UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




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




For
the quarterly period ended March 31, 2009


or




o
            
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from  _________ to _________




Commission
File Number 0-29185




SAVE
THE WORLD AIR, INC.


(Exact
name of registrant as specified in its charter)




Nevada
            52-2088326(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)




235
Tennant Avenue


Morgan
Hill, California 95037


(Address,
including zip code, of principal executive offices


(408) 778-0101


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Exchange Act:
None.




Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock,
$0.001 par value.




Check
whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes xNo o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
 See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filero
            Accelerated
      filer  oNon-accelerated
      filer  o  (Do
      not check if a smaller reporting company)
            Smaller
      reporting company  x





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes oNo x




The
number of shares of the Registrant’s Common Stock outstanding as
of  May 11, 2009 was 65,235,546 shares.




1


SAVE
THE WORLD AIR, INC.


FORM
10-Q


INDEX




PagePART
      I
            
            3ITEM
      1. Financial Statements
            
            3Condensed
      consolidated balance sheets
            
            3Condensed
      consolidated statements of operations (unaudited)
            
            4Condensed
      consolidated statement of changes in stockholders’ deficiency
      (unaudited)
            
            5-13Condensed
      consolidated statements of cash flows (unaudited)
            
            14-15Notes
      to condensed consolidated financial statements (unaudited)
            
            16ITEM
      2. Management’s Discussion and Analysis or Plan of
    Operations
            
            27ITEM
      3. Quantitative and Qualitative Disclosure About Market
    Risk
            
            35ITEM
      4. Controls and Procedures
            
            35PART
      II
            
            36ITEM
      1. Legal Proceedings
            
            36ITEM
      1A. Risk Factors
            
            37ITEM
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            37ITEM
      3. Defaults Upon Senior Securities
            
            38ITEM
      4. Submission of Matters to a Vote of Security Holders
            
            38ITEM
      5. Other Information
            
            39ITEM
      6. Exhibits
            
            39SIGNATURES
            
            40EXHIBIT
      INDEX
            
            41EXHIBIT
      31.1EXHIBIT
      31.2EXHIBIT
      32







2


PART
I


Item 1.
Financial Statements


SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





CONDENSED
CONSOLIDATED BALANCE SHEETS







March
      31, 2009
                      (unaudited)
                    
                    
                    December
      31,
                      2008ASSETSCurrent
      assetsCash
                    $
                    45,536
                    
                    
                    $
                    59,346Other
      current assets
                    
                    21,434
                    
                    
                    
                    33,275Total
      current assets
                    
                    66,970
                    
                    
                    
                    92,621Property and Equipment,
      net of accumulated depreciation and amortization
                      of
      $119,620 and $111,193, respectively
                    
                    123,542
                    
                    
                    
                    131,969Other
      assets
                    
                    11,250
                    
                    
                    
                    11,250Total
      assets
                    $
                    201,762
                    
                    
                    $
                    235,840LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      liabilitiesAccounts
      payable-related parties
                    $
                    125,292
                    
                    
                    $
                    93,003Accounts
      payable-License Agreements
                    
                    828,750
                    
                    
                    
                    716,500Accounts
      payable-other
                    
                    467,957
                    
                    
                    
                    384,467Accrued
      salaries-related parties
                    
                    499,015
                    
                    
                    
                    441,667Accrued
      expenses
                    
                    479,938
                    
                    
                    
                    362,128Accrued
      professional fees
                    
                    378,868
                    
                    
                    
                    390,535Loan
      payable-related party
                    
                    79,351
                    
                    
                    
                    78,280Convertible
      debentures, net-related parties
                    
                    22,732
                    
                    
                    
                    12,466Convertible
      debentures, net-others
                    
                    533,431
                    
                    
                    
                    290,659Total
      current liabilities
                    
                    3,415,334
                    
                    
                    
                    2,769,705Commitments
      and contingenciesStockholders’
      deficiencyCommon
      stock, $.001 par value: 200,000,000 shares authorized, 64,498,834 and
      62,940,891
                      shares
      issued and outstanding at March 31, 2009 and December 31, 2008,
      respectively
                    
                    64,499
                    
                    
                    
                    62,941Common
      stock to be issued
                    
                    -
                    
                    
                    
                    16,500Additional
      paid-in capital
                    
                    41,017,211
                    
                    
                    
                    40,129,758Deficit
      accumulated during the development stage
                    
                    (44,295,282
                    )
                    
                    
                    (42,743,064
                    )Total
      stockholders’ deficiency
                    
                    (3,213,572
                    )
                    
                    
                    (2,533,865
                    )Total
      liabilities and stockholders’ deficiency
                    $
                    201,762
                    
                    
                    $
                    235,840







See notes
to condensed consolidated financial statements.


3




SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)






Three monthsended
            
            
            February
      18, 1998March
      31,
            
            
            March
      31,
            
            
            (inception)
      to2009
            
            
            2008
            
            
            March
      31, 2009Net
      sales
            
            $
            —
            
            
            $
            —
            
            
            $
            69,000Cost
      of goods sold
            
            
            —
            
            
            
            —
            
            
            
            24,120Gross
      profit
            
            
            —
            
            
            
            —
            
            
            
            44,880Operating
      expenses
            
            
            840,818
            
            
            
            760,142
            
            
            
            30,767,758Research
      and development expenses
            
            
            246,840
            
            
            
            259,670
            
            
            
            5,705,433Non-cash
      patent settlement cost
            
            
            —
            
            
            
            —
            
            
            
            1,610,066Loss
      before other income(expense)
            
            
            (1,087,658
            )
            
            
            (1,019,812
            )
            
            
            (38,038,377
            )Other
      income(expense)Other
      income (loss)
            
            
            —
            
            
            
            200
            
            
            
            (1,140
            )Interest
      income
            
            
            —
            
            
            
            354
            
            
            
            16,342Interest
      expense
            
            
            (464,560
            )
            
            
            (327,003
            )
            
            
            (6,418,866
            )Loss
      on sale of equipment
            
            
            —
            
            
            
            (9,683
            )
            
            
            (14,426
            )Settlement
      of debt due Morale/Matthews
            
            
            —
            
            
            
            (927,903
            )
            
            
            (927,903
            )Settlement
      of litigation and debt
            
            
            —
            
            
            
            —
            
            
            
            1,089,088Net
      loss
            
            $
            (1,552,218
            )
            
            $
            (2,283,847
            )
            
            $
            (44,295,282
            )Net
      loss per common share, basic and diluted
            
            $
            (0.02
            )
            
            $
            (0.05
            )Weighted
      average common shares outstanding, basic and diluted
            
            
            63,964,895
            
            
            
            49,551,981











See notes
to condensed consolidated financial statements


4




SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            
            Common
      Stock
            
            
            Common
              Stock
              to
      be
            
            
            Additional
              Paid-in
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            Total
              Stockholders’Share
            
            
            Shares
            
            
            Amount
            
            
            Issued
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            DeficiencyBalance, February 18,
      1998  (date of inception)
            
            
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            $
            —Issuance
      of common stock on April 18, 1998
            
            
            .0015 -
      .01
            
            
            
            10,030,000
            
            
            
            10,030
            
            
            
            —
            
            
            
            14,270
            
            
            
            —
            
            
            
            —
            
            
            24,300Net
      loss
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (21,307
            )
            
            (21,307
            )Balance,
      December 31, 1998
            
            
            
            
            
            
            10,030,000
            
            
            $
            10,030
            
            
            $
            —
            
            
            
            14,270
            
            
            $
            —
            
            
            $
            (21,307
            )
            $
            2,993Issuance
      of common stock on May 18, 1999
            
            
            1.00 -
      6.40
            
            
            
            198,003
            
            
            
            198
            
            
            
            —
            
            
            
            516,738
            
            
            
            —
            
            
            
            —
            
            
            516,936Issuance
      of common stock for ZEFS on September 14, 1999
            
            
            .001
            
            
            
            5,000,000
            
            
            
            5,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            5,000Stock
      issued for professional services on May 18, 1999
            
            
            0.88
            
            
            
            69,122
            
            
            
            69
            
            
            
            —
            
            
            
            49,444
            
            
            
            —
            
            
            
            —
            
            
            49,513Net
      loss
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,075,264
            )
            
            (1,075,264
            )Balance,
      December 31, 1999
            
            
            
            
            
            
            15,297,125
            
            
            $
            15,297
            
            
            $
            —
            
            
            $
            580,452
            
            
            $
            —
            
            
            $
            (1,096,571
            )
            $
            (500,822
            )






(continued)


5





SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            Common
      Stock
            
            Common
              Stock
              to
      be
            
            Additional
              Paid-in
            
            Deferred
            
            Deficit
              Accumulated
              During
      the
              Development
            
            Total
              Stockholders’Share
            
            Shares
            
            
            Amount
            
            Issued
            
            Capital
            
            Compensation
            
            Stage
            
            DeficiencyBalance,
      December 31, 1999
            
            
            
            15,297,125
            
            
            $
            15,297
            
            $
            —
            
            $
            580,452
            
            $
            —
            
            $
            (1,096,571
            )
            $
            (500,822
            )Issuance
      of common stock for services
            $0.38 -
      $5.31
            
            
            305,810
            
            
            
            306
            
            
            —
            
            
            588,704
            
            
            —
            
            
            —
            
            
            589,010Stock
      issued for employee compensation on February 8, 2000
            $1.03-$5.31
            
            
            42,000
            
            
            
            42
            
            
            —
            
            
            137,378
            
            
            —
            
            
            —
            
            
            137,420Stock
      issued for directors fees
            $3.38-$4.44
            
            
            56,000
            
            
            
            56
            
            
            —
            
            
            195,584
            
            
            —
            
            
            —
            
            
            195,640Common
      stock cancelled
            
            
            
            (55,000
            )
            
            
            (55
            )
            
            
            
            
            (64,245
            )
            
            
            
            
            
            
            
            (64,300
            )Net
      loss
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,270,762
            )
            
            (1,270,762
            )Balance,
      December 31, 2000
            
            
            
            15,645,935
            
            
            
            15,646
            
            
            —
            
            
            1,437,873
            
            
            —
            
            
            (2,367,333
            )
            
            (913,814
            )Issuance
      of common stock for services
            $0.25-$1.65
            
            
            1,339,912
            
            
            
            1,340
            
            
            —
            
            
            1,031,231
            
            
            —
            
            
            —
            
            
            1,032,571Stock
      issued for directors fees
            $0.60-$0.95
            
            
            1,100,000
            
            
            
            1,100
            
            
            
            
            
            1,008,900
            
            
            
            
            
            
            
            
            1,010,000Intrinsic
      value of options issued to employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,600,000
            
            
            (2,600,000)
            
            
            
            
            
            —Fair
      value of options issued to non-employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            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
            )






(continued)


6





SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY (continued)


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            
            Common
      Stock
            
            Common
              Stock
              to
      be
            
            
            Additional
              Paid-in
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Total
              Stockholders’Share
            
            
            Shares
            
            
            Amount
            
            Issued
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            DeficiencyBalance,
      December 31, 2001
            
            
            
            
            
            18,085,847
            
            
            $
            18,086
            
            $
            —
            
            
            $
            6,220,322
            
            
            $
            (2,408,333
            )
            
            $
            (5,102,346
            )
            
            $
            (1,272,271
            )Stock
      issued for directors fees
            
            
            0.40
            
            
            
            2,150,000
            
            
            
            2,150
            
            
            —
            
            
            
            857,850
            
            
            
            —
            
            
            
            —
            
            
            
            860,000Common
      stock sold (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
            
            
            0.15-0.25
            
            
            
            2,305,000
            
            
            
            2,305
            
            
            (433,750
            )
            
            
            431,445
            
            
            
            —
            
            
            
            —
            
            
            
            —Sale
      of common stock
            
            $
            0.25
            
            
            
            9,504,000
            
            
            
            9,504
            
            
            
            
            
            
            2,366,439
            
            
            
            —
            
            
            
            —
            
            
            
            2,375,943Issuance
      of common stock for services
            
            $
            0.55
            
            
            
            83,414
            
            
            
            83
            
            
            —
            
            
            
            45,794
            
            
            
            —
            
            
            
            —
            
            
            
            45,877Common
      stock issued for convertible debt
            
            $
            0.25
            
            
            
            2,000,000
            
            
            
            2,000
            
            
            
            
            
            
            498,000
            
            
            
            —
            
            
            
            —
            
            
            
            500,000Finders’
      fees related to stock issuances
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            43,875
            
            
            
            (312,582
            )
            
            
            —
            
            
            
            —
            
            
            
            (268,707
            )Common
      stock
              sold
      (25,000
              shares)
            
            
            0.25
            
            
            
            —
            
            
            
            —
            
            
            6,250
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            6,250Amortization
      of deferred comp
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            
            —
            
            
            
            863,727
            
            
            
            —
            
            
            
            863,727Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (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
            )






(continued)


7





SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY (continued)


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            
            Common
      Stock
            
            Common
              Stock
              to
      be
            
            Additional
              Paid-in
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Total
              Stockholders’Share
            
            
            Shares
            
            
            Amount
            
            Issued
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            DeficiencyBalance,
      December 31, 2003
            
            
            
            
            
            34,128,261
            
            
            $
            34,128
            
            $
            6,250
            
            $
            10,162,177
            
            
            $
            (708,333
            )
            
            $
            (10,327,608
            )
            
            $
            (833,386
            )Common
      stock issuedpreviously
      paid for
            
            $
            .25
            
            
            
            25,000
            
            
            
            25
            
            
            (6,250)
            
            
            6,225
            
            
            
            
            
            
            
            
            
            
            
            —Sale
      of common stock
            
            $
            1.00
            
            
            
            1,272,500
            
            
            
            1,273
            
            
            119,000
            
            
            1,271,227
            
            
            
            —
            
            
            
            —
            
            
            
            1,391,500Stock
      issued for services
            
            $
            .15-$1.70
            
            
            
            1,268,560
            1,
            
            
            1,268
            
            
            
            
            
            1,388,663
            
            
            
            
            
            
            
            
            
            
            
            1,389,931Stock
      issued for directors fees
            
            $
            1.50
            
            
            
            50,000
            
            
            
            50
            
            
            —
            
            
            74,950
            
            
            
            —
            
            
            
            —
            
            
            
            75,000Common
      stock issued for convertible debt
            
            $
            1.53
            
            
            
            60,000
            
            
            
            60
            
            
            
            
            
            91,740
            
            
            
            —
            
            
            
            —
            
            
            
            91,800Common
      stock issued upon exercise of warrants and options
            
            $
            .20
      -$.40
            
            
            
            960,500
            
            
            
            960
            
            
            —
            
            
            193,240
            
            
            
            —
            
            
            
            —
            
            
            
            194,200Common
      stock issued for patent settlement
            
            $
            1.24
            
            
            
            20,000
            
            
            
            20
            
            
            
            
            
            24,780
            
            
            
            
            
            
            
            
            
            
            
            24,800Fair
      value of warrants issued
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,614,138
            
            
            
            
            
            
            
            
            
            
            
            1,614,138Fair
      value of options issued to employees
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            248,891
            
            
            
            (248,891
            )
            
            
            —
            
            
            
            —Fair
      value of options issued to non-employees
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            55,381
            
            
            
            (55,381
            )
            
            
            —
            
            
            
            —Amortization
      of deferred compensation
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —
            
            
            
            936,537
            
            
            
            —
            
            
            
            936,537Finders’
      fees related to stock issuances
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (88,384
            )Net
      loss
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —
            
            
            
            —
            
            
            
            (6,803,280
            )
            
            
            (6,803,280
            )Balance,
      December 31, 2004
            
            
            
            
            
            
            37,784,821
            
            
            $
            37,784
            
            $
            119,000
            
            $
            15,043,028
            
            
            $
            (76,068
            )
            
            $
            (17,130,888
            )
            
            $
            (2,007,144
            )








(continued)


8




SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY (continued)


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            Common
      Stock
            
            Common
              Stock
              to
      be
            
            Additional
              Paid-in
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Total
              Stockholders’Share
            
            Shares
            
            
            Amount
            
            Issued
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            DeficiencyBalance,
      December 31, 2004
            
            
            
            37,784,821
            
            
            $
            37,784
            
            $
            119,000
            
            $
            15,043,028
            
            
            $
            (76,068
            )
            
            $
            (17,130,888
            )
            
            $
            (2,007,144
            )Common
      stock issued previously paid for
            $1.00
            
            
            119,000
            
            
            
            119
            
            
            (119,000
            )
            
            118,881
            
            
            
            —
            
            
            
            —
            
            
            
            —Sale
      of common stock
            $1.00
            
            
            1,530,500
            
            
            
            1,530
            
            
            
            
            
            1,528,970
            
            
            
            —
            
            
            
            —
            
            
            
            1,530,500Common
      stock issued upon exercise of warrants
            $.40
      - $1.00
            
            
            500
            
            
            
            1
            
            
            —
            
            
            199
            
            
            
            —
            
            
            
            —
            
            
            
            200Common
      stock to be issued for settlement of payables
            
            
            
            
            
            
            
            
            
            
            612,521
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            612,521Fair
      value of options issued for settlement costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            31,500
            
            
            
            
            
            
            
            
            
            
            
            31,500Fair
      value of warrants issued
            
            
            
            
            
            
            
            
            
            
            
            
            
            18,462
            
            
            
            
            
            
            
            
            
            
            
            18,462Fair
      value of warrants issued and intrinsic value of beneficial conversion
      associated with convertible notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,453,181
            
            
            
            
            
            
            
            
            
            
            
            1,453,181Fair
      value of options issued to employees
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            243,750
            
            
            
            (243,750
            )
            
            
            —
            
            
            
            —Amortization
      of deferred compensation
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —
            
            
            
            177,631
            
            
            
            —
            
            
            
            177,631Finders’
      fees related to stock issuances
            
            
            
            
            
            
            
            
            
            
            
            
            
            (109,840
            )
            
            
            
            
            
            
            
            
            
            
            (109,840
            )Common
      stock cancelled
            
            
            
            (8,047,403
            )
            
            
            (8,047
            )
            
            
            
            
            8,047
            
            
            
            
            
            
            
            
            
            
            
            —Net
      loss
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —
            
            
            
            —
            
            
            
            (3,115,186
            )
            
            
            (3,115,186
            )Balance,
      December 31, 2005
            
            
            
            31,387,418
            
            
            $
            31,387
            
            $
            612,521
            
            $
            18,336,178
            
            
            $
            (142,187
            )
            
            $
            (20,246,074
            )
            
            $
            (1,408,175
            )






(continued)


9





SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY (continued)


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            Common
      Stock
            
            Common
              Stock
              to
      be
            
            Additional
              Paid-in
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Total
              Stockholders’Share
            
            Shares
            
            
            Amount
            
            Issued
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            DeficiencyBalance,
      December 31, 2005
            
            
            
            31,387,418
            
            
            $
            31,387
            
            $
            612,521
            
            $
            18,336,178
            
            
            $
            (142,187)
            
            
            $
            (20,246,074
            )
            
            $
            (1,408,175
            )Common
      stock issued previously paid for
            
            
            
            846,549
            
            
            
            847
            
            
            (612,521
            )
            
            611,674
            
            
            
            —
            
            
            
            —
            
            
            
            —Sale
      of common stock
            $1.00
      - $1.89
            
            
            1,360,537
            
            
            
            1,360
            
            
            60,000
            
            
            2,401,048
            
            
            
            —
            
            
            
            —
            
            
            
            2,462,408Common
      stock issued upon exercise of warrants
            $.50
      - $1.50
            
            
            2,583,533
            
            
            
            2,584
            
            
            —
            
            
            1,794,944
            
            
            
            —
            
            
            
            —
            
            
            
            1,797,528Common
      stock to be issued for convertible debt
            $.70
            
            
            3,416,186
            
            
            
            3,417
            
            
            
            
            
            2,356,449
            
            
            
            
            
            
            
            
            
            
            
            2,359,866Common
      stock to be issued for  out of line of credit
            $.55
      - $1.22
            
            
            487,483
            
            
            
            487
            
            
            
            
            
            379,610
            
            
            
            
            
            
            
            
            
            
            
            380,097Fair
      value of options issued to employees
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            2,253,263
            
            
            
            
            
            
            
            —
            
            
            
            2,253,263Fair
      value of options issued for settlement costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            31,500
            
            
            
            
            
            
            
            
            
            
            
            31,500Fair
      value of warrants issued for services
            
            
            
            
            
            
            
            
            
            
            
            
            
            463,627
            
            
            
            
            
            
            
            
            
            
            
            463,627Fair
      value of warrants issued and intrinsic value of beneficial conversion
      associated with convertible notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,259.696
            
            
            
            
            
            
            
            
            
            
            
            1,259,696Write
      off of  deferred compensation
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            (142,187
            )
            
            
            142,187
            
            
            
            —
            
            
            
            —Finders’
      fees related to stock issuances
            
            
            
            
            
            
            
            
            
            
            
            
            
            (284,579
            )
            
            
            
            
            
            
            
            
            
            
            (284,579
            )Fees
      paid on equity line of credit
            
            
            
            
            
            
            
            
            
            
            
            
            
            (30,402
            )
            
            
            
            
            
            
            
            
            
            
            (30,402
            )Net
      loss
            
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —
            
            
            
            —
            
            
            
            (10,181,523
            )
            
            
            (10,181,523
            )Balance,
      December 31, 2006
            
            
            
            40,081,757
            
            
            $
            40,082
            
            $
            60,000
            
            $
            29,430,821
            
            
            $
            —
            
            
            $
            (30,427,597
            )
            
            $
            (896,694
            )






(continued)


10





SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY (continued)


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            Common
      Stock
            
            
            Common
              Stock
              to
      be
            
            
            Additional
              Paid-in
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Total
              Stockholders’Share
            
            Shares
            
            
            Amount
            
            
            Issued
            
            
            Capital
            
            
            Stage
            
            
            DeficiencyBalance,
      December 31, 2006
            
            
            
            40,081,757
            
            
            $
            40,082
            
            
            $
            60,000
            
            
            $
            29,430,821
            
            
            $
            (30,427,597
            )
            
            $
            (896,694Common
      stock issued previously paid for
            
            
            
            2,597,524
            
            
            
            2,598
            
            
            
            (60,000
            )
            
            
            57,402
            
            
            
            —
            
            
            
            —Common
      stock to be issued for convertible debt
            $.17
      - $.53
            
            
            1,910,711
            
            
            
            1,911
            
            
            
            
            
            
            
            524,569
            
            
            
            
            
            
            
            526,480Common
      stock  issued for  put of line of
    credit
            $.27
      - $.73
            
            
            1,880,421
            
            
            
            1,880
            
            
            
            
            
            
            
            990,175
            
            
            
            
            
            
            
            992,055Common
      stock granted for services
            
            
            
            
            
            
            
            
            
            
            
            4,000
            
            
            
            
            
            
            
            
            
            
            
            4,000Fair
      value of options issued to employees
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            67,592
            
            
            
            —
            
            
            
            67,592Fair
      value of warrants issued for services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35,340
            
            
            
            
            
            
            
            35,340Fair
      value of warrants issued and intrinsic value of beneficial conversion
      associated with convertible notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,253,548
            
            
            
            
            
            
            
            1,253,548Fees
      paid on equity line of credit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (79,364
            )
            
            
            
            
            
            
            (79,364
            )Net
      loss
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (6,262,743
            )
            
            
            (6,262,743
            )Balance,
      December 31, 2007
            
            
            
            46,470,413
            
            
            $
            46,471
            
            
            $
            4,000
            
            
            $
            32,280,083
            
            
            $
            (36,690,340
            )
            
            $
            (4,359,786
            )








(continued)


11





SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY (continued)


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            Common
      Stock
            
            
            Common
              Stock
              to
      be
            
            
            Additional
              Paid-in
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Total
              Stockholders’Share
            
            Shares
            
            
            Amount
            
            
            Issued
            
            
            Capital
            
            
            Stage
            
            
            DeficiencyBalance,
      December 31, 2007
            
            
            
            46,470,413
            
            
            $
            46,471
            
            
            $
            4,000
            
            
            $
            32,280,083
            
            
            $
            (36,690,340
            )
            
            $
            (4,359,786
            )Common
      stock issued for convertible debt
            $.17
      - $.53
            
            
            5,575,082
            
            
            
            5,574
            
            
            
            16,500
            
            
            
            1,936,171
            
            
            
            —
            
            
            
            1,958,245Common
      stock issued for Morale/ Matthews settlement
            $.38
            
            
            7,421,896
            
            
            
            7,422
            
            
            
            —
            
            
            
            2,776,289
            
            
            
            —
            
            
            
            2,783,711Common
      stock issued for services
            $.17
      - $.49
            
            
            2,398,850
            
            
            
            2,399
            
            
            
            —
            
            
            
            516,230
            
            
            
            —
            
            
            
            518,629Common
      stock issued upon exercise of warrants
            $.50
            
            
            1,064,650
            
            
            
            1,065
            
            
            
            —
            
            
            
            531,260
            
            
            
            —
            
            
            
            532,325Fair
      value of options issued as compensations
            —
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            645,745
            
            
            
            —
            
            
            
            645,745Fair
      value of warrants issued and intrinsic value of beneficial conversion
      associated with convertible notes
            —
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,323,077
            
            
            
            —
            
            
            
            1,323,077Fair
      value of warrants issued to PIPE holders
            —
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            116,913
            
            
            
            —
            
            
            
            116,913Common
      stock issued for services
            0.17
            
            
            10,000
            
            
            
            10
            
            
            
            (4,000
            )
            
            
            3,990
            
            
            
            —
            
            
            
            —Net
      loss
            —
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (6,052,724
            )
            
            
            (6,052,724Balance,
      December 31, 2008
            
            
            
            62,940,891
            
            
            $
            62,941
            
            
            $
            16,500
            
            
            $
            40,129,758
            
            
            $
            (42,743,064
            )
            
            $
            (2,533,865
            )






(continued)


12





SAVE
THE WORLD AIR, INC.


(A
DEVELOPMENT STAGE ENTERPRISE)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY (continued)


FROM
FEBRUARY 18, 1998 (INCEPTION) TO MARCH 31, 2009




Price
      per
            
            Common
      Stock
            
            
            Common
      Stock
              to
      be
            
            
            Additional
              Paid-in
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Total
              Stockholders’Share
            
            Shares
            
            
            Amount
            
            
            Issued
            
            
            Capital
            
            
            Stage
            
            
            DeficiencyBalance,
      December 31, 2008
            
            
            
            62,940,891
            
            
            $
            62,941
            
            
            $
            16,500
            
            
            $
            40,129,758
            
            
            $
            (42,743,064
            )
            
            $
            (2,533,865
            )Common
      stock issued for convertible debt
            0.15-0.50
            
            
            1,065,588
            
            
            
            1,066
            
            
            
            (16,500
            )
            
            
            225,763
            
            
            
            —
            
            
            
            210,329Common
      stock issued for services
            0.17-0.49
            
            
            442,355
            
            
            
            442
            
            
            
            —
            
            
            
            151,171
            
            
            
            —
            
            
            
            151,613Common
      stock issued for settlement of accounts payable
            0.27
            
            
            50,000
            
            
            
            50
            
            
            
            
            
            
            
            13,450
            
            
            
            
            
            
            
            13,500Fair
      value of options issued as compensation
            —
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            22,249
            
            
            
            —
            
            
            
            22,249Fair
      value of warrants issued and intrinsic value of beneficial conversion
      associated with convertible notes
            —
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            474,820
            
            
            
            —
            
            
            
            474,820Net
      loss
            —
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,552,218
            )
            
            
            (1,552,218)Balance,
      March 31, 2009
            
            
            
            64,498,834
            
            
            $
            64,499
            
            
            $
            —
            
            
            $
            41,017,211
            
            
            $
            (44,295,282
            )
            
            $
            (3,213,572
            )











See notes
to consolidated financial statements.





13




SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)




Three months
      ended
            
            
            February
      18, 1998March
      31,
            
            
            March
      31,
            
            
            (inception)2009
            
            
            2008
            
            
            To
      March 31, 2009Cash
      flows from operating activitiesNet
      loss
            
            $
            (1,552,218
            )
            
            $
            (2,283,847
            )
            
            $
            (44,295,282
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Write
      off of intangible assets
            
            
            —
            
            
            
            —
            
            
            
            505,000Settlement
      of litigation and debt
            
            
            —
            
            
            
            —
            
            
            
            (1,017,208
            )Settlement
      of debt due Morale/Matthews
            
            
            —
            
            
            
            927,903
            
            
            
            927,903Stock
      based compensation expense
            
            
            22,249
            
            
            
            21,818
            
            
            
            3,637,170Issuance
      of common stock for services
            
            
            151,613
            
            
            
            501,037
            
            
            
            5,355,844Issuance
      of options for legal settlement
            
            
            —
            
            
            
            —
            
            
            
            31,500Issuance
      of warrants for legal settlement
            
            
            —
            
            
            
            —
            
            
            
            4,957Issuance
      of warrants for financing fees
            
            
            —
            
            
            
            116,913
            
            
            
            152,253Non-cash
      increase in convertible notes recorded as expense
            
            
            —
            
            
            
            89,470
            
            
            
            163,962Patent
      acquisition cost
            
            
            —
            
            
            
            —
            
            
            
            1,610,066Amortization
      of issuance costs and original issue debt discounts including
              beneficial
      conversion feature-part of interest expense
            
            
            463,367
            
            
            
            471,643
            
            
            
            6,081,676Amortization
      of deferred compensation
            
            
            —
            
            
            
            —
            
            
            
            3,060,744Loss
      on disposition of assets
            
            
            —
            
            
            
            9,683
            
            
            
            14,426Depreciation
      and amortization of leasehold improvements
            
            
            8,427
            
            
            
            10,299
            
            
            
            401,556Bad
      debt
            
            
            -
            
            
            
            1,380
            
            
            
            1,380Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            
            
            
            
            —
            
            
            
            (1,380
            )Inventory
            
            
            —
            
            
            
            —
            
            
            
            —Prepaid
      expenses and other
            
            
            11,841
            
            
            
            (2,148
            )
            
            
            (21,434
            )Other
      assets
            
            
            —
            
            
            
            —
            
            
            
            (11,250
            )Accounts
      payable and accrued expenses
            
            
            405,020
            
            
            
            (411,879
            )
            
            
            4,092,631Net
      cash used in operating activities
            
            
            (489,701
            )
            
            
            (547,728
            )
            
            
            (19,305,486
            )Cash
      flows from investing activitiesPurchase
      of property and equipment
            
            
            —
            
            
            
            —
            
            
            
            (553,452
            )Proceeds
      from sale of equipment
            
            
            —
            
            
            
            17,478
            
            
            
            17,478Net
      cash provided by (used in) investing activities
            
            
            —
            
            
            
            17,478
            
            
            
            (535,974
            )Cash
      flows from financing activitiesNet
      proceeds under equity line of credit
            
            
            —
            
            
            
            —
            
            
            
            1,262,386Increase
      (decrease) in payables to related parties and shareholder
            
            
            1,071
            
            
            
            (19,113
            )
            
            
            611,135Advances
      from founding executive officer
            
            
            —
            
            
            
            —
            
            
            
            517,208Net
      proceeds from issuance of convertible notes and warrants
            
            
            474,820
            
            
            
            474,000
            
            
            
            6,935,243Repayment
      of convertible notes
            
            
            —
            
            
            
            —
            
            
            
            (226,250
            )Proceeds
      from exercise of warrants
            
            
            —
            
            
            
            170,830
            
            
            
            10,787,274Net
      cash provided by financing activities
            
            
            475,891
            
            
            
            625,717
            
            
            
            19,886,996Net
      increase (decrease) in cash
            
            
            (13,810
            )
            
            
            95,467
            
            
            
            45,536Cash, beginning of
      period
            
            
            59,346
            
            
            
            47,660
            
            
            
            —Cash, end of
      period
            
            $
            45,536
            
            
            $
            143,127
            
            
            $
            45,536




See notes
to condensed consolidated financial statements.


14





SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)




Three
      months ended
                              
                              
                              February
      18, 1998March
      31,
                              
                              
                              March
      31,
                              
                              
                              (inception)2009
                              
                              
                              2008
                              
                              
                              To
      March 31, 2009Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
                              
                              $
                              121
                              
                              
                              $
                              499
                              
                              
                              $
                              136,520Income
      taxes
                              
                              $
                              1,600
                              
                              
                              $
                              —
                              
                              
                              $
                              5,882Non-cash
      investing and financing activitiesAcquisition
      of intangible asset through advance from related party and issuance of
      common stock
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              505,000Deferred
      compensation for stock options issued for services
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              3,202,931Purchase
      of property and equipment financed by advance from related
      party
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              3,550Conversion
      of related party debt to equity
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              515,000Issuance
      of common stock in settlement of payable
                              
                              
                              13,500
                              
                              
                              
                              —
                              
                              
                              
                              113,981Cancellation
      of stock
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              8,047Conversion
      of accounts payable and accrued expenses to common stock
      issued
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              612,521Conversion
      of related party debt to convertible debentures
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              45,000Conversion
      of convertible debentures to common stock
                              
                              
                              210,329
                              
                              
                              
                              1,951,212
                              
                              
                              
                              5,142,008Issuance
      of shares for settlement of loans and other payable to
      Morale/Matthews
                              
                              
                              —
                              
                              
                              
                              2,783,711
                              
                              
                              
                              2,783,711Write
      off of deferred compensation
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              142,187Non-cash
      equity-warrant valuation and intrinsic value of beneficial conversion
      associated with convertible notes
                              
                              
                              474,820
                              
                              
                              
                              331,535
                              
                              
                              
                              5,881,235










See notes
to condensed consolidated financial statements.


15


SAVE
THE WORLD AIR, INC. AND SUBSIDIARY


(A
DEVELOPMENT STAGE ENTERPRISE)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2009 (UNAUDITED)







1.Organization and basis of
presentation





Basis
of presentation





The
accompanying unaudited condensed consolidated financial statements of Save the
World Air, Inc. (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and pursuant to the requirements for reporting on Form
10-Q and Regulation S-K for scaled disclosures for smaller reporting companies.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in United States of America for
complete financial statements. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments), which are, in
the opinion of management, necessary for the fair presentation of the
consolidated financial position and the consolidated results of operations.
Results shown for interim periods are not necessarily indicative of the results
to be obtained for a full fiscal year.





The
condensed consolidated balance sheet information as of December 31, 2008 was
derived from the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K filed with the SEC. These interim financial
statements should be read in conjunction with that report.




Going
Concern




The
accompanying condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. As
reflected in the accompanying condensed consolidated financial statements, the
Company had a net loss of $1,552,218 and a negative cash flow from operations of
$489,701 for the three months ended March 31, 2009, and had a working capital
deficiency of $3,348,364 and a stockholders’ deficiency of $3,213,572 at March
31, 2009.  In addition, the Company is in default of its obligations
under its license agreements with Temple University (see Note
8).  These factors raise substantial doubt about the Company’s ability
to continue as a going concern. The ability of the Company to continue as a
going concern is dependent upon the Company’s ability to raise additional funds
and implement its business plan. The condensed consolidated financial statements
do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.




Description
of business





Save the
World Air, Inc. (“STWA”) designs, licenses and develops products to increase
engine performance, reduce harmful emissions and increase fuel
efficiency.  The Company is a green technology company that leverages
a suite of patented, patent-pending and licensed intellectual properties related
to the treatment of fuels. Technologies patented by or licensed to us utilize
either magnetic or uniform electrical fields to alter physical characteristics
of fuels and are designed to create cleaner combustion. Cleaner combustion has
been shown to improve performance, enhance fuel economy and/or reduce harmful
emissions in laboratory testing.




The
Company has three product lines; MAG ChargRTM and ECO ChargRTM, ELEKTRATM and AOT
(Applied Oil Technology).  The Company believes development of MAG
ChargR is complete and it will be ready to be manufactured by the end of second
quarter 2009.  We believe the ELEKTRA is nearing the end of the
product development cycle which we believe will culminate in an upcoming SAE
(Society of Automotive Engineers) test to prove and certify the level of fuel
savings.  AOT is in the research and development phase.





The
Company was incorporated on February 18, 1998, as a Nevada corporation,
under the name Mandalay Capital Corporation. The Company changed its name to
Save the World Air, Inc. on February 11, 1999, following the acquisition of
marketing and manufacturing rights of the ZEFS technologies.





2.Summary of significant
accounting policies





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.




16




The
Company’s focus is on product development and marketing of proprietary devices
that are designed to reduce harmful emissions, and improve fuel efficiency and
engine performance on equipment and vehicles driven by internal combustion
engines and has not yet generated meaningful revenues.  The
technologies are called “ZEFS”, “MK IV”, “ELEKTRA” and “CAT-MATE”. The Company
is currently marketing its ECO and MAG ChargR products incorporating ZEFS and MK
IV technologies, worldwide; and the Company is in the early stages of developing
ELEKTRA products.  Expenses have been funded through the sale of
company stock, convertible notes and the exercise of warrants.  The
Company has taken actions to secure the intellectual property rights to the
ZEFS, MK IV and CAT-MATE devices and is the worldwide exclusive licensee for
patent pending technologies associated with the development of
ELEKTRA.





Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Certain significant estimates were made in connection with preparing the
Company’s financial statements. Actual results could differ from those
estimates.





Loss
per share





Basic
loss per share is computed by dividing net loss available to common stockholders
by the weighted average number of common shares outstanding during the period.
Diluted loss 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 loss of the Company. In computing diluted
loss per share, the treasury stock method assumes that outstanding options and
warrants are exercised and the proceeds are used to purchase common stock at the
average market price during the period. Options and warrants may have a dilutive
effect under the treasury stock method only when the average market price of the
common stock during the period exceeds the exercise price of the options and
warrants. For the three month periods ended March 31, 2009 and 2008, the
dilutive impact of outstanding stock options of 4,551,225 and 2,515,396
respectively, and outstanding warrants of 11,133,635 and 15,608,024 have been
excluded because their impact on the loss per share is
anti-dilutive.




Stock-based
compensation





The
Company periodically issues stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs. The Company adopted SFAS No. 123R, “Share Based Payment”, effective
February 1, 2006, and is using the modified prospective method in which
compensation cost is recognized beginning with the effective date (a) based on
the requirements of SFAS No. 123R for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS No. 123R for all awards
granted to employees prior to the effective date of SFAS No. 123R that remained
unvested on the effective date.





The
Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with 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" and EITF No. 00-18: "Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees" whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.




Fair
value of financial instruments




Fair
Value Measurements are determined by the Company's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 157, “Fair Vaule Measurements”
("SFAS 157") as of January 1, 2008, with the exception of the
application of the statement to non-recurring, non-financial assets and
liabilities as permitted. The adoption of SFAS 157 did not have a material
impact on the Company's fair value measurements. SFAS 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the
measurement date. SFAS 157 establishes a fair
value hierarchy, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:




Level 1—Quoted
prices in active markets for identical assets or liabilities.


Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly
or indirectly.


Level 3—Unobservable
inputs based on the Company's assumptions.




17


SFAS 157
requires the use of observable market data if such data is available without
undue cost and effort




Recent
accounting pronouncements




In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued.  SFAS
141R replaces SFAS 141 “Business Combinations”.  SFAS 141R requires
the acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to
the business combination to be expensed as incurred. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The effective date, as well as the adoption date
for the Company was January 1, 2009.  Although SFAS 141R may impact
our reporting in future financial periods, we have determined that the standard
did not have any impact on our historical consolidated financial statements at
the time of adoption.




In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
142.  This pronouncement requires enhanced disclosures concerning a
company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. FST 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008.  The
effective date, as well as the adoption date for the Company was January 1,
2009.  Although FSP 142-3 may impact our reporting in future financial
periods, we have determined that the standard did not have any impact on our
historical consolidated financial statements at the time of
adoption.




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.





3.Certain relationships and related
transactions





Loans
from related parties





In May
2007 and August 2007, a former officer and incumbent director of the Company
loaned $31,404 and $50,000 to the Company. These amounts are unsecured, bear
interest at 6% per annum and are due on demand.  At March 31, 2009 and
December 31, 2008, the balance of these loans including interest was $79,351 and
$78,280, respectively.




Lease
agreement with related party




During
2003, the Company entered into a sublease agreement with Scottish Glen Golf
Company, Inc. (SGGC) to lease office space in North Hollywood, California for
its principal executive offices.  Bruce McKinnon, the former Chief
Executive Officer and former Director of the Company, is a beneficial owner of
the lessor. The original lease term was from November 1, 2003 through
October 16, 2005, and was amended to October 15, 2007.  On
July 19, 2007, SGGC sued the Company for failure to pay past due
rent.  The Company vacated the premises on July 25,
2007.  On April 30, 2008 the Company and SGGC settled their pending
litigation and the Company agreed to pay SGGC $51,000 in full settlement of
SGGC’s claims.





Accounts
payable to related parties




As
of March 31, 2009, the Company had accounts payable to related parties in
the amount of $125,292, which was composed of $87,504 in unpaid Directors
Fees and $37,788 in unreimbursed expenses incurred by Officers and
Directors. As of December 31, 2008, the Company
had accounts payable to related parties in the amount of $93,003, which was
composed of $59,705 in unpaid Directors Fees, $33,298 in unreimbursed
expenses incurred by Officers and Directors.




Marketing
and promotional services agreement with related party




In July
2006, the Company entered into an agreement with SS Sales and Marketing Group
(“SS Sales”), to provide exclusive marketing and promotional services in the
western United States and western Canada  (the “Territory”) for the
Company’s products. The agreement has a term of five years unless sooner
terminated by either party on 30 days’ notice. In the event of termination,
SS Sales will be entitled to receive all commissions payable through the date of
termination.  SS Sales is owned by Nathan Shelton, who has served as
one of the directors of the Company since February 12, 2007.  There
were no payments made to SS Sales for the three month periods ending March 31,
2009 and 2008.





4.Loans and other payablesdue to
Morale/Matthews





Leodis
Matthews, through his law firm, Matthews & Partners, (“Matthews”) serves as
outside legal counsel to the Company.  Morale Orchards, LLC (“Morale”)
is owned by Jacqueline Alexander, the wife of Leodis
Matthews.




18




In 2006
and 2007, Morale purchased two convertible promissory notes totaling
$1,225,000.  The notes were unsecured, convertible into 1,595,588
shares of common stock, due one year from the date issued, and had an implied
interest rate of 22.5%.  Warrants to purchase 797,794 shares of common
stock were issued with the notes. As of January 31, 2008, the notes were in
default, and the total amount due for the notes was $1,362,212, including
penalties and interest.  In addition to the two notes, the Company
borrowed $20,000 from Morale on October 30, 2007. At January 31, 2008, the
Company was also indebted to Matthews $472,762 for past legal fee.





Effective
January 31, 2008, the Company, Morale, and Matthews agreed to a settlement of
the Company’s loans due Morale and fees due Matthews.   Morale
agreed to waive all accrued interest on the notes after January 31, 2008, and
Morale and Matthews agreed to accept 7,421,896 shares of common stock of the
Company as payment of the notes payable and fees.





On March
10, 2008, the Company issued 5,530,848 shares of the Company’s common stock
valued at $2,101,722 to Morale for the conversion of the notes (totaling
$1,362,212) and cancellation of $20,000 Note.   Also on March 10,
2008, the Company issued 1,891,048 shares of the Company’s common stock valued
at $718,598 to Matthews in exchange for settlement of the legal fees due
Matthews of $472,762.





The fair
value of the shares of common stock issued was determined to be $0.38 per share,
based on the closing price of the Company’s common stock on January 31, 2008,
for a total settlement of $2,820,320.  As a result of the issuance of
shares of common stock, the Company incurred additional non-cash costs of
$927,903 that have been reflected as costs to settle outstanding debt in the
accompanying condensed consolidated statement of operations for the three months
ended March 31, 2008.





5.Convertible
Debentures





Convertible
debentures consist of the following:




Maturity
      dates
            
            March
      31,
              2009
            
            
            December
      31,
              20082007
      Winter Offering
            February
      29, 2009
            
            $
            —
            
            
            $
            66,0002008
      Summer Offering
            August
      31, 2009
            
            
            341,000
            
            
            
            341,0002008
      Fall Offering
            October
      31, 2009
            
            
            127,820
            
            
            
            152,0202008
      Winter Offering
            December
      5, 2009
            
            
            227,700
            
            
            
            337,7002009
      Winter Offering – I
            April
      26, 2009
            
            
            240,000
            
            
            
            —2009
      Winter Offering – II
            March
      12, 2010
            
            
            247,302
            
            
            
            —Sub-total
            
            
            
            1,183,822
            
            
            
            896,720Less,
      remaining debt discount
            
            
            
            (627,659
            )
            
            
            (593,595
            )Total
            
            
            
            556,163
            
            
            
            303,125Less:
      Convertible debentures, net, related parties
            
            
            
            (22,732
            )
            
            
            (12,466
            )Convertible
      debentures, net, others
            
            
            $
            533,431
            
            
            $
            290,659





2008
Summer Offering





From July
17, 2008 to August 31, 2008,  the Company conducted an offering (the
“2008 Summer Offering”) of up to $600,000 aggregate face amount of its
convertible notes “the”2008 Summer Offering) with a small number of accredited
investors. Of this amount $484,000 aggregate face amount of the 2008 Summer
Notes were sold for an aggregate purchase price of $440,000 net
proceeds.  Therefore, while the stated interest rate on the 2008
Summer Notes is 0%, the implied interest rate on the 2008 Summer Notes is
10%.  The 2008 Summer Notes will mature on the first anniversary of the
date of issuance.  The 2008 Summer Notes are convertible, at the
option of the noteholders, into shares of common stock of the Company (the
“Conversion Shares”) at a conversion price equal to the average of the closing
bid price of the Company’s common stock for the five trading days preceding the
closing date of the 2008 Summer Offering (the “Conversion Price”).  Up
to 1,423,530 Conversion Shares are issuable at a Conversion Price of $0.34 per
share.




19




Each of
the investors in the 2008 Summer Offering received, for no additional
consideration, a warrant (the “ 2008 Summer Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the ( 2008 Summer Notes) are
convertible (the “2008 Summer Warrant Shares”). Each 2008 Summer Warrant is
exercisable on a cash basis only at a price of $0.50 per share, and is
exercisable for a period of two years from the date of issuance.  Up
to 711,764, 2008 Summer Warrant Shares are initially issuable upon exercise of
the 2008 Summer Warrants.  As of March 31, 2009, investors have
converted $143,000 of the Convertible Notes into 420,589 shares of the
Company’s common stock.  The outstanding balance at March 31, 2009 was
$341,000.





The
aggregate value of the Summer 2008 Offering Warrants issued in connection with
the August 31, 2008 closing were valued at $92,711 using the Black-Scholes
option valuation model with the following assumptions; risk-free interest rate
of 4.27%; dividend yield of 0%; volatility factors of the expected market price
of common stock of 137.95%; and an expected life of two years (statutory term)
and vest immediately upon issuance.  The Company also determined that
the notes contained a beneficial conversion feature of $179,416.  The
value of the Winter 2007 Offering Warrants, the beneficial conversion feature,
and the transaction fees of $44,000 are considered as debt discount and are
being amortized over the life of the Note.





2008
Fall Offering





From
September 8, 2008 to October 31, 2008, the Company conducted an offering (the
“2008 Fall Offering”) of up to $500,000 aggregate face amount of its Convertible
Notes.  A total of $198,220 aggregate face amount of the 2008 Fall
Notes were sold for an aggregate purchase price of $180,200 net
proceeds.  Therefore, while the stated interest on the 2008 Fall Notes
is 0%, the implied interest rate on the 2008 Fall Notes is 10%.  The
2008 fall notes will mature on the first anniversary of the date of
issuance.  The 2008 Fall Notes are convertible, at the option of the
noteholders, into shares of common stock of the Company (the “Conversion
Shares”) at a conversion price equal to the average of the closing bid price of
the Company’s common stock for the five trading days preceding the closing date
of the 2008 Fall Offering (the “Conversion Price”).  Up to 1,321,466
Conversion Shares are issuable at a Conversion Price of $0.15 per
share.





Each of
the investors in the 2008 Fall Offering received, for no additional
consideration, a warrant (the “ 2008 Fall Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the ( 2008 Fall Notes) are
convertible (the “2008 Fall Warrant Shares”). Each 2008 Fall Warrant is
exercisable on a cash basis only at a price of $0.50 per share, and is
exercisable for a period of two years from the date of issuance.  Up
to 660,734 2008 Fall Warrant Shares are initially issuable upon exercise of the
2008 Fall Warrants.  As of March 31, 2009, investors have converted
$70,400 of the Convertible Notes into 469,333 shares of the Company’s common
stock.  The outstanding balance at March 31, 2009 was
$127,820.





The
aggregate value of the Fall 2008 Offering Warrants issued in connection with the
October 31, 2008 closing were valued at $53,320 using the Black-Scholes option
valuation model with the following assumptions; risk-free interest rate of
4.68%; dividend yield of 0%; volatility factors of the expected market price of
common stock of 145.98%; and an expected life of two years (statutory term) and
vest immediately upon issuance.  The Company also determined that the
notes contained a beneficial conversion feature of $126,880.  The
value of the Fall 2008 Offering Warrants, the beneficial conversion feature, and
the transaction fees of $18,020 are considered as debt discount and are being
amortized over the life of the Note.




2008
Winter Offering





From
November 24, 2008 to December 5, 2008, the Company conducted an offering (the
“2008 Winter Offering”) of up to $500,000 aggregate face amount of its
Convertible Notes.  A total of $524,700 aggregate face amount of the
2008 Winter Notes were sold for an aggregate purchase price of $477,000 net
proceeds.  Therefore, while the stated interest on the 2008 Winter
Notes is 0%, the implied interest rate on the 2008 Winter Notes is
10%.  The 2008 Winter Notes will mature on the first anniversary of
the date of issuance.  The 2008 Winter Notes are convertible, at the
option of the noteholders, into shares of common stock of the Company (the
“Conversion Shares”) at a conversion price equal to the average of the closing
bid price of the Company’s common stock for the five trading days preceding the
closing date of the 2008 Winter Offering (the “Conversion Price”).  Up
to 3,086,470 Conversion Shares are issuable at a Conversion Price of $0.17 per
share.




Each of
the investors in the 2008 Winter Offering received, for no additional
consideration, a warrant (the “ 2008 Winter Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the ( 2008 Winter Notes) are
convertible (the “2008 Winter Warrant Shares”). Each 2008 Winter Warrant is
exercisable on a cash basis only at a price of $0.30 per share, and is
exercisable for a period of two years from the date of issuance.  Up
to 1,543,235 2008 Winter Warrant Shares are initially issuable upon exercise of
the 2008 Winter Warrants.  As of March 31, 2009, investors have
converted $297,000 of the Convertible Notes into 1,747,059 shares of
the Company’s common stock.  The outstanding balance at March 31, 2009
was $227,700.




20


The aggregate value of the Winter 2008
Offering Warrants issued in connection with the December 5, 2008 closing were
valued at $168,925 using the Black-Scholes option valuation model with the
following assumptions; risk-free interest rate of 3.42%; dividend yield of 0%;
volatility factors of the expected market price of common stock of 153.56%; and
an expected life of two years (statutory term) and vest immediately upon
issuance.  The Company also determined that the notes contained a
beneficial conversion feature of $308,075.  The value of the Winter
2007 Offering Warrants, the beneficial conversion feature, and the transaction
fees of $47,700 are considered as debt discount and are being amortized over the
life of the Note.





2009
Winter Offering I





From
January 13, 2009, through January 26, 2009, Save the World Air, Inc. (the
“Company”) conducted and concluded a private offering (the “Winter 2009 Offering
I”) of up to $250,000 aggregate face amount of its convertible notes (the
“Winter 2009 Notes”) with 8 accredited investors. A total of $250,000 aggregate
face amount of the Winter 2009 Notes were sold for an aggregate purchase price
of $250,000.  The Winter 2009 Notes bear interest at 10% per annum,
payable at maturity. The Winter 2009 Notes mature three months from their date
of issuance.  The Winter 2009 Notes are convertible, at the option of
the noteholder, into shares of common stock of the Company (the “Conversion
Shares”) at an initial conversion price equal to the average of the closing bid
price of the Company’s common stock for the five trading days preceding the
closing dates of the Winter 2009 Offering (the “Conversion Price”). Up to
694,444 Conversion Shares are initially issuable at a Conversion Price of $0.36
per share.





Each of
the investors in the Winter 2009 Offering received, for no additional
consideration, a warrant (the “Winter 2009 Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the Winter 2009 Notes are
convertible (the “Warrant Shares”).  Each Winter 2009 Warrant is
exercisable on a cash basis only at an initial price of $0.50 per share, and is
exercisable immediately upon issuance and for a period of two (2) years from the
date of issuance. Up to 347,722 Warrant Shares are initially issuable on
exercise of the Winter 2009 Warrants.





The
aggregate value of the Winter 2009 Offering Warrants issued in connection with
the January 26, 2009 closing were valued at $66,178 using the Black-Scholes
option valuation model with the following assumptions; risk-free interest rate
of 0.85%; dividend yield of 0%; volatility factors of the expected market price
of common stock of 151.42%; and an expected life of two
years  (statutory term) and vest immediately upon
issuance.  The Company also determined that the notes contained a
beneficial conversion feature of $183,822.  The value of the Winter
2009 Offering Warrants and the beneficial conversion feature are considered as
debt discount and are being amortized over the life of the notes.





The
Company did not repay the Winter 2009 Notes when they were due on April 26,
2009.  The Company is currently negotiating an extension on the Winter
2009 Notes.





2009
Winter Offering II





From
February 4, 2009, through March 11, 2009, the Company conducted and concluded a
private offering (the “Winter 2009 Offering II”) of up to $250,000 aggregate
face amount of its convertible notes (the “Winter 2009  #2 Notes”)
with 17 accredited investors. A total of $247,302 aggregate face amount of the
Winter 2009 #2 Notes were sold for an aggregate purchase price of
$224,820.  While the stated interest rate on the Winter 2009#2 Notes
is 0%, the actual interest rate on the Winter 2009 #2 Notes is 10% per annum.
The Winter 2009 #2 Notes mature on the first anniversary of their date of
issuance. The Winter 2009 #2 Notes are convertible, at the option of the
noteholder, into shares of common stock of the Company (the “Conversion Shares”)
at an initial conversion price equal to the average of the closing bid price of
the Company’s common stock for the five trading days preceding the closing dates
of the Winter 2009 #2 Offering (the “Conversion Price”). Up to 772,818
Conversion Shares are initially issuable at a Conversion Price of $0.32 per
share.





Each of
the investors in the Winter 2009 #2 Offering received, for no additional
consideration, a warrant (the “Winter 2009 #2 Warrants”), entitling the holder
to purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the Winter 2009 #2 Notes are
convertible (the “Warrant Shares”). Each Winter 2009 #2 Warrant is exercisable
on a cash basis only at an initial price of $0.50 per share, and is exercisable
immediately upon issuance and for a period of two (2) years from the date of
issuance. Up to 386,409 Warrant Shares are initially issuable on exercise of the
Winter 2009 #2Warrants.





The
Company received $224,820 in net proceeds in the Winter 2009 #2 Offering which
will be used for general corporate purposes and working capital. The aggregate
value of the Winter 2009 #2 Offering Warrants issued in connection with the
January 26, 2009 closing were valued at $62,028 using the Black-Scholes option
valuation model with the following assumptions; risk-free interest rate of
0.70%; dividend yield of 0%; volatility factors of the expected market price of
common stock of 136.76%; and an expected life of two years (statutory term) and
vest immediately upon issuance.  The Company also determined that the
notes contained a beneficial conversion feature of $162,792.  The
value of the Winter 2009 Offering Warrants, the beneficial conversion feature,
and the transaction fees of $22,482 are considered as debt discount and are
being amortized over the life of the Note.




21


6.Capital
stock





During
the three months ended March 31, 2009, the Company issued 1,065,588 shares of
common stock in exchange for conversion of $210,200 of Convertible
Notes.





During
the three months ended March 31, 2009, the Company issued 442,355 shares of
common stock in exchange for services in the amount of $151,613.





7.Stock options and
warrants





Options




The
Company currently issues stock options to employees, directors and consultants
under the 2004 Stock Option Plan (the Plan). The Company could issue options
under the Plan to acquire up to 5,000,000 shares of common stock. In
February 2006, the board approved an amendment to the Plan (approved by the
Shareholders in May 2006), increasing the authorized shares by
2,000,000 shares to 7,000,000 shares. At March 31, 2009, 2,698,775
were available to be granted under the Plan. Prior to 2004, the Company granted
3,250,000 options outside the Plan to officers of the Company of which 250,000
are still outstanding.





Employee
options vest according to the terms of the specific grant and expire from 5 to
10 years from date of grant. Non-employee option grants to date are vested
upon issuance. The weighted-average, remaining contractual life of employee
options outstanding at March 31, 2009 was 8.2 years. Stock option activity
for the period January 1, 2009 to March 31, 2009, was as follows:




Weighted
      Avg.
              Options
            
            
            Weighted
      Avg.
              Exercise
      PriceOptions
      outstanding, January 1,
      2009
            
            
            4,601,225
            
            
            $
            0.53Options
      granted
            
            
            —
            
            
            
            —Options
      exercised
            
            
            (50,000
            )
            
            
            0.27Options
      forfeited
            
            
            —
            
            
            
            —Options
      cancelled
            
            
            —
            
            
            
            —Options
      outstanding, March 31,
      2009
            
            
            4,551,225
            
            
            $
            0.54





The
weighted average exercise prices, remaining contractual lives for options
granted, exercisable, and expected to vest under the Plan as of March 31, 2009
were as follows:




Outstanding
      Options
            
            
            Exercisable
      OptionsOption
            
            
            
            
            
            Weighted
            
            
            
            
            
            WeightedExercise
      Price Per
            
            
            
            Life
            
            Average
      Exercise
            
            
            
            
            
            Average
      ExerciseShare
            
            Shares
            
            (Years)
            
            Exercise
      Price
            
            
            Shares
            
            
            Price$
      0.21 - $ 0.99
            
            
            4,163,679
            
            8.4
            
            $
            0.46
            
            
            
            3,913,679
            
            
            $
            0.46$
      1.00 - $ 1.99
            
            
            327,546
            
            5.8
            
            $
            1.41
            
            
            
            327,546
            
            
            $
            1.41$
      2.00 - $ 2.26
            
            
            60,000
            
            2.6
            
            $
            2.26
            
            
            
            60,000
            
            
            $
            2.264,551,225
            
            8.2
            
            $
            0.53
            
            
            
            4,301,225
            
            
            $
            0.54




22




As
of March 31, 2009 the market price of the Company’s stock was $0.42 per
share. Future compensation expense on the options which were not
exercisable at March 31, 2009 is $29,665.  At March 31, 2009, the
aggregate intrinsic value of the warrants and options outstanding and
exercisable was $373,000 and $368,00, respectively.





Black-Scholes
value of options




During
the three months ended March 31, 2009 and 2008, the Company valued options for
pro-forma purposes at the grant date using the Black-Scholes pricing model with
the following average assumptions:




March
      31,2009
            
            2008Expected
      life (years
            
            
            5.05
            
            
            
            5.5Risk
      free interest rate
            
            
            4.37
            %
            
            
            4.42
            %Volatility
            
            
            124.05
            %
            
            
            124.57
            %Expected
      dividend yield
            
            
            0.00
            %
            
            
            0.00
            %





The
weighted average fair value for options granted in 2008 was $0.24. During
the three months ended March 31, 2009, no options were granted.




Warrants





The
following table summarizes certain information about the Company’s stock
purchase warrants from January 1, 2009 to March 31, 2009.




Warrants
            
            
            Weighted
      Avg.
              Exercise
      PriceWarrants
      outstanding, January 1, 2009
            
            
            10,400,003
            
            
            $
            0.70Warrants
      granted
            
            
            733,632
            
            
            
            0.50Warrants
      exercised
            
            
            —
            
            
            
            —Warrants
      cancelled
            
            
            —
            
            
            
            —Warrants
      outstanding, March 31, 2009
            
            
            11,133,635
            
            
            $
            0.68






Outstanding Warrants
              
              
              Exercisable
      WarrantsWarrant
              
              
              
              
              
              Weighted
              
              
              
              
              
              WeightedExercise
      Price Per
              
              
              
              Life
              
              Average
      Exercise
              
              
              
              
              
              Average
      ExerciseShare
              
              Shares
              
              (Years)
              
              Exercise
      Price
              
              
              Shares
              
              
              Price$
      0.30
      - $ 0.99
              
              
              8,510,191
              
              1.8
              
              $
              0.48
              
              
              
              8,510,191
              
              
              $
              0.48$
      1.00 - $ 1.99
              
              
              2,057,966
              
              2.8
              
              $
              1.00
              
              
              
              2,057,966
              
              
              $
              1.00$
      2.00
      - $ 2.70
              
              
              565,478
              
              0.7
              
              $
              2.67
              
              
              
              565,478
              
              
              $
              2.6711,133,635
              
              
              
              $
              0.68
              
              
              
              11,133,635
              
              
              $
              0.68




8.Research and
development




The
Company has research and development facilities in Morgan Hill, California. The
Company has tested products incorporating our ZEFS, MK IV and ELEKTRA
technologies for multiple makes and models diesel engines, motorbikes, boats,
generators, lawnmowers and other small engines.  The Company has
purchased test vehicles, test engines and testing equipment. The Company
incurred $246,840 and $259,670 for the three months ended March 31, 2009 and
2008, respectively, on its research and development activities.




23


Temple
University License Agreements





The
Company has entered into a research and development agreement (R&D
Agreement) with Temple University to conduct further research on the
ELEKTRA technology. Under the R&D Agreement Temple University will conduct a
24-month research project towards expanding the scope of, and developing
products utilizing, the technologies covered under the License Agreements,
including design and manufacture of prototypes utilizing electric fields to
improve diesel, gasoline and kerosene fuel injection in engines using such fuels
and a device utilizing a magnetic field to reduce crude oil viscosity for crude
oil (paraffin and mixed base) and edible oil flow in pipelines. If the research
project yields results within the scope of the technologies licensed pursuant to
the License Agreements, those results will be deemed included as rights licensed
to the Company pursuant to the License Agreements. If the research project
yields results outside of the scope of the technologies covered by the License
Agreements, the Company has a six-month right of first negotiation to enter into
a new worldwide, exclusive license agreement with Temple University for the
intellectual property covered by those results.





The
Company has entered into three License Agreements with
Temple University covering Temple University’s current patent
applications concerning certain electric field effects on gasoline, kerosene and
diesel fuel particle size distribution, and concerning electric field effects on
crude oil and edible oil viscosity. Initially, the License Agreements are
exclusive and the territory licensed to the Company is worldwide. Pursuant to
the License Agreements, the Company will pay to Temple University
(i) license fees in the aggregate amount of $300,000.  A payment
of $50,000 was due on November 1, 2006; a payment of $100,000 was due on March
2, 2007; a payment of $75, 000 was due on February 2, 2008 and the final payment
was due on February 2, 2009.  Annual maintenance fees of $25,000 for the
first license were due on November 1, 2007 and November 1,
2008.  Annual maintenance payments of $125,000 for two of the licenses
were due January 1, 2008.  In addition, each License Agreement
separately provides that the Company will pay royalties to Temple University on
net sales of products incorporating the technology licensed under that License
Agreement in an amount equal to 7% of the first $20 million of net sales,
6% of the next $20 million of net sales and 5% of net sales in excess of
$40 million. Sales under the three License Agreements are not aggregated
for purposes of calculating the royalties payable to Temple University. In
addition, the Company has agreed to bear all costs of obtaining and maintaining
patents in any jurisdiction where the Company directs Temple University to
pursue a patent for either of the licensed technologies. Should the Company not
wish to pursue a patent in a particular jurisdiction, that jurisdiction would
not be included in the territory licensed to the Company.




At
December 31, 2008, the Company is in default in the amount of $300,000 in
connection with its payment obligations under the License Agreements and
maintenance payments.  On November 10, 2008, the Company received written
notice from Temple University of a material breach relating to required
payments under the License Agreements.  The notice provides the
Company with 60 days’ notice to cure the material breach.  The
Company’s failure to cure could result in a termination of the License
Agreements. If the termination occurs, the Company estimates this would have a
material adverse impact on the Company’s financial condition and
operations.  Under the License Agreements the Company is subject to a
penalty of 1% per month of the amounts due and unpaid under the License
Agreements.  As of December 31. 2008, the Company estimated the penalty to
be $40,250, and has accrued this in the accompanying financial statements at
December 31, 2008.




The
Company has also entered into a research and development agreement (R&D
Agreement) with Temple University to conduct further research on the
ELEKTRA technology. Under the R&D Agreement Temple University will conduct a
24-month research project towards expanding the scope of, and developing
products utilizing, the technologies covered under the License Agreements,
including design and manufacture of prototypes utilizing electric fields to
improve diesel, gasoline and kerosene fuel injection in engines using such fuels
and a device utilizing a magnetic field to reduce crude oil viscosity for crude
oil (paraffin and mixed base) and edible oil flow in pipelines. If the research
project yields results within the scope of the technologies licensed pursuant to
the License Agreements, those results will be deemed included as rights licensed
to the Company pursuant to the License Agreements. If the research project
yields results outside of the scope of the technologies covered by the License
Agreements, the Company has a six-month right of first negotiation to enter into
a new worldwide, exclusive license agreement with Temple University for the
intellectual property covered by those results.  Pursuant to the R&D
Agreement, the Company will make payments to Temple University in the
aggregate amount of $500,000.




At
December 31, 2008, the Company is in default in the amount of $376,250 under the
R&D Agreement.  On November 10, 2008, the Company received written
notice of default from Temple University. The notice provides the Company
with 60 days to cure the material breach.  The Company’s failure to
cure the breach could result in the termination of the R&D
Agreement.  If the termination occurs, the Company estimates this
would have a material adverse impact on the Company’s financial condition and
operations.





24


At
December 31, 2008, the Company owed to Temple University a total of $716,500 for
the License Agreements, Maintenance Fees, R & D Agreement and
penalties.  On January 9, 2009, the Company entered into a Letter
Agreement with Temple University wherein Temple University granted to the
Company an extension of time to cure the above-referenced breaches until March
31, 2009.  The Letter Agreement provides for payments of $100,000 on
each of January 31, 2009, February 28, 2009 and March 31, 2009. The Company made
the January 31, 2009 payment but did not make the payment due on February 28,
2009. On March 26, 2009, the Company received a written extension for both the
February 28, 2009 payment and the March 31, 2009 payment until April 30,
2009.  All additional amounts past due as of December 31, 2008 were to
be re-negotiated on or before March 31, 2009, however, this has now been
extended to May 29, 2009.  A penalty equal to 1% of the amount due and
unpaid on the first day of each calendar month will be added to the outstanding
amount due Temple University.





The
Company has provided for all past due amounts in the financial statements at
March 31, 2009 and December 31, 2008.  Fees due Temple University
as of March 31, 2009 and December 31, 2008 were $828,750 and $716,500,
respectively, and are included in accounts payable-Temple University in the
accompanying condensed consolidated financial statements.  During the
three months ended March 31, 2009 and 2008, the Company recorded $212,250 and
$257,000, respectively, of fees due to Temple University.  (See
Note 10).





9.Commitments and
contingencies





Legal matters




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




On
July 2, 2002, after an investigation by the Company’s newly constituted
board of directors, the Company filed a cross-complaint in the SEC action
against Mr. Muller and others seeking injunctive relief, disgorgement of
monies and stock and financial restitution for a variety of acts and omissions
in connection with sales of the Company’s stock and other transactions occurring
between 1998 and 2002.  Among other things, the Company alleged that
Mr. Muller and certain others sold Company stock without providing adequate
consideration to the Company; sold insider shares without making proper
disclosures and failed to make necessary filing required under federal
securities laws; engaged in self-dealing and entered into various
undisclosed  related-party transactions; misappropriated for their own
use proceeds from sales of the Company’ stock; and entered into various
undisclosed arrangement regarding the control, voting and disposition of their
stock.




On
July 30, 2002, the U.S. Federal District Court, Southern District of New
York, granted the Company’s application for a preliminary injunction against
Mr. Muller and others, which prevented Mr. Muller and other
cross-defendants from selling, transferring, or encumbering any assets and
property previously acquired from the Company, from selling or transferring any
of the Company’s stock that they may have owned or controlled, or from taking
any action to injure the Company or the Company’s business and from having any
direct contact with the Company’s shareholders. The injunctive order also
prevented Mr. Muller or his nominees from engaging in any effort to
exercise control over the Company’s corporation and from serving as an officer
or director of the Company. In the course of the litigation, the Company
has obtained ownership control over all patent rights to the ZEFS
device.




On
January 4, 2007, the Court entered a final judgment against Jeffrey Muller which
barred Mr. Muller from serving as an officer or director of a public
company for a period of 20 years, ordered Mr. Muller to disgorge any
shares of the Company’s stock that he still owns and directed the Company to
cancel any issued and outstanding shares of the Company’s stock still owned by
Mr. Muller. Mr. Muller was also ordered to disgorge unlawful profits
in the amount of $7.5 million and to pay a civil penalty in the amount of
$100,000.  Acting in accordance with the ruling and decision of the
Court, the Company has canceled (i) 8,047,403 shares of common stock that
had been held by Mr. Muller and/or his affiliates, (ii) options to
acquire an additional 10,000,000 shares of the Company’s common stock held by
Mr. Muller personally and (iii) $1,017,208 of debt which Mr. Muller
claimed was owed to him by the Company.  After an appeal filed by Mr.
Muller was dismissed the Judgment against him is considered final.





On
February 8, 2007, Federal Magistrate Judge Maas issued a post-judgment order, at
the Company’s request, which further concluded that all of the shares of the
Company’s stock held by Mr. Muller or any of his nominees directly or indirectly
owned or controlled were to be recaptured by the Company and were subject to
disgorgement and forfeiture.  The ruling provided that all shares,
options and any other obligations allegedly owed by the Company to Mr. Muller
were to be disgorged in our favor and confirmed the earlier judgment holding
Mr. Muller liable for $7.5 million in actual damages, imposing a
$100,000 fine and barring Mr. Muller from any involvement with a publicly traded
company for 20 years.  With prejudgment interest, this ruling
brings the actual damages against Muller to over
$11 million.  Additionally, the Court clarified that the order
required the disgorgement of any shares of the Company’s stock that
Mr. Muller or any of his nominees directly or indirectly owned or
controlled.  In furtherance of this order, the Company has taken
action to cancel over 3.6 million shares which had been issued to offshore
companies.  The Order also confirmed the appropriateness of actions
previously taken by the Company to acquire the patent rights and to consolidate
the manufacturing, marketing and distribution rights with its ownership of all
rights to the existing patents. On February 11, 2009, Judge Maas confirmed that
his previous decision was modified and Save the World Air’s Motion for Summary
Judgment was granted in favor of Save the World Air as set forth in his order of
February 8, 2007.  A proposed Final Judgment in favor of Save the
World air is pending before the United States District Court, Southern District
of New York




25




Patent
Infringement Claims by Jeffrey A. Muller




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




This
lawsuit brought by Mr. Muller arose out of the same claims that were the
subject of litigation in the Federal District Court for the Southern District of
New York, in which the Court entered judgment against Mr.
Muller.  Those claims are pending further
proceedings.  While the Company believes that the Company has valid
claims and defenses, there can be no assurance that an adverse result or outcome
on the pending motions or a trial of this case would not have a material adverse
effect on the Company’s financial position or cash flow. Muller’s claims for
patent infringement against Save The World Air were dismissed and the case was
closed on October 15, 2008, by order of George B. Daniels, United States
District Judge, Southern District of New York.





Litigation
Involving Scottish Glen Golf Company




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





On April
30, 2008 the Company and SGGC settled their pending litigation relating to the
Company’s prior offices.  The Company agreed to pay SGGC $51,000 in full
settlement of SGGC’s claims.  On May 28, 2008 the initial payment of
$34,000 was made and on July 9, 2008 the final payment of $17,000 was made and
the Complaint was dismissed, with prejudice.   The Company
recorded $52,069 as other income and as a reduction of accounts
payable.





10.Subsequent
events





In April
2009, the Company issued 736,712 shares of common stock in exchange for
conversion of $139,800 convertible notes.





On April
29, 2009, the Company received from Temple University a written extension of the
January 9, 2009 Letter Agreement.  The agreement provides an extension
of the $100,000 due to Temple on February 28, 2009 and $100,000 due March 30,
2009 to May 29, 2009.  The Company expects that all payments regarding
past due amounts, with the exception of the prescribed payments, will be
renegotiated on or before May 29, 2009.




On April
30, 2009, the Company closed its 2009 Spring Offering. From March 17, 2009,
through April 30, 2009, the Company conducted and concluded a private offering
(the “Spring 2009 Offering”) of up to $300,000 aggregate face amount of its
convertible notes (the “Spring 2009 Notes”) with 10 accredited investors. A
total of $181,500 aggregate face amount of the Spring 2009 Notes were sold for
an aggregate purchase price of $165,000.  The Spring 2009 Notes mature
on the first anniversary of their date of issuance, are convertible, at the
option of the noteholder, into up to 672,222 shares of common stock of the
Company at an conversion price of $0.27 per share.




Each of
the investors in the Spring 2009 Offering received, for no additional
consideration, a warrant (the “Spring 2009 Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the Spring 2009 Notes are
convertible (the “Warrant Shares”). Each Spring 2009 Warrant is exercisable
on a cash basis only at an initial price of $0.50 per share, and is exercisable
for a period of two years.  Up to 336,111 Warrant Shares are initially
issuable on exercise of the Spring 2009 Warrants.




In April
2009, two shareholders made loans to the company in the amount of
$72,000.  Terms are being negotiated.





26





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





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




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





You can
identify these and other forward-looking statements by the use of words such as
“may,” “will,” “expects,” “anticipates,” “believes,” “estimates,” “continues,”
or the negative of such terms, or other comparable terminology.




Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing statements.




Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2008. All forward-looking statements included in
this document are based on information available to us on the date hereof. We
assume no obligation to update any forward-looking statements.





Overview





The
following discussion and analysis of our condensed consolidated financial
condition and condensed consolidated results of operations should be read in
conjunction with the condensed consolidated financial statements and notes
thereto included in Part I, Item 1 of this Form 10-Q and the condensed
consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K for the fiscal year ended December 31,
2008.




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




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




27




Our first
revenues have come from initial sales in Asia for our ECO ChargR product in the
motorcycle industry. We plan on commencing sales of ECO ChargR to customers in
the United States in the motorcycle industry in second quarter of 2009. We also
plan on commencing initial sales of our MAG ChargR product in the United
States in the automobile and motorcycle industry in the second quarter of
2009.  See “Recent Developments” and “Sales and Marketing”
below.




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




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




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




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




We are a
development stage company that generated its first initial revenues in the
fourth quarter of 2006. Our expenses to date have been funded primarily through
the sale of stock and convertible debt, as well as proceeds from the exercise of
stock purchase warrants. We raised capital in 2008 and will need to raise
substantial additional capital in 2009, and possibly beyond, to fund our sales
and marketing efforts, continuing research and development, and certain other
expenses, until our revenue base grows sufficiently.




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




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





Results
of Operations




We did
not generate any revenue for the three-month period ended March 31, 2009 and
2008.




Operating
expenses were $840,018 for the three-month period ended March 31, 2009, compared
to $760,142 for the three-month period ended March 31, 2008, an increase of
$79,876. This increase is attributable to an increase in cash expenses of
$204,568 offset by a decrease in non-cash expenses of $124,692. The increase in
cash expense is attributable to increases in consulting and professional fees
($138,635), salaries and benefits ($46,039), office and other expenses ($16,989)
and corporate and travel expenses ($2,905). The decrease in non-cash expenses is
attributable to decreases in the fair value of common stocks issued for legal
and consulting fees ($121,872) and depreciation and bad debt expense ($3,251),
offset by an increase in fair value of options issued to an officer
($431).




Research
and development expenses were $246,840 for the three-month period ended March
31, 2009, compared to $259,670 for the three-month period ended March 31, 2008,
a decrease of $12,830. This decrease is attributable a decrease contract fees
($44,750) offset by an increase in testing tools and supplies
($31,920).




Other
expense for the three-month period ended March 31, 2009 were $464,560, compared
to $1,264,035 for the three-month period ended March 31, 2008, a decrease of
$799,475. This decrease is attributable to decreases in non-cash interest
expense ($790,346) and loss on sale of equipment ($9,683), offset by an increase
in other income ($554).




28




We had a
net loss of $1,552,218, or $0.02 per share, for the three-month period ended
March 31, 2009, compared to a net loss of $2,283,847, or $0.05 per share, for
the three-month period ended March 31, 2008. We expect to incur additional net
loss in the fiscal year ending December 31, 2009, primarily attributable to
continued operating and marketing-related expenditures without the benefit of
any significant revenue for the remainder of the year.





Liquidity
and Capital Resources





General




We have
incurred negative cash flow from operations in the developmental stage since our
inception in 1998. As of March 31, 2009, we have been funded primarily through
the sale of convertible notes and issuance of our stock upon exercise of
warrants.




The
condensed consolidated financial statements accompanying this Quarterly Report
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of our business. As reflected in the accompanying condensed consolidated
financial statements, we had a net loss of $1,552,218 and a negative cash flow
from operations of $489,701 for the three months ended March 31, 2009, and a
stockholders’ deficiency of $3,213,572 as of March 31, 2009. These factors raise
substantial doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent on our ability to raise additional
funds, generate revenue and implement our business plan. The financial
statements do not include any adjustments that might be necessary if we are
unable to continue as a going concern.




Our
current liabilities greatly exceed our assets and we are unable to meet our
obligations as they become due. We face significant challenges in generating
revenue and maintaining adequate working capital during the remainder of 2008 as
a result of several factors. Among other things, to date our distributors,
primarily located in Asia, have placed fewer orders than we had expected under
the terms of our distribution agreements. This resulted in our having less
revenue and therefore less working capital available for the further development
of our business at a time when the operating costs of our business have been
increasing. We will require significant additional outside capital during 2009
in order to meet all of our obligations, produce products for sale and ship such
products.





Details
of Recent Financing Transactions




Morale Orchards,
LLC and Leodis Matthews





Leodis
Matthews, through his law firm, Matthews & Partners, (“Matthews”) serves as
outside legal counsel to the Company.  Morale Orchards, LLC (“Morale”)
is owned by Jacqueline Alexander, the wife of Leodis
Matthews.




In 2006
and 2007, Morale purchased two convertible promissory notes totaling
$1,225,000.  The notes were unsecured; convertible into 1,595,588
shares of common stock, due one year from the date issued, and had an implied
interest rate of 22.5%.  Warrants to purchase 797,794 shares of common
stock were issued with the notes. As of January 31, 2008, the notes were in
default, and the total amount due for the notes was $1,362,212, including
penalties and interest.  In addition to the two notes, we borrowed
$20,000 from Morale on October 30, 2007.  At January 31, 2008, we were
also indebted to Matthews $472,762 for past legal fee.




Effective
January 31, 2008, the Company, Morale, and Matthews agreed to a settlement of
our loans due Morale and fees due Matthews.   Morale agreed to
waive all accrued interest on the notes after January 31, 2008, and Morale and
Matthews agreed to accept 7,421,896 shares of common stock of the Company as
payment of the notes payable and fees.




On March
10, 2008, we issued 5,530,848 shares of the Company’s common stock valued at
$2,101,722 to Morale for the conversion of the notes (totaling $1,362,212) and
cancellation of $20,000 Note.   Also on March 10, 2008, the we
issued 1,891,048 shares of the Company’s common stock valued at $718,598 to
Matthews in exchange for settlement of the legal fees due Matthews of
$472,762.




The fair
value of the shares of common stock issued was determined to be $0.38 per share,
based on the closing price of the Company’s common stock on January 31, 2008,
for a total settlement of $2,820,320.  As a result of the issuance of
shares of common stock, the we incurred additional non-cash costs of $927,903
that have been reflected as costs to settle outstanding debt in the accompanying
condensed consolidated statement of operations.




29




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




Each of
the investors in the 2007 Winter Offering received, for no additional
consideration, a warrant (the “ 2007 Winter Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the (2007 Winter Notes) are
convertible (the “2007 Warrant Shares”)  Each  2007 Winter
Warrant is exercisable on a cash basis only at a Price of $0.50 per share, and
is exercisable for a period of two years from the date of
issuance.  Up to 521,400 2008 Warrant Shares are initially issuable on
exercise of the 2007 Winter Warrants.  As of March 31, 2009, investors
have converted $521,400 of the Convertible Notes into 1,042,800 shares of the
Company’s common stock.  There was no outstanding balance at March 31,
2009.




2008 Spring
Offering. On May
27, 2008,  we made an offering (the “2008 Spring Offering”) with a
certain investor of which, $66,000 face amount of the 2008 Spring Note was
sold for $60,000 net proceeds.  Therefore, while the stated interest
rate on the 2008 Spring Note is 0%, the implied interest rate on the 2008 Spring
Note is 10%. The 2008 Spring Note will mature on the first anniversary of
the date of issuance.  The 2008 Spring Note is convertible, at the
option of the noteholder, into shares of common stock of the Company (the
“Conversion Shares”) at a conversion price equal to the average of the closing
bid price of the Company’s common stock for the five trading days preceding the
closing date of the 2008 Spring Offering (the “Conversion
Price”).  The 132,000 Conversion Shares are issuable at a Conversion
Price of $0.50 per share.




The
investor in the 2008 Spring Offering received, for no additional consideration,
a warrant (the “ 2008 Spring Warrants”), entitling the holder to purchase a
number of shares of the Company’s common stock equal to 50% of the number of
shares of common stock into which the ( 2008 Spring Notes) are convertible (the
“2008 Spring Warrant Shares”).  The 2008 Spring Warrant Shares is
exercisable on a cash basis only at a Price of $0.50 per share, and is
exercisable for a period of two years from the date of issuance.  The
66,000 2008 Spring Warrant Shares are initially issuable upon exercise of the
2008 Spring Warrants.  As of March 31, 2009, the investor converted
$66,000 of the Convertible Notes into 132,000 shares of the Company’s common
stock.  There was no outstanding balance at March 31,
2009.




2008 Summer
Offering.  From July 17,
2008 to August 31, 2008,  we conducted an offering (the “2008 Summer
Offering”) of up to $600,000 aggregate face amount of its convertible notes
“the”2008 Summer Offering) with a small number of accredited investors. Of this
amount $484,000 aggregate face amount of the 2008 Summer Notes were sold for an
aggregate purchase price of $440,000 net proceeds.  Therefore, while
the stated interest rate on the 2008 Summer Notes is 0%, the implied interest
rate on the 2008 Summer Notes is 10%.  The 2008 Summer Notes will mature on
the first anniversary of the date of issuance.  The 2008 Summer Notes
are convertible, at the option of the noteholders, into shares of common stock
of the Company (the “Conversion Shares”) at a conversion price equal to the
average of the closing bid price of the Company’s common stock for the five
trading days preceding the closing date of the 2008 Summer Offering (the
“Conversion Price”).  Up to 1,423,530 Conversion Shares are issuable
at a Conversion Price of $0.34 per share.




Each of
the investors in the 2008 Summer Offering received, for no additional
consideration, a warrant (the “ 2008 Summer Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the ( 2008 Summer Notes) are
convertible (the “2008 Summer Warrant Shares”). Each 2008 Summer Warrant is
exercisable on a cash basis only at a price of $0.50 per share, and is
exercisable for a period of two years from the date of issuance.  Up
to 711,764 2008 Summer Warrant Shares are initially issuable upon exercise of
the 2008 Summer Warrants.  As of March 31, 2009, investors have
converted $143,000 of the Convertible Notes into 420,589 shares of the Company’s
common stock.  The outstanding Convertible Note balance at March 31,
2009 was $341,000.




2008 Fall
Offering.  From September 8, 2008 to October 31, 2008, we
conducted an offering (the “2008 Fall Offering”) of up to $500,000 aggregate
face amount of its Convertible Notes.  A total of $198,220 aggregate
face amount of the 2008 Fall Notes were sold for an aggregate purchase price of
$180,200 net proceeds.  Therefore, while the stated interest on the
2008 Fall Notes is 0%, the implied interest rate on the 2008 Fall Notes is
10%.  The 2008 fall notes will mature on the first anniversary of the
date of issuance.  The 2008 Fall Notes are convertible, at the option
of the noteholders, into shares of common stock of the Company (the “Conversion
Shares”) at a conversion price equal to the average of the closing bid price of
the Company’s common stock for the five trading days preceding the closing date
of the 2008 Fall Offering (the “Conversion Price”).  Up to 1,321,466
Conversion Shares are issuable at a Conversion Price of $0.15 per
share.




30


Each of
the investors in the 2008 Fall Offering received, for no additional
consideration, a warrant (the “ 2008 Fall Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the ( 2008 Fall Notes) are
convertible (the “2008 Fall Warrant Shares”). Each 2008 Fall Warrant is
exercisable on a cash basis only at a price of $0.50 per share, and is
exercisable for a period of two years from the date of issuance.  Up
to 660,734 2008 Fall Warrant Shares are initially issuable upon exercise of the
2008 Fall Warrants.  As of March 31, 2009, investors have converted
$70,400 of the Convertible Notes into 469,333 shares of the Company’s common
stock.  The outstanding Convertible Note balance at March 31, 2009 was
$127,820.




2008 Winter
Offering.  From November 24, 2008 to December 5, 2008, we
conducted an offering (the “2008 Winter Offering”) of up to $500,000 aggregate
face amount of its Convertible Notes.  A total of $524,700 aggregate
face amount of the 2008 Winter Notes were sold for an aggregate purchase price
of $477,000 net proceeds.  Therefore, while the stated interest on the
2008 Winter Notes is 0%, the implied interest rate on the 2008 Winter Notes is
10%.  The 2008 Winter Notes will mature on the first anniversary of
the date of issuance.  The 2008 Winter Notes are convertible, at the
option of the noteholders, into shares of common stock of the Company (the
“Conversion Shares”) at a conversion price equal to the average of the closing
bid price of the Company’s common stock for the five trading days preceding the
closing date of the 2008 Winter Offering (the “Conversion Price”).  Up
to 3,086,470 Conversion Shares are issuable at a Conversion Price of $0.17 per
share.




Each of
the investors in the 2008 Winter Offering received, for no additional
consideration, a warrant (the “ 2008 Winter Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the ( 2008 Winter Notes) are
convertible (the “2008 Winter Warrant Shares”). Each 2008 Winter Warrant is
exercisable on a cash basis only at a price of $0.30 per share, and is
exercisable for a period of two years from the date of issuance.  Up
to 1,543,235 2008 Winter Warrant Shares are initially issuable upon exercise of
the 2008 Winter Warrants.  As of March 31, 2009, investors have
converted $297,000 of the Convertible Notes into 1,747,059 shares of
the Company’s common stock.  The outstanding Convertible Note balance
at March 31, 2009 was $227,700.




2009 Winter
Offering.  From January 13, 2009, through January 26, 2009,
Save the World Air, Inc. (the “Company”) conducted and concluded a private
offering (the “Winter 2009 Offering”) of up to $250,000 aggregate face amount of
its convertible notes (the “Winter 2009 Notes”) with 8 accredited investors. A
total of $250,000 aggregate face amount of the Winter 2009 Notes were sold for
an aggregate purchase price of $250,000.  The Winter 2009 Notes bear
interest at 10% per annum, payable at maturity. The Winter 2009 Notes mature
three months from their date of issuance. The Winter 2009 Notes are convertible,
at the option of the noteholder, into shares of common stock of the Company (the
“Conversion Shares”) at an initial conversion price equal to the average of the
closing bid price of the Company’s common stock for the five trading days
preceding the closing dates of the Winter 2009 Offering (the “Conversion
Price”). Up to 694,444 Conversion Shares are initially issuable at a Conversion
Price of $0.36 per share.




Each of
the investors in the Winter 2009 Offering received, for no additional
consideration, a warrant (the “Winter 2009 Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the Winter 2009 Notes are
convertible (the “Warrant Shares”).  Each Winter 2009 Warrant is
exercisable on a cash basis only at an initial price of $0.50 per share, and is
exercisable immediately upon issuance and for a period of two (2) years from the
date of issuance. Up to 347,722 Warrant Shares are initially issuable on
exercise of the Winter 2009 Warrants.




As of
March 31, 2009, investors have converted $10,000 of the Convertible Notes into
27,778 shares of the Company’s common stock. The outstanding Convertible Note
balance at March 31, 2009 was $240,000.




2009 Winter
Offering #2. From February 4, 2009, through March 11, 2009, we
conducted and concluded a private offering (the “Winter 2009 #2 Offering”) of up
to $250,000 aggregate face amount of its convertible notes (the “Winter
2009  #2 Notes”) with 17 accredited investors. A total of $247,302
aggregate face amount of the Winter 2009 #2 Notes were sold for an aggregate
purchase price of $224,820.  While the stated interest rate on the
Winter 2009#2 Notes is 0%, the actual interest rate on the Winter 2009 #2 Notes
is 10% per annum. The Winter 2009 #2 Notes mature on the first anniversary of
their date of issuance. The Winter 2009 #2 Notes are convertible, at the option
of the noteholder, into shares of common stock of the Company (the “Conversion
Shares”) at an initial conversion price equal to the average of the closing bid
price of the Company’s common stock for the five trading days preceding the
closing dates of the Winter 2009 #2 Offering (the “Conversion Price”). Up to
772,818 Conversion Shares are initially issuable at a Conversion Price of $0.32
per share.




31




Each of
the investors in the Winter 2009 #2 Offering received, for no additional
consideration, a warrant (the “Winter 2009 #2 Warrants”), entitling the holder
to purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the Winter 2009 #2 Notes are
convertible (the “Warrant Shares”). Each Winter 2009 #2 Warrant is exercisable
on a cash basis only at an initial price of $0.50 per share, and is exercisable
immediately upon issuance and for a period of two (2) years from the date of
issuance. Up to 386,409 Warrant Shares are initially issuable on exercise of the
Winter 2009 #2Warrants.




We
received $224,820 in net proceeds in the Winter 2009 #2 Offering which will be
used for general corporate purposes and working capital.  The
outstanding Convertible Note balance at March 31, 2008 was
$247,302.




In order
to fund our capital needs for the foreseeable future, including the operations
of our business, and the repayment of our outstanding Convertible Notes, we must
raise substantial additional funds.  In addition, we will require
additional funds in connection with the license and research and development
agreements with Temple University, costs associated with product development and
commercialization of the ELEKTRA technology, costs to manufacture and ship our
products, costs to design and implement an effective system of internal controls
and disclosure controls and procedures, costs of maintaining our status as a
public company by filing periodic reports with the SEC, and costs required to
protect our intellectual property. We also have substantial contractual
commitments, including without limitation salaries to our executive officers
pursuant to employment agreements, certain severance payments to former officers
and consulting fees, during the remainder of 2009 and beyond.




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




Therefore,
in addition to the recently-completed 2009 Winter Offering #2, we are actively
pursuing additional financing alternatives, but no commitments have been
received and, accordingly, no assurance can be given that any financing will be
available or, if available, that it will be on terms that are satisfactory
to  us..




Contractual
Obligations




The
following table discloses our contractual commitments for future periods.
Long-term commitments are comprised operating leases and minimum guaranteed
compensation payments under employment and other agreements. See Note 9 to Notes
to Condensed consolidated Financial Statements.




Year
      ending December 31,
            
            Operating
              Leases(1)
            
            
            Guaranteed
      Payments2009
            
            $
            62,830
            
            
            $
            195,033
            (2)2010
            
            $
            43,560
            
            
            $
            142,567
            (3)2011
            
            $
            —
            
            
            $
            —$
            106,390
            
            
            $
            337,600





(1)    Consists
of rent for our Morgan Hill Facility expiring on August 31, 2009 and Sta.
Barbara office expiring December 31, 2010. (For description of this
property, see Part 1, Item 2, “Property”).


(2)  
Consists of total compensation, including base salary and certain
contractually-provided benefits, to   two executive officers,
pursuant to employment agreements that expire on July 25, 2009 and January 30,
2010.


(3)  
Consists of an aggregate of $17,567 in total compensation, including base salary
and certain contractually provided benefits to one executive officer, pursuant
to employment agreement that expires on January 30, 2010 and $125,000 of license
and maintenance fees due to Temple University.





32





License
agreements with Temple University




In 2007,
we entered into three License Agreements with
Temple University covering Temple University’s current patent
applications concerning certain electric field effects on gasoline, kerosene and
diesel fuel particle size distribution, and concerning electric field effects on
crude oil and edible oil viscosity. Initially, the License Agreements are
exclusive and the territory licensed to the us is worldwide. Pursuant to
the License Agreements, we agreed to pay Temple University license
fees in the aggregate amount of $300,000 as follows: $50,000 was due November 1,
2006, $100,000 was due on March 2, 2007, $75, 000 was due February 2, 2008 and
$75,000 was due on February 2, 2009.  Annual maintenance fees of $25,000
for the first license were due on November 1, 2007 and November 1,
2008.  Annual maintenance payments of $125,000 for two of the licenses
were due January 1, 2008. In addition, each License Agreement provides that
we will pay royalties to Temple University on net sales of products
incorporating such licensed technology.




We have
also entered into a research and development agreement (R&D Agreement) with
Temple University to conduct further research on the ELEKTRA
technology. Under the R&D Agreement Temple University will conduct a
24-month research project towards expanding the scope of, and developing
products utilizing, the technologies covered under the License
Agreements. Pursuant to the R&D Agreement, we will make payments to
Temple University in the aggregate amount of $500,000.




At
December 31, 2008, we were in default in the amount of $716,500 under the
License Agreements, maintenance fees, R & D Agreement and related
penalties.  On January 9, 2009, we entered into a Letter
Agreement with Temple University wherein Temple University granted to us an
extension of time to cure the above-referenced breaches until March 31,
2009.  The Letter Agreement provides for payments of $100,000 on
January 31, 2009, $100,000 on February 28, 2009 and $100,000 on March 31,
2009.  We made the January 31, 2009 payment but did not make the
payment due on February 28, 2009.  On March 26, 2009, we received a
written extension for both the February 28, 2009 payment and the March 31,
2009 payment until April 30, 2009. All additional amounts past due as of
November 10, 2008 were to be re-negotiated on or before March 31, 2009, however,
this has now been extended to April 30, 2009.  A penalty equal to 1%
of the amount due and unpaid on the first day of each calendar month will be
added to the outstanding amount due Temple University.





Fees due
Temple University as of March 31, 2009 and 2008 were $828,750 and $418,250,
respectively, and include all past due amounts and related penalties.
 During the three months ended March 31, 2009 and 2008, the Company
recorded $212,250, and $257,000, respectively, of fees due to
Temple University.




Critical
Accounting Policies and Estimates





Our
discussion and analysis of our condensed consolidated financial condition and
results of operations is based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these condensed consolidated
financial statements and related disclosures requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, expenses, and
related disclosure of contingent assets and liabilities. We evaluate, on an
on-going basis, our estimates and judgments, including those related to the
useful life of the assets. We base our estimates on historical experience and
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.




The
methods, estimates and judgments we use in applying our most critical accounting
policies have a significant impact on the condensed consolidated results that we
report in our financial statements. The SEC considers an entity’s most critical
accounting policies to be those policies that are both most important to the
portrayal of a company’s financial condition and results of operations and those
that require management’s most difficult, subjective or complex judgments, often
as a result of the need to make estimates about matters that are inherently
uncertain at the time of estimation.. For a more detailed discussion of the
accounting policies of the Company, see Note 2 of Notes to the condensed
consolidated financial statements.




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




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Certain significant estimates were made in connection with preparing our
condensed consolidated financial statements as described in Note 1 to Notes to
condensed consolidated financial statements. Actual results could differ from
those estimates




33


Revenue
Recognition




We have
adopted Staff Accounting Bulletin 104, “Revenue Recognition” and therefore
recognize revenue based upon meeting four criteria:





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





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





Long-lived assets





We
account for the impairment and disposition of long-lived assets in accordance
with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” In accordance with SFAS No. 144, long-lived assets to be held are
reviewed for events or changes in circumstances that indicate that their
carrying value may not be recoverable. We periodically review the carrying
values of long-lived assets to determine whether or not impairment to such value
has occurred. No impairments were recorded for the three months ended September
30, 2008. We recorded an impairment of approximately $505,000 during the period
from inception (February 18, 1998) through March 31, 2009.





Stock-Based
Compensation




We
periodically issue stock options and warrants to employees and non-employees in
capital raising transactions, for services and for financing costs. We adopted
SFAS No. 123R effective January 1, 2006, and are using the modified prospective
method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS No. 123R for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS No.
123R for all awards granted to employees prior to the effective date of SFAS No.
123R that remain unvested on the effective date. We account for stock option and
warrant grants issued and vesting to non-employees in accordance with 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” and
EITF No. 00-18 “Accounting Recognition for Certain Transactions involving Equity
Instruments Granted to Other Than Employees” whereas the value of the stock
compensation is based upon the measurement date as determined at either a) the
date at which a performance commitment is reached, or b) at the date at which
the necessary performance to earn the equity instruments is
complete.





Recent
Accounting Pronouncements





In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued.  SFAS
141R replaces SFAS 141 “Business Combinations”.  SFAS 141R requires
the acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to
the business combination to be expensed as incurred. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The effective date, as well as the adoption date
for the Company was January 1, 2009.  Although SFAS 141R may impact
our reporting in future financial periods, we have determined that the standard
did not have any impact on our historical consolidated financial statements at
the time of adoption.




In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
142.  This pronouncement requires enhanced disclosures concerning a
company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. FST 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008.  The
effective date, as well as the adoption date for the Company was January 1,
2009.  Although FSP 142-3 may impact our reporting in future financial
periods, we have determined that the standard did not have any impact on our
historical consolidated financial statements at the time of
adoption.




34




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.





Item
3. Quantitative and Qualitative Disclosure about Market Risk





The
Company is a smaller reporting company and is not required to provide the
information required by this.





Item 4.
Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange
Act”) are not adequate to ensure that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.





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





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




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




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as required in Rule 13a-15(b).  In
December 2006 our Controller retired and in January 2007 our Chief Financial
Officer retired, although our former Controller still provides certain financial
consulting services for us.  We have hired an Interim Chief Financial
Officer and a full-time Controller.  We have retained a consulting
firm and are conducting an evaluation to design and implement adequate systems
of accounting and financial statement disclosure controls. We expect to complete
this review during 2009 to comply with the requirements of the
SEC.  We believe that the ultimate success of our plan to improve
our internal control over financial reporting will require a
combination of additional financial resources, outside consulting services,
legal advice, additional personnel, further reallocation of responsibility among
various persons, and substantial additional training of those of our officers,
personnel and others, including certain of our directors such as our Chairman of
the Board and committee chairs, who are charged with implementing and/or
carrying out our plan.  It should also be noted that the design of any
system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.




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




Other
than as described above, there were no changes in our internal control over
financial reporting that occurred during the period covered by this Quarterly
Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




35




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




On
July 2, 2002, after an investigation by the Company’s newly constituted
board of directors, the Company filed a cross-complaint in the SEC action
against Mr. Muller and others seeking injunctive relief, disgorgement of
monies and stock and financial restitution for a variety of acts and omissions
in connection with sales of the Company’s stock and other transactions occurring
between 1998 and 2002.  Among other things, the Company alleged that
Mr. Muller and certain others sold Company stock without providing adequate
consideration to the Company; sold insider shares without making proper
disclosures and failed to make necessary filing required under federal
securities laws; engaged in self-dealing and entered into various
undisclosed  related-party transactions; misappropriated for their own
use proceeds from sales of the Company’ stock; and entered into various
undisclosed arrangement regarding the control, voting and disposition of their
stock.




On
July 30, 2002, the U.S. Federal District Court, Southern District of New
York, granted the Company’s application for a preliminary injunction against
Mr. Muller and others, which prevented Mr. Muller and other
cross-defendants from selling, transferring, or encumbering any assets and
property previously acquired from the Company, from selling or transferring any
of the Company’s stock that they may have owned or controlled, or from taking
any action to injure the Company or the Company’s business and from having any
direct contact with the Company’s shareholders. The injunctive order also
prevented Mr. Muller or his nominees from engaging in any effort to
exercise control over the Company’s corporation and from serving as an officer
or director of the Company.




In the
course of the litigation, the Company has obtained ownership control over all
patent rights to the ZEFS device.




On
January 4, 2007, the Court entered a final judgment against Jeffrey Muller which
barred Mr. Muller from serving as an officer or director of a public
company for a period of 20 years, ordered Mr. Muller to disgorge any
shares of the Company’s stock that he still owns and directed the Company to
cancel any issued and outstanding shares of the Company’s stock still owned by
Mr. Muller. Mr. Muller was also ordered to disgorge unlawful profits
in the amount of $7.5 million and to pay a civil penalty in the amount of
$100,000.  Acting in accordance with the ruling and decision of the
Court, the Company has canceled (i) 8,047,403 shares of common stock that
had been held by Mr. Muller and/or his affiliates, (ii) options to
acquire an additional 10,000,000 shares of the Company’s common stock held by
Mr. Muller personally and (iii) $1,017,208 of debt which Mr. Muller
claimed was owed to him by the Company.  After an appeal filed by Mr.
Muller was dismissed the Judgment against him is considered final.




On
February 8, 2007, Federal Magistrate Judge Maas issued a post-judgment order, at
the Company’s request, which further concluded that all of the shares of the
Company’s stock held by Mr. Muller or any of his nominees directly or indirectly
owned or controlled were to be recaptured by the Company and were subject to
disgorgement and forfeiture.  The ruling provided that all shares,
options and any other obligations allegedly owed by the Company to Mr. Muller
were to be disgorged in our favor and confirmed the earlier judgment holding
Mr. Muller liable for $7.5 million in actual damages, imposing a
$100,000 fine and barring Mr. Muller from any involvement with a publicly traded
company for 20 years.  With prejudgment interest, this ruling
brings the actual damages against Muller to over
$11 million.  Additionally, the Court clarified that the order
required the disgorgement of any shares of the Company’s stock that
Mr. Muller or any of his nominees directly or indirectly owned or
controlled.  In furtherance of this order, the Company has taken
action to cancel over 3.6 million shares which had been issued to offshore
companies.  The Order also confirmed the appropriateness of actions
previously taken by the Company to acquire the patent rights and to consolidate
the manufacturing, marketing and distribution rights with its ownership of all
rights to the existing patents. On February 11, 2009, Judge Maas confirmed that
his previous decision was modified and Save the World Air’s Motion for Summary
Judgment was granted in favor of Save the World Air as set forth in his order of
February 8, 2007.  A proposed Final Judgment in favor of Save the
World air is pending before the United States District Court, Southern District
of New York





Patent
Infringement Claims by Jeffrey A. Muller




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




36




This
lawsuit brought by Mr. Muller arose out of the same claims that were the
subject of litigation in the Federal District Court for the Southern District of
New York, in which the Court entered judgment against Mr.
Muller.  Those claims are pending further
proceedings.  While the Company believes that the Company has valid
claims and defenses, there can be no assurance that an adverse result or outcome
on the pending motions or a trial of this case would not have a material adverse
effect on the Company’s financial position or cash flow. Muller’s claims for
patent infringement against Save The World Air were dismissed and the case was
closed on October 15, 2008, by order of George B. Daniels, United States
District Judge, Southern District of New York.





Litigation
Involving Scottish Glen Golf Company




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




On April
30, 2008 we and SGGC settled our pending litigation relating to our prior
offices.  We agreed to pay SGGC $51,000 in full settlement of SGGC’s
claims.  On May 28, 2008 the initial payment of $34,000 was made and
on July 9, 2008 the final payment of $17,000 was made and the Complaint was
dismissed, with prejudice.   We recorded $52,069 as other income
and as a reduction of accounts payable.





Item
1A.  Risk Factors




There
have been no material changes in the risk factors previously disclosed in Form
10-K we filed with the SEC on March 31, 2009.




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





Morale
Orchards Transaction




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




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




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




2007
Winter Offering




From
December 27, 2008 through February 29, 2008, the Company conducted a private
offering (the “2007 Winter Offering”) and issued Convertible Notes in the
aggregate face amount of $521,400.  These Notes were sold for an
aggregate purchase price of $474,000 net proceeds.  The Notes are
convertible into 1,042,800 shares of the Company’s common stock and in addition,
investors received warrants entitling the holders to purchase up to 521,400
shares of the Company’s common stock.  (See “Details of Recent
Financing Transactions”).




37


2008
Spring Offering




On May
27, 2008 the Company conducted a private offering (the “2008 Spring Offering”)
and issued a Convertible Note in the aggregate face amount of
$66,000.  This note was sold for an aggregate purchase price of
$60,000 net proceeds.  The Note is convertible in to 132,000 shares of
the Company’s common stock and in addition, the investor received warrants
entitling the holder to purchase up to 66,000 shares of the Company’s common
stock.  (See “Details of Recent Financing Transactions”).




2008
Summer Offering





From July
17, 2008 through August 31, 2008, the Company conducted a private offering (the
“2008 Summer Offering”) and issued Convertible Notes in the aggregate face
amount of $484,000.  These Notes were sold for an aggregate purchase
price of $440,000 net proceeds.  The Notes are convertible into
1,423,530 shares of the Company’s common stock and in addition, investors
received warrants entitling the holders to purchase up to 711,764 shares of the
Company’s common stock.  (See “Details of Recent Financing
Transactions”).





2008
Winter Offering





From
November 24, 2008 through December 5, 2008, the Company conducted a private
offering (the “2008 Winter Offering”) and issued Convertible Notes in the
aggregate face amount of $524,700.  These Notes were sold for an aggregate
purchase price of $477,000 net proceeds.  The Notes are convertible
into 3,086,470 shares of the Company’s common stock and in addition, investors
received warrants entitling the holders to purchase up to 1,543,235 shares of
the Company’s common stock.  (See “Details of Recent Financing
Transactions”).




2009
Winter Offering I




From
January 13, 2009 through January 26, 2009, the Company conducted a private
offering (the “2009 Winter Offering I”) and issued Convertible Notes in the
aggregate face amount of $250,000.  These Notes were sold for an aggregate
purchase price of $250,000 net proceeds.  The Notes are convertible
into 699,444 shares of the Company’s common stock and in addition, investors
received warrants entitling the holders to purchase up to 347,722 shares of the
Company’s common stock.  (See “Details of Recent Financing
Transactions”).




2009
Winter Offering II




From
February 4, 2009 through March 11, 2009, the Company conducted a private
offering (the “2009 Winter Offering  II”) and issued Convertible Notes
in the aggregate face amount of $247,302.  These Notes were sold for an
aggregate purchase price of $224,820 net proceeds.  The Notes are
convertible into 772,818 shares of the Company’s common stock and in addition,
investors received warrants entitling the holders to purchase up to 386,409
shares of the Company’s common stock.  (See “Details of Recent
Financing Transactions”).




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




Other
Issuances.




During
the three months ended March 31, 2009, the Company issued 968,171 shares of
common stock in exchange for conversion of $210,200 of Convertible
Notes.




During
the three months ended March 31, 2009, the Company issued 492,355 shares of
common stock in exchange for services in the amount of $165,113.




Item 3.
Defaults Upon Senior Securities




None





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





None





38


Item 5.
Other Information





In April
2009, the Company issued 736,712 shares of common stock in exchange for
conversion of $139,800 convertible notes.




On April
29, 2009, the Company received from Temple University a written extension of the
January 9, 2009 Letter Agreement.  The extension provided by this
notice shall be until May 29, 2009 and includes $100,000 that was due to Temple
on February 28, 2009 and $100,000 that was due on March 30, 2009.  A
total amount of $200,000 will be due to Temple on or before May 30,
2009.  All payments regarding past due amounts, with the exception of
the prescribed payments, will be renegotiated on or before May 29,
2009.




On April
30, 2009, the Company closed its 2009 Spring Offering. From March 17, 2009,
through April 30, 2009, Save the World Air, Inc. (the “Company”) conducted and
concluded a private offering (the “Spring 2009 Offering”) of up to $300,000
aggregate face amount of its convertible notes (the “Spring 2009 Notes”) with 10
accredited investors. A total of $181,500 aggregate face amount of the Spring
2009 Notes were sold for an aggregate purchase price of
$165,000.  While the stated interest rate on the Spring 2009 Notes is
0%, the actual interest rate on the Spring 2009 Notes is 10% per annum. The
Spring 2009 Notes mature on the first anniversary of their date of issuance. The
Spring 2009 Notes are convertible, at the option of the noteholder, into shares
of common stock of the Company (the “Conversion Shares”) at an initial
conversion price equal to the average of the closing bid price of the Company’s
common stock for the five trading days preceding the closing dates of the Spring
2009 Offering (the “Conversion Price”). Up to 672,222 Conversion Shares are
initially issuable at a Conversion Price of $0.27 per share.




Each of
the investors in the Spring 2009 Offering received, for no additional
consideration, a warrant (the “Spring 2009 Warrants”), entitling the holder to
purchase a number of shares of the Company’s common stock equal to 50% of the
number of shares of common stock into which the Spring 2009 Notes are
convertible (the “Warrant Shares”). Each Spring 2009 Warrant is exercisable on a
cash basis only at an initial price of $0.50 per share, and is exercisable
immediately upon issuance and for a period of two (2) years from the date of
issuance. Up to 336,111 Warrant Shares are initially issuable on exercise of the
Spring 2009 Warrants.




In April
2009, two shareholders made loans to the Company in the amount of
$72,000.  Terms are being negotiated.





Item 6.
Exhibits




Exhibit
      No.
            
            Description31.1
            
            Certification
      of Chief Executive Officer of Quarterly Report Pursuant to Rule
      13(a)-15(e) or Rule 15(d)-15(e)31.2
            
            Certification
      of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.
      Section 135032
            
            Certification
      of Chief Executive Officer and Chief Financial Officer of Quarterly Report
      pursuant to Rule 13(a)-15(e) or
  Rule 15(d)-15(e)






39





SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this Report to be signed on its behalf by the undersigned, hereunto duly
authorized.




SAVE
      THE WORLD AIR, INC.Date:
      May 14, 2009
              By:
              /s/
      EUGENE E. EICHLEREugene
      E. EichlerInterim
      Chief Financial Officer






40


EXHIBIT
INDEX






Exhibit
      No.
            
            Description31.1
            
            Certification
      of Chief Executive Officer of Quarterly Report Pursuant to Rule
      13(a)-15(e) or Rule 15(d)-15(e)31.2
            
            Certification
      of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.
      Section 135032
            
            Certification
      of Chief Executive Officer and Chief Financial Officer of Quarterly Report
      pursuant to Rule 13(a)-15(e) or
  Rule 15(d)-15(e)


















































41