004 as it
expands its research and development program, provides for general and
administrative expenses and commences marketing activities, without the
benefit of revenue. 20




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##### Table of Contents



Item 2. Managements Discussion and Analysis This Quarterly Report on Form 10-QSB contains forward-looking statements.
These forward-looking statements include predictions regarding our future:  
    
    research and development expenses;  
    
    scientific test results;  
    
    general and administrative expenses;  
    
    liquidity and sufficiency of existing cash;  
    
    technology;  
    
    the outcome of pending or threatened litigation. You can identify these and other forward-looking statements by the use of
words such as may, will, expects, anticipates, believes,
estimates, continues, or the negative of such terms, or other comparable
terminology. Forward-looking statements also include the assumptions underlying
or relating to any of the foregoing statements. Such statements, which include statements concerning future revenue
sources and concentrations, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed elsewhere in this Form 10-QSB, that could actual
results to differ materially from those projected. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below under the heading Risk Factors in our Annual Report on Form
10-KSB for the year ended December 31, 2003. All forward-looking statements
included in this document are based on information available to us on the date
hereof. We assume no obligation to update any forward-looking statements. The forward-looking statements set forth in this Form 10-QSB are as of
June 30, 2004, and we undertake no duty to update this information. Overview The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Financial
Statements and notes thereto included in Part I, Item 1 of this Form 10-QSB and
the Financial Statements and notes thereto contained in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2003. We are a development stage company that has not yet commenced operations
and does not generate revenue. Our current focus is on research and development
of proprietary devices that can be installed on motor vehicles and which are
designed to reduce harmful emissions, improve fuel efficiency and improve
performance. Utilizing our test vehicles, motorcycles, engines and equipment at
our research and development facilities in Australia and the United States, we
have created prototype devices for one-, two- and four-barrel carbureted
engines and multiple devices for fuel injection engines that we call ZEFS. We
have devoted the bulk of our efforts to complete the design and development of
our production models and raise the financing required to do so and to fund our
expenses. We have also recently developed devices for use on two- and four-stroke
motorcycles, generators and lawnmower engines, which we call CAT-MATE. On
June 4, 2004, we filed a New Provisional Patent Application for an Inline
Exhaust Device to Improve Efficiency of a Catalytic Converter. We have also
trademarked the name CAT-MATE. 21




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##### Table of Contents



We anticipate that our research and development efforts will continue for
at least the remainder of 2004. We do not envision generating any significant
revenue in 2004, although limited marketing activities later in 2004 could
produce nominal revenue. We are in the process of raising additional capital to
fund continuing research and development activities and meet our operating
expenses, including marketing activities, for the remainder of 2004. Results of Operations To date, we have not generated any revenues and our business is in the
development stage. Our operating costs and expenses consist primarily of research and
development expenses and general and administrative expenses. We expect our
operating costs to increase once we begin to manufacture and market the ZEFS
and CAT-MATE devices, which we do not expect to occur earlier than the fourth
quarter of 2004. Our research and development expenses include contractual
payments to RAND Corporation, consultants fees, capital expenditures, cost of
services and supplies. We expect our research and development costs to increase
as we continue to develop the ZEFS and CAT-MATE devices and develop new
applications of our technology. Our general and administrative expenses include compensation expenses
related to executive and other administrative personnel, facility lease, the
costs of our insurance and legal and accounting support. We expect our general
and administrative expenses to increase as we expand our infrastructure in
support of our anticipated increased operations, which we do not expect to
occur earlier than the fourth quarter of 2004. We had a net loss of $1,163,588 for the three months ended June 30, 2004,
compared to a net loss of $440,669 for the three months ended June 30, 2003. We
had a net loss of $1,940,158 for the six months ended June 30, 2004, compared
to a net loss of $1,046,670 for the six months ended June 30, 2003. These
increases in loss are primarily attributable to an increase in research and
development expenses as a result of the agreement we entered into with RAND
Corporation in December 2002, as amended. We expect an increase in net loss
through 2004 attributable to increased research and development, and general
and administrative expenses, as well as the commencement of marketing
activities. Liquidity and Capital Resources We have incurred negative cash flow from operations in the developmental
stage since our inception in 1998. As of June 30, 2004 we had cash of $138,815
and an accumulated deficit of $12,267,766. Our 2004 negative operating cash
flows have been funded primarily through the net proceeds of a private
financing that we commenced in November 2002 and completed in October 2003.
Because of our current cash position, the Company does not have sufficient cash
on hand to continue to fund operations for any significant period of time.
Accordingly, we commenced another private offering in late-July 2004, which is
ongoing. As of the date of the filing of this report, we have raised in excess
of $550,000 in this offering. We anticipate additional operating losses, which
may increase, through at least the remainder of 2004 as we expand our research
and development program, provide for general and administrative expenses and
commence marketing activities, without the benefit of revenue. The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected
in the accompanying financial statements, for the six month period ended June
30, 2004, the Company has a net loss of $1,940,158, a negative cash flow from
operations of
$949,251, a working capital deficiency of $661,494 and
a stockholders deficiency of $1,640,963. These factors raise
concerns about the Companys ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent on the Companys ability to
raise 22




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##### Table of Contents



additional funds and implement its business plan. The financial
statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern. We believe that we have sufficient cash to fund our operations through at
least the end of the third quarter of 2004. In order to meet our operational
needs, we are raising additional capital in a private offering as described
above. However, there can be no assurance that additional financing will be
available or, if it is available, that is will be available on terms that are
favorable to the Company. If we are unable to obtain additional capital, we may
be required to delay, reduce the scope of, or eliminate our research and
development programs, or relinquish rights to technologies that we might
otherwise seek to develop or commercialize. In the action by the Securities and Exchange Commission (the SEC)
against Jeffrey Muller, the founder and former sole director of the Company,
and others, we seek, among other relief, the cancellation of all shares of our
common stock controlled, directly or indirectly, by Mr. Muller and his
affiliates, options to purchase an additional 10,000,000 shares of our common
stock, and Mr. Mullers original royalty agreement. See Part II, Item 1, Legal
Proceeding. The cancellation of these shares and options would have a
significant positive effect on our capitalization. Critical Accounting Policies Our discussion and analysis of financial condition and results of
operations is based upon our Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these Financial Statements and related
disclosures requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, expenses, and related disclosure of
contingent assets and liabilities. We evaluate, on an on-going basis, our
estimates and judgments, including those related to the useful life of the
assets. We base our estimates on historical experience and assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates. The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results that we report in
our Financial Statements. The SEC considers an entitys most critical
accounting policies to be those policies that are both most important to the
portrayal of a companys financial condition and results of operations and
those that require managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates about matters that
are inherently uncertain at the time of estimation. We believe the following
critical accounting policies, among others, require significant judgments and
estimates used in the preparation of our Financial Statements: Stock-Based Compensation We account for stock-based compensation to employees as defined by using
the intrinsic-value method prescribed in Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees. We account for stock option and warrant grants issued to non-employees
using the guidance of SFAS No. 123, Accounting for Stock-Based Compensation
and EITF No. 96-18: Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, whereby the fair value of such option and warrant grants is
determined using the Black-
Scholes option pricing model at the earlier of the date at which the
non-employees performance is completed or a performance commitment is reached. Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the 23




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reported amounts of revenues and expenses during the
reporting period. Certain significant estimates were made in connection with
preparing our financial statements as described in Note 1 of our Financial
Statements. See Item 1, Part I, Financial Statements. Actual results could
differ from those estimates. New Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities., which are subject to
the provisions of this statement for the first fiscal period beginning after
December 15, 2004. The Company believes that the adoption of SFAS No. 150 will
not have an impact on its financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. In December 2003, the FASB
issued a revised version of FIN 46 (FIN 46R) that replaced the original FIN
46. FIN 46R requires identification of a companys participation in variable
interest entities (VIEs), which are defined as entities with a level of
invested equity that is not sufficient to fund future activities to permit it
to operate on a standalone basis. For entities identified as a VIE, FIN 46R
sets forth a model to evaluate potential consolidation based on an assessment
of which party to the VIE, if any, bears a majority of the exposure to its
expected losses, or stands to gain from a majority of its expected returns. FIN
46R also sets forth certain disclosures regarding interests in VIEs that are
deemed significant even if consolidation is not required. The Company is not
currently participating in, or invested in, any VIEs, as defined in FIN 46R.
The implementation of the provisions of FIN 46R in 2003 did not have a
significant effect on the Companys consolidated financial statement
presentation or disclosures. 
 Item 3. Controls and Procedures (a) Evaluation of disclosure controls and procedures: Our management
evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. It should be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. (b) Changes in internal control over financial reporting: There was
no change in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-QSB
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 24




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PART II 
 Item 1. Legal Proceedings On December 19, 2001, the SEC filed civil charges in the United States
Federal District Court, Southern District of New York, against us, our former
President and then sole director Jeffrey Muller, and others, alleging that we
and the other defendants were engaged in a fraudulent scheme to promote our
stock. The SEC complaint alleged the existence of a promotional campaign using
press releases, Internet postings, an elaborate website, and televised media
events to disseminate false and materially misleading information as part of a
fraudulent scheme to manipulate the market for stock in our corporation, which
was then controlled by Mr. Muller. On March 22, 2002, we signed a Consent to
Final Judgment of Permanent Injunction and Other Relief in settlement of this
action as against the corporation only, which the court approved on July 2,
2002. Under this settlement, we were not required to pay any fines or
restitution. The SECs action continues against Mr. Muller and others. On July 2, 2002, after an investigation by our newly constituted board of
directors, we filed a cross-complaint in the SEC action against Mr. Muller and
others seeking injunctive relief, disgorgement and financial restitution for a
variety of acts and omissions in connection with sales of our stock and other
transactions occurring between 1998 and 2002. Among other things, we allege
that Mr. Muller and certain others sold stock without consideration and without
registration under federal securities laws; engaged in self-dealing and entered
into various undisclosed related-party transactions; misappropriated for their
own use proceeds from sales of our stock; and entered into various undisclosed
arrangements regarding the control, voting and disposition of their stock. We
contend that we are entitled to a judgment canceling all of the approximately
8,716,710 shares of our common stock which we believe are controlled, directly
or indirectly, by Mr. Muller, divesting Mr. Muller of any right to exercise
options for 10,000,000 shares of our stock, the entry of an existing
preliminary injunction to prevent Mr. Muller from any involvement with the
company and a monetary judgment against Muller and others in the amount of
several million dollars. We are also seeking cancellation of the previous
royalty arrangement with Mr. Muller. On July 30, 2002, the U.S. Federal District Court, Southern District of
New York, granted our application for a preliminary injunction against Mr.
Muller and others, which prevents Mr. Muller and other cross-defendants from
selling, transferring, or encumbering any of our assets and property, from
selling or transferring any of our stock that they may own or control, or from
taking any action to injure us or our business and shareholders. The order also
prevents Mr. Muller from exercising any control over our corporation and
serving as an officer or director of our company. While we believe that we have
valid claims, there can be no assurance that an adverse result or settlement
would not have a material adverse effect on our financial position or cash
flow. In the course of the litigation, we have obtained control over Mr.
Mullers patent rights to the ZEFS device. Under a Buy-Sell Agreement between
Jeffrey Muller and us dated December 29, 1998, Mr. Muller, who was listed on
the ZEFS devise patent application as the inventor of the ZEFS device, granted
us the marketing, manufacturing and distribution rights to the ZEFS device. In
conjunction with these proceedings, a settlement agreement was reached whereby
the $10 per unit royalty previously due to Mr. Muller was terminated and
replaced with a $.20 per unit royalty payable to the bankruptcy trustee. On
November 7, 2002, under our settlement with the Muller bankruptcy trustee, the
trustee transferred all ownership and legal rights to this international patent
application for the ZEFS device to us. The SEC filed a motion for summary judgment on May 28, 2004. Further
proceedings for pretrial motions have been assigned to U.S. Magistrate Frank
Maas. Judge Maas postponed and rescheduled the filing date for the Company to
file its motion for summary judgment. The Company has notified the
court that it will file its motion no later than August 24, 2004. After a period of time during which Mr. Muller will
have an opportunity to respond and the Company and the SEC will have an
opportunity to reply, it is expected that a hearing to resolve the issues
raised in these motions will be calendared during October 2004. 25




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Although the outcome of this litigation cannot be predicted with any
degree of certainty, we are optimistic that the Courts ruling will either
significantly narrow the issues for any later trial or will result in a
disposition of the case in a manner favorable to the company. While we believe
that we have valid claims, there can be no assurance that an adverse result or
settlement would not have a material adverse effect on our financial position
or cash flow. 
 Item 2. Changes in Securities In April 2004, the Company issued 60,000 shares of common stock to Joette
Masry, the wife of our Chief Executive Officer Edward Masry, in connection with
the conversion and cancellation of $15,000 debt owed to Ms. Masry. In April 2004, the Company issued 65,000 shares of common stock to John
Fawcett, for services rendered by him to the Company under a consulting
agreement dated December 1, 2001. In June 2004, the Company issued 200,000
shares of common stock to each of John Kostic, Adrian Menzell and Pat Baker,
for services rendered by them to the Company under consulting agreements dated
April 1, 2003. Half of the shares issued to each of Messrs. Kostic, Menzell
and Baker vested on April 1, 2004 and the remainder of such shares vest on
April 1, 2005. In June 2004, the Company issued an aggregate 950,000 shares of common
stock to various individuals in connection with the exercise of
warrants previously issued to them. The aggregate gross and net proceeds to the Company
in connection with such exercises were $190,000. The issuance of the shares described above was made in reliance on the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933, as amended. We made no public solicitation in connection with the
issuance of the above-mentioned securities. We relied on representation from
the purchasers of the securities that they purchased the securities for
investment only and not with a view to any distribution thereof and that they
were aware of our business affairs and financial condition and had sufficient
information to reach an informed and knowledgeable decision regarding their
acquisition of the securities. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission Of Matters to a Vote of Security Holders We held our annual meeting of stockholders on May 24, 2004. At that
meeting, our stockholders: 1. Elected seven directors to serve until our 2005 annual meeting of
stockholders or until his or her successor is duly elected and qualified: Name
    
    For
    
    WithheldEdward L. Masry
    
    
    17,832,404
    
    
    
    583,090Eugene E. Eichler
    
    
    17,824,604
    
    
    
    590,890Bruce H. McKinnon
    
    
    17,824,704
    
    
    
    590,790Robert F. Sylk
    
    
    17,832,504
    
    
    
    582,990John Brown
    
    
    17,832,504
    
    
    
    582,990John F. Price
    
    
    17,832,504
    
    
    
    582,990Joseph Helleis
    
    
    17,832,404
    
    
    
    583,090
 26




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2. Ratified the appointment of Weinberg & Company, P.A., as our
independent auditors for the current fiscal year: Votes For
    
    
    17,821,377Votes Against
    
    
    557,093Abstentions
    
    
    37,024Broker Non-Votes
    
    
    0
 3. Adopted the Save the World Air, Inc. 2004 Stock Option Plan: Votes For
    
    
    12,179,979Votes Against
    
    
    651,677Abstentions
    
    
    36,075Broker Non-Votes
    
    
    5,547,763
 
 Item 5. Other Information None. 
 Item 6. Exhibits and Reports on Form 8-K (a) The exhibits listed below are required by Item 601 of Regulation S-B. Exhibit No.
    
    Description10.1(1)
    
    Commercial Sublease between the Registrant and KZ Golf, Inc., dated October 16,
2003.10.2(1)
    
    General Tenancy Agreement between the Registrant and Autumlee Pty Ltd., dated
November 15, 2003.10.3(2)
    
    Agreement between the Registrant and RAND, dated December 13, 2002.10.4(1)*
    
    Agreement between the Registrant and RAND, dated May 7, 2003.10.5(4)
    
    Modification No. 1 dated as of August 21, 2003 to Exhibit 10.410.6(4)
    
    Modification No. 2 dated as of October 17, 2003 to Exhibit 10.410.7(4)
    
    Modification No. 3 dated as of January 20, 2004 to Exhibit 10.410.8(3)
    
    Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann
Muller and Lynette Anne Muller (Bankrupts).
 27




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Exhibit No.
    
    Description10.9(3)
    
    Assignment and Bill of Sale between Pro Hart and the Registrant dated May 28, 2002.31.1
    
    Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule
13(a)-15(e) or Rule 15(d)-15(e).31.2
    
    Certification of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.
Section 1350.32
    
    Certification of Chief Executive Officer and Chief Financial Officer of Quarterly
Report pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
   *
    
    Confidential Treatment Requested.(1)
    
    Incorporated by reference from Registrants Form 10-KSB for fiscal year ended December 31, 2002.(2)
    
    Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.(3)
    
    Incorporated by reference from Registrants Form 8-K filed on November 12, 2002(4)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31, 2004 (b) Reports onForm 8-K. On May 21, 2004, we filed a Current Report on Form 8-K with the SEC, in
connection with certain recent business developments. On May 28, 2004, we filed a Current Report on Form 8-K with the SEC, in
connection with a press release we issued announcing the election of
directors at our 2004 Annual Meeting of Stockholders and the election of
officers at the Annual Meeting of the Board of Directors held on the same
date. 28




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized. SAVE THE WORLD AIR, INC.Date: August 23, 2004
    By:
    /s/ Edward L. MasryEdward L. MasryChief Executive Officer 29




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EXHIBIT INDEX Exhibit No.
    
    Description10.1(1)
    
    Commercial Sublease between the Registrant and KZ Golf, Inc., dated October 16,
2003.10.2(1)
    
    General Tenancy Agreement between the Registrant and Autumlee Pty Ltd., dated
November 15, 2003.10.3(2)
    
    Agreement between the Registrant and RAND, dated December 13, 2002.10.4(1)*
    
    Agreement between the Registrant and RAND, dated May 7, 2003.10.5(4)
    
    Modification No. 1 dated as of August 21, 2003 to Exhibit 10.410.6(4)
    
    Modification No. 2 dated as of October 17, 2003 to Exhibit 10.410.7(4)
    
    Modification No. 3 dated as of January 20, 2004 to Exhibit 10.410.8(3)
    
    Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann
Muller and Lynette Anne Muller (Bankrupts).10.9(3)
    
    Assignment and Bill of Sale between Pro Hart and the Registrant dated May 28, 2002.31.1
    
    Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule
13(a)-15(e) or Rule 15(d)-15(e).31.2
    
    Certification of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.
Section 1350.32
    
    Certification of Chief Executive Officer and Chief Financial Officer of Quarterly
Report pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
   *
    
    Confidential Treatment Requested.(1)
    
    Incorporated by reference from Registrants Form 10-KSB for fiscal year ended December 31, 2002.(2)
    
    Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.(3)
    
    Incorporated by reference from Registrants Form 8-K filed on November 12, 2002.(4)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31, 2004 30