##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005.
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5125 Lankershim Boulevard
North Hollywood, California 91601(Address, including zip code, of principal executive offices) (818) 487-8000(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par
value. Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o The number of shares of the Registrants Common Stock outstanding as of March 31, 2005 was
38,450,321 shares. Transitional Small Business Disclosure Format (Check one): Yes o No þ




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SAVE THE WORLD AIR, INC.
FORM 10-QSB
INDEX PagePART IITEM 1. Financial Statements
    
    
    1Condensed balance sheets
    
    
    1Condensed statements of operations (unaudited)
    
    
    2Condensed statements of changes in stockholders deficiency (unaudited)
    
    
    3Condensed statements of cash flows (unaudited)
    
    
    8Notes to condensed financial statements (unaudited)
    
    
    10ITEM 2. Managements Discussion and Analysis or Plan of Operations
    
    
    21ITEM 3. Controls and Procedures
    
    
    25PART IIITEM 1. Legal Proceedings
    
    
    26ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28ITEM 3. Defaults Upon Senior Securities
    
    
    28ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    28ITEM 5. Other Information
    
    
    28ITEM 6. Exhibits
    
    
    28SIGNATURES
    
    
    29EXHIBIT INDEXEX-31.1EX-31.2EX-32
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SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) 
 CONDENSED BALANCE SHEETS 
 March 31, 2005
    
    
    December 31,(unaudited)
    
    
    2004ASSETSCurrent assetsCash
    
    $
    90,915
    
    
    $
    84,826Other current assets
    
    
    5,402
    
    
    
    2,602Total current assets
    
    
    96,317
    
    
    
    87,428Property and equipment, net of accumulated depreciation
    
    
    33,328
    
    
    
    35,596TOTAL ASSETS
    
    $
    129,645
    
    
    $
    123,024LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilitiesAccounts payable
    
    $
    75,547
    
    
    $
    64,089Accrued expenses
    
    
    82,507
    
    
    
    84,420Accrued research and development fees
    
    
    345,032
    
    
    
    50,000Accrued professional fees
    
    
    912,029
    
    
    
    876,452Income taxes payable
    
    
    1,176
    
    
    
    Payables to related parties
    
    
    136,478
    
    
    
    36,478Finders fees payable
    
    
    
    
    
    
    1,521Total current liabilities
    
    
    1,552,769
    
    
    
    1,112,960Advances from founding executive officer
    
    
    1,017,208
    
    
    
    1,017,208Commitments and contingenciesStockholders deficiencyCommon stock, $.001 par value: 200,000,000 shares
authorized, 38,450,321 and 37,784,821 shares issued
and outstanding at March 31, 2005 and December 31,
2004, respectively
    
    
    38,450
    
    
    
    37,784Common stock to be issued
    
    
    44,000
    
    
    
    119,000Additional paid-in capital
    
    
    15,673,162
    
    
    
    15,043,028Deferred compensation
    
    
    
    
    
    
    (76,068
    )Deficit accumulated during the development stage
    
    
    (18,195,944
    )
    
    
    (17,130,888
    )Total stockholders deficiency
    
    
    (2,440,332
    )
    
    
    (2,007,144
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIENCY
    
    $
    129,645
    
    
    $
    123,024
 See notes to condensed financial statements. 1




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SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) 
 CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2005 
 CumulativeMarch 31,
    
    
    March 31,
    
    
    since2005
    
    
    2004
    
    
    inceptionNet sales
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses
    
    
    661,595
    
    
    
    666,163
    
    
    
    13,526,964Research and development expenses
    
    
    401,485
    
    
    
    109,807
    
    
    
    3,054,711Non-cash patent settlement cost
    
    
    
    
    
    
    
    
    
    
    1,610,066Loss before other income
    
    
    (1,063,080
    )
    
    
    (775,970
    )
    
    
    (18,191,741
    )Other incomeInterest income
    
    
    
    
    
    
    400
    
    
    
    954Loss before provision for income taxes
    
    
    (1,063,080
    )
    
    
    (775,570
    )
    
    
    (18,190,787
    )Provision for income taxes
    
    
    1,976
    
    
    
    1,000
    
    
    
    5,157Net loss
    
    $
    (1,065,056
    )
    
    $
    (776,570
    )
    
    $
    (18,195,944
    )Net loss per common share, basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )Weighted average common shares outstanding, basic and diluted
    
    
    38,036,260
    
    
    
    34,556,765
 See notes to condensed financial statements. 2




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SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) 
 CONDENSED STATEMENTS OF STOCKHOLDERS DEFICIENCYFROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2005 
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyBalance, February 18, 1998(date of inception)
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    -Issuance of common stock on April 18, 1998
    
    
    .0015  .01
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270
    
    
    
    
    
    
    
    
    
    
    
    24,300Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,307
    )
    
    
    (21,307
    )Balance, December 31, 1998(as corrected, see Note 1)
    
    
    
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270
    
    
    
    
    
    
    
    (21,307
    )
    
    
    2,993Issuance of common stock on May 18, 1999
    
    
    1.00  6.40
    
    
    
    198,003
    
    
    
    198
    
    
    
    
    
    
    
    516,738
    
    
    
    
    
    
    
    
    
    
    
    516,936Issuance of common stock for ZEFS on September 14, 1999
    
    
    .001
    
    
    
    5,000,000
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Stock issued for professional services on May 18, 1999
    
    
    0.88
    
    
    
    69,122
    
    
    
    69
    
    
    
    
    
    
    
    49,444
    
    
    
    
    
    
    
    
    
    
    
    49,513Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,075,264
    )
    
    
    (1,075,264
    )Balance, December 31, 1999(as corrected, see Note 1)
    
    
    
    
    
    
    15,297,125
    
    
    
    15,297
    
    
    
    
    
    
    
    580,452
    
    
    
    
    
    
    
    (1,096,571
    )
    
    
    (500,822
    )Stock issued for employee compensation on February 8, 2000
    
    
    1.03
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    20,580
    
    
    
    
    
    
    
    
    
    
    
    20,600Stock issued for consulting services on February 8, 2000
    
    
    1.03
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    102,900
    
    
    
    
    
    
    
    
    
    
    
    103,000Stock issued for professional services on April 18, 2000
    
    
    3.38
    
    
    
    27,000
    
    
    
    27
    
    
    
    
    
    
    
    91,233
    
    
    
    
    
    
    
    
    
    
    
    91,260Stock issued for directors fees on April 18, 2000
    
    
    3.38
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    168,950
    
    
    
    
    
    
    
    
    
    
    
    169,000Stock issued for professional services on May 19, 2000
    
    
    4.06
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    20,295
    
    
    
    
    
    
    
    
    
    
    
    20,300Stock issued for directors fees on June 20, 2000
    
    
    4.44
    
    
    
    6,000
    
    
    
    6
    
    
    
    
    
    
    
    26,634
    
    
    
    
    
    
    
    
    
    
    
    26,640Stock issued for professional services on June 20, 2000
    
    
    4.44
    
    
    
    1,633
    
    
    
    2
    
    
    
    
    
    
    
    7,249
    
    
    
    
    
    
    
    
    
    
    
    7,251Stock issued for professional services on June 26, 2000
    
    
    5.31
    
    
    
    1,257
    
    
    
    1
    
    
    
    
    
    
    
    6,674
    
    
    
    
    
    
    
    
    
    
    
    6,675Stock issued for employee compensation on June 26, 2000
    
    
    5.31
    
    
    
    22,000
    
    
    
    22
    
    
    
    
    
    
    
    116,798
    
    
    
    
    
    
    
    
    
    
    
    116,820Stock issued for consulting services on June 26, 2000
    
    
    5.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    52,203
    
    
    
    
    
    
    
    
    
    
    
    52,213Stock issued for promotional services on July 28, 2000
    
    
    4.88
    
    
    
    9,675
    
    
    
    9
    
    
    
    
    
    
    
    47,205
    
    
    
    
    
    
    
    
    
    
    
    47,214Stock issued for consulting services on July 28, 2000
    
    
    4.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    47,975
    
    
    
    
    
    
    
    
    
    
    
    47,985Stock issued for consulting services on August 4, 2000
    
    
    2.13
    
    
    
    35,033
    
    
    
    35
    
    
    
    
    
    
    
    74,585
    
    
    
    
    
    
    
    
    
    
    
    74,620Stock issued for promotional services on August 16, 2000
    
    
    2.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    56,225
    
    
    
    
    
    
    
    
    
    
    
    56,250Stock issued for consulting services on September 5, 2000
    
    
    2.25
    
    
    
    12,833
    
    
    
    13
    
    
    
    
    
    
    
    28,861
    
    
    
    
    
    
    
    
    
    
    
    28,874Stock issued for consulting services on September 10, 2000
    
    
    1.50
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    14,740
    
    
    
    
    
    
    
    
    
    
    
    14,750Stock issued for consulting services on November 2, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on November 4, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on December 20, 2000
    
    
    0.50
    
    
    
    19,082
    
    
    
    19
    
    
    
    
    
    
    
    9,522
    
    
    
    
    
    
    
    
    
    
    
    9,541
 See notes to condensed financial statements. 3




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SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF STOCKHOLDERS DEFICIENCY - ContinuedFROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2005 
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyStock issued for filing services on December 20, 2000
    
    
    0.50
    
    
    
    5,172
    
    
    
    5
    
    
    
    
    
    
    
    2,581
    
    
    
    
    
    
    
    
    
    
    
    2,586Stock issued for professional services on December 26, 2000
    
    
    0.38
    
    
    
    12,960
    
    
    
    13
    
    
    
    
    
    
    
    4,912
    
    
    
    
    
    
    
    
    
    
    
    4,925Other stock issuance on August 24, 2000
    
    
    2.13
    
    
    
    2,000
    
    
    
    2
    
    
    
    
    
    
    
    4,258
    
    
    
    
    
    
    
    
    
    
    
    4,260Common shares cancelled
    
    
    
    
    
    
    (55,000
    )
    
    
    (55
    )
    
    
    
    
    
    
    (64,245
    )
    
    
    
    
    
    
    
    
    
    
    (64,300
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,270,762
    )
    
    
    (1,270,762
    )Balance, December 31, 2000(as corrected, see Note 1)
    
    
    
    
    
    
    15,645,935
    
    
    
    15,646
    
    
    
    
    
    
    
    1,437,873
    
    
    
    
    
    
    
    (2,367,333
    )
    
    
    (913,814
    )Stock issued for consulting services on January 8, 2001
    
    
    0.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,038
    
    
    
    
    
    
    
    
    
    
    
    3,048Stock issued for consulting services on February 1, 2001
    
    
    0.33
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,235
    
    
    
    
    
    
    
    
    
    
    
    3,245Stock issued for consulting services on March 1, 2001
    
    
    0.28
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,743
    
    
    
    
    
    
    
    
    
    
    
    2,753Stock issued for legal services on March 13, 2001
    
    
    0.32
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    47,850
    
    
    
    
    
    
    
    
    
    
    
    48,000Stock issued for consulting services on April 3, 2001
    
    
    0.25
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,448
    
    
    
    
    
    
    
    
    
    
    
    2,458Stock issued for legal services on April 4, 2001
    
    
    0.25
    
    
    
    30,918
    
    
    
    31
    
    
    
    
    
    
    
    7,699
    
    
    
    
    
    
    
    
    
    
    
    7,730Stock issued for professional services on April 4, 2001
    
    
    0.25
    
    
    
    7,040
    
    
    
    7
    
    
    
    
    
    
    
    1,753
    
    
    
    
    
    
    
    
    
    
    
    1,760Stock issued for consulting services on April 5, 2001
    
    
    0.25
    
    
    
    132,600
    
    
    
    132
    
    
    
    
    
    
    
    33,018
    
    
    
    
    
    
    
    
    
    
    
    33,150Stock issued for filing fees on April 30, 2001
    
    
    1.65
    
    
    

    1,233
    
    
    
    1
    
    
    
    
    
    
    
    2,033
    
    
    
    
    
    
    
    
    
    
    
    2,034Stock issued for filing fees on September 19, 2001
    
    
    0.85
    
    
    
    2,678
    
    
    
    2
    
    
    
    
    
    
    
    2,274
    
    
    
    
    
    
    
    
    
    
    
    2,276Stock issued for professional services on September 28, 2001
    
    
    0.62
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    92,850
    
    
    
    
    
    
    
    
    
    
    
    93,000Stock issued for directors services on October 5, 2001
    
    
    0.60
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    59,900
    
    
    
    
    
    
    
    
    
    
    
    60,000Stock issued for legal services on October 17, 2001
    
    
    0.60
    
    
    
    11,111
    
    
    
    11
    
    
    
    
    
    
    
    6,655
    
    
    
    
    
    
    
    
    
    
    
    6,666Stock issued for consulting services on October 18, 2001
    
    
    0.95
    
    
    
    400,000
    
    
    
    400
    
    
    
    
    
    
    
    379,600
    
    
    
    
    
    
    
    
    
    
    
    380,000Stock issued for consulting services on October 19, 2001
    
    
    1.25
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    187,350
    
    
    
    
    
    
    
    
    
    
    
    187,500Stock issued for exhibit fees on October 22, 2001
    
    
    1.35
    
    
    
    5,000
    
    
    
    6
    
    
    
    
    
    
    
    6,745
    
    
    
    
    
    
    
    
    
    
    
    6,751Stock issued for directors services on November 2, 2001
    
    
    0.95
    
    
    
    1,000,000
    
    
    
    1,000
    
    
    
    
    
    
    
    949,000
    
    
    
    
    
    
    
    
    
    
    
    950,000Stock issued for consulting services on November 7, 2001
    
    
    0.85
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    16,980
    
    
    
    
    
    
    
    
    
    
    
    17,000Stock issued for consulting services on November 20, 2001
    
    
    0.98
    
    
    
    43,000
    
    
    
    43
    
    
    
    
    
    
    
    42,097
    
    
    
    
    
    
    
    
    
    
    
    42,140Stock issued for consulting services on November 27, 2001
    
    
    0.98
    
    
    
    10,000
    
    
    
    10
    
    
    
    
    
    
    
    9,790
    
    
    
    
    
    
    
    
    
    
    
    9,800Stock issued for consulting services on November 28, 2001
    
    
    0.98
    
    
    
    187,000
    
    
    
    187
    
    
    
    
    
    
    
    183,073
    
    
    
    
    
    
    
    
    
    
    
    183,260Intrinsic value of options issued to employees
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600,000
    
    
    
    (2,600,000
    )
    
    
    
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,318
    
    
    
    
    
    
    
    
    
    
    
    142,318
 See notes to condensed financial statements. 4




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##### Table of Contents



SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF STOCKHOLDERS DEFICIENCY - ContinuedFROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2005 
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyAmortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,667
    
    
    
    
    
    
    
    191,667Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,735,013
    )
    
    
    (2,735,013
    )Balance, December 31, 2001
    
    
    
    
    
    
    18,085,847
    
    
    
    18,086
    
    
    
    
    
    
    
    6,220,322
    
    
    
    (2,408,333
    )
    
    
    (5,102,346
    )
    
    
    (1,272,271
    )Stock issued for directors services on December 10, 2002
    
    
    0.40
    
    
    
    2,150,000
    
    
    
    2,150
    
    
    
    
    
    
    
    857,850
    
    
    
    
    
    
    
    
    
    
    
    860,000Common stock paid for, but not issued (2,305,000 shares)
    
    
    0.15-0.25
    
    
    
    
    
    
    
    
    
    
    
    389,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389,875Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,909
    
    
    
    (54,909
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    891,182
    
    
    
    
    
    
    
    891,182Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    )Stock issued, previously paid for
    
    
    0.15
    
    
    
    1,425,000
    
    
    
    1,425
    
    
    
    (213,750
    )
    
    
    212,325
    
    
    
    
    
    
    
    
    
    
    
    Stock issued, previously paid for
    
    
    0.25
    
    
    
    880,000
    
    
    
    880
    
    
    
    (220,000
    )
    
    
    219,120
    
    
    
    
    
    
    
    
    
    
    
    Stock and warrants issued for cash on March 20, 2003
    
    
    0.25
    
    
    
    670,000
    
    
    
    670
    
    
    
    
    
    
    
    166,830
    
    
    
    
    
    
    
    
    
    
    
    167,500Stock and warrants issued for cash on April 4, 2003
    
    
    0.25
    
    
    
    900,000
    
    
    
    900
    
    
    
    
    
    
    
    224,062
    
    
    
    
    
    
    
    
    
    
    
    224,962Stock and warrants issued for cash on April 8, 2003
    
    
    0.25
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    24,900
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock and warrants issued for cash on May 8, 2003
    
    
    0.25
    
    
    
    1,150,000
    
    
    
    1,150
    
    
    
    
    
    
    
    286,330
    
    
    
    
    
    
    
    
    
    
    
    287,480Stock and warrants issued for cash on June 16, 2003
    
    
    0.25
    
    
    
    475,000
    
    
    
    475
    
    
    
    
    
    
    
    118,275
    
    
    
    
    
    
    
    
    
    
    
    118,750Stock issued for legal services on June 27, 2003
    
    
    0.55
    
    
    
    83,414
    
    
    
    83
    
    
    
    
    
    
    
    45,794
    
    
    
    
    
    
    
    
    
    
    
    45,877Debt converted to stock and warrants on June 27, 2003
    
    
    0.25
    
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    
    
    
    
    498,000
    
    
    
    
    
    
    
    
    
    
    
    500,000Stock and warrants issued for cash on July 11, 2003
    
    
    0.25
    
    
    
    519,000
    
    
    
    519
    
    
    
    
    
    
    
    129,231
    
    
    
    
    
    
    
    
    
    
    
    129,750Stock and warrants issued for cash on September 29, 2003
    
    
    0.25
    
    
    
    1,775,000
    
    
    
    1,775
    
    
    
    
    
    
    
    441,976
    
    
    
    
    
    
    
    
    
    
    
    443,751Stock and warrants issued for cash on October 21, 2003
    
    
    0.25
    
    
    
    1,845,000
    
    
    
    1,845
    
    
    
    
    
    
    
    459,405
    
    
    
    
    
    
    
    
    
    
    
    461,250Stock and warrants issued for cash on October 28, 2003
    
    
    0.25
    
    
    
    1,570,000
    
    
    
    1,570
    
    
    
    
    
    
    
    390,930
    
    
    
    
    
    
    
    
    
    
    
    392,500Stock and warrants issued for cash on November 19, 2003
    
    
    0.25
    
    
    
    500,000
    
    
    
    500
    
    
    
    
    
    
    
    124,500
    
    
    
    
    
    
    
    
    
    
    
    125,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,875
    
    
    
    (312,582
    )
    
    
    
    
    
    
    
    
    
    
    (268,707
    )Common stock paid for, but not issued (25,000 shares)
    
    
    0.25
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,250Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    863,727
    
    
    
    
    
    
    
    863,727Net loss for year ended December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,476,063
    )
    
    
    (2,476,063
    )Balance, December 31, 2003
    
    
    
    
    
    
    34,128,261
    
    
    
    34,128
    
    
    
    6,250
    
    
    
    10,162,177
    
    
    
    (708,333
    )
    
    
    (10,327,608
    )
    
    
    (833,386
    )
 See notes to condensed financial statements. 5




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##### Table of Contents



SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF STOCKHOLDERS DEFICIENCY - ContinuedFROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2005 
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyCommon stock issued, previously paid for
    
    
    0.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    (6,250
    )
    
    
    6,225
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for director services on March 31, 2004
    
    
    1.50
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    74,950
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued for finders fees on March 31, 2004
    
    
    0.15
    
    
    
    82,500
    
    
    
    82
    
    
    
    
    
    
    
    12,293
    
    
    
    
    
    
    
    
    
    
    
    12,375Stock issued for finders fees on March 31, 2004
    
    
    0.25
    
    
    
    406,060
    
    
    
    407
    
    
    
    
    
    
    
    101,199
    
    
    
    
    
    
    
    
    
    
    
    101,606Stock issued for services on April 2, 2004
    
    
    1.53
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    99,385
    
    
    
    
    
    
    
    
    
    
    
    99,450Debt converted to stock on April 2, 2004
    
    
    1.53
    
    
    
    60,000
    
    
    
    60
    
    
    
    
    
    
    
    91,740
    
    
    
    
    
    
    
    
    
    
    
    91,800Stock issued upon exercise of warrants on May 21, 2004
    
    
    0.20
    
    
    
    950,000
    
    
    
    950
    
    
    
    
    
    
    
    189,050
    
    
    
    
    
    
    
    
    
    
    
    190,000Stock issued for directors services on June 8, 2004
    
    
    1.70
    
    
    
    600,000
    
    
    
    600
    
    
    
    
    
    
    
    1,019,400
    
    
    
    
    
    
    
    
    
    
    
    1,020,000Stock issued for cash on August 25, 2004
    
    
    1.00
    
    
    
    550,000
    
    
    
    550
    
    
    
    
    
    
    
    549,450
    
    
    
    
    
    
    
    
    
    
    
    550,000Stock issued upon exercise of options on August 30, 2004
    
    
    0.40
    
    
    
    4,000
    
    
    
    4
    
    
    
    
    
    
    
    1,596
    
    
    
    
    
    
    
    
    
    
    
    1,600Stock issued for cash on September 8, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for consulting services on September 15, 2004
    
    
    1.31
    
    
    
    50,000
    
    
    
    49
    
    
    
    
    
    
    
    65,451
    
    
    
    
    
    
    
    
    
    
    
    65,500Stock issued for patent settlement on September 22, 2004
    
    
    1.24
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    24,780
    
    
    
    
    
    
    
    
    
    
    
    24,800Stock issued for research and development on October 6, 2004
    
    
    1.40
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    90,935
    
    
    
    
    
    
    
    
    
    
    
    91,000Stock issued for cash on October 6, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on October 15, 2004
    
    
    1.00
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    149,850
    
    
    
    
    
    
    
    
    
    
    
    150,000Stock issued upon exercise of stock options on October 21, 2004
    
    
    0.40
    
    
    
    6,500
    
    
    
    6
    
    
    
    
    
    
    
    2,594
    
    
    
    
    
    
    
    
    
    
    
    2,600Stock issued for cash on November 3, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on November 18, 2004
    
    
    1.00
    
    
    
    172,500
    
    
    
    173
    
    
    
    
    
    
    
    172,327
    
    
    
    
    
    
    
    
    
    
    
    172,500Stock issued for cash on December 9, 2004
    
    
    1.00
    
    
    
    75,000
    
    
    
    75
    
    
    
    
    
    
    
    74,925
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued for cash on December 23, 2004
    
    
    1.00
    
    
    
    250,000
    
    
    
    250
    
    
    
    
    
    
    
    249,750
    
    
    
    
    
    
    
    
    
    
    
    250,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,384
    )
    
    
    
    
    
    
    
    
    
    
    (88,384
    )Common stock paid for, but not issued (119,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,891
    
    
    
    (248,891
    )
    
    
    
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,381
    
    
    
    (55,381
    )
    
    
    
    
    
    
    Fair value of warrants issued for settlement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,585,266
    
    
    
    
    
    
    
    
    
    
    
    1,585,266Fair value of warrants issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,872
    
    
    
    
    
    
    
    
    
    
    
    28,872Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936,537
    
    
    
    
    
    
    
    936,537Net loss for year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,803,280
    )
    
    
    (6,803,280
    )Balance, December 31, 2004
    
    
    
    
    
    
    37,784,821
    
    
    
    37,784
    
    
    
    119,000
    
    
    
    15,043,028
    
    
    
    (76,068
    )
    
    
    (17,130,888
    )
    
    
    (2,007,144
    )
 See notes to condensed financial statements. 6




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##### Table of Contents



SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF STOCKHOLDERS DEFICIENCY - ContinuedFROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2005 
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyCommon stock issued, previously paid for
    
    
    1.00
    
    
    
    50,000
    
    
    
    50
    
    
    
    (50,000
    )
    
    
    49,950
    
    
    
    
    
    
    
    
    
    
    
    Stock issued upon exercise of warrants, previously paid for
    
    
    1.00
    
    
    
    50,000
    
    
    
    50
    
    
    
    (50,000
    )
    
    
    49,950
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for cash on January 20, 2005
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued upon exercise of warrants on January 31, 2005
    
    
    0.40
    
    
    
    500
    
    
    
    1
    
    
    
    
    
    
    
    199
    
    
    
    
    
    
    
    
    
    
    
    200Stock issued for cash on February 17, 2005
    
    
    1.00
    
    
    
    325,000
    
    
    
    325
    
    
    
    
    
    
    
    324,675
    
    
    
    
    
    
    
    
    
    
    
    325,000Stock issued for cash on March 31, 2005
    
    
    1.00
    
    
    
    215,000
    
    
    
    215
    
    
    
    
    
    
    
    214,785
    
    
    
    
    
    
    
    
    
    
    
    215,000Common stock paid for, but not issued (25,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,400
    )
    
    
    
    
    
    
    
    
    

    
    (34,400
    )Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,068
    
    
    
    
    
    
    
    76,068Net loss for three months ended March 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,065,056
    )
    
    
    (1,065,056
    )Balance, March 31, 2005 (unaudited)
    
    
    
    
    
    
    38,450,321
    
    
    $
    38,450
    
    
    $
    44,000
    
    
    $
    15,673,162
    
    
    $
    
    
    
    $
    (18,195,944
    )
    
    $
    (2,440,331
    )
 See notes to condensed financial statements. 7




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##### Table of Contents



SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) 
 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2005 
 CumulativeMarch 31,
    
    
    March 31,
    
    
    since2005
    
    
    2004
    
    
    inceptionCash flows from operating activitiesNet loss
    
    $
    (1,065,056
    )
    
    $
    (776,570
    )
    
    $
    (18,195,944
    )Adjustments to reconcile net loss to net cash
used in operating activities:Write off of intangible assets
    
    
    
    
    
    
    
    
    
    
    505,000Fair value of options issued for services
    
    
    
    
    
    
    
    
    
    
    171,190Issuance of common stock for services
    
    
    
    
    
    
    12,500
    
    
    
    5,280,623Amortization of deferred compensation
    
    
    76,068
    
    
    
    317,425
    
    
    
    2,959,181Depreciation
    
    
    2,268
    
    
    
    1,292
    
    
    
    16,685Non-cash patent settlement cost
    
    
    
    
    
    
    
    
    
    
    1,610,066Changes in operating assets and liabilities:Prepaid expenses and other current assets
    
    
    (2,800
    )
    
    
    
    
    
    
    (5,402
    )Income taxes payable
    
    
    1,176
    
    
    
    1,000
    
    
    
    1,176Accrued expenses
    
    
    338,633
    
    
    
    7,129
    
    
    
    1,529,096Net cash used in operating activities
    
    
    (649,711
    )
    
    
    (437,224
    )
    
    
    (6,128,329
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    
    
    
    
    (4,870
    )
    
    
    (46,463
    )Net cash used in investing activities
    
    
    
    
    
    
    (4,870
    )
    
    
    (46,463
    )Cash flows from financing activitiesIncrease (decrease) in payables to related parties
    
    
    100,000
    
    
    
    (21,425
    )
    
    
    647,928Advances from founding executive officer
    
    
    
    
    
    
    
    
    
    
    517,208Issuance of common stock for cash
    
    
    565,200
    
    
    
    
    
    
    
    5,491,937Cash paid for finders fees
    
    
    (34,400
    )
    
    
    
    
    
    
    (435,366
    )Cash received for common stock to be issued
    
    
    25,000
    
    
    
    
    
    
    
    44,000Net cash provided by (used in)
financing activities
    
    
    655,800
    
    
    
    (21,425
    )
    
    
    6,265,707Net increase (decrease) in cash
    
    
    6,089
    
    
    
    (463,519
    )
    
    
    90,915Cash, beginning of period
    
    
    84,826
    
    
    
    926,052
    
    
    
    Cash, end of period
    
    $
    90,915
    
    
    $
    462,533
    
    
    $
    90,915
 See notes to condensed financial statements. 8




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SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) - Continued
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO MARCH 31, 2005 
 CumulativeMarch 31,
    
    
    March 31,
    
    
    since2005
    
    
    2004
    
    
    inceptionSupplemental disclosures of cash flow
informationCash paid during the year forInterest
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    800
    
    
    $
    
    
    
    $
    3,200Non-cash investing and financing activitiesAcquisition of intangible asset through
advance from related party and issuance
of common stock
    
    $
    
    
    
    $
    
    
    
    $
    505,000Deferred compensation from stock options issued for services
    
    
    
    
    
    
    419,702
    
    
    
    2,959,181Purchase of property and equipment financed by advance from related party
    
    
    
    
    
    
    
    
    
    
    3,550Conversion of related party debt to equity
    
    
    
    
    
    
    
    
    
    
    512,940Issuance of common stock in settlement of payable
    
    
    
    
    
    
    
    
    
    
    113,492Common stock issued, previously paid for
    
    
    100,000
    
    
    
    
    
    
    
    Stock issued for previously accrued finders fees
    
    
    
    
    
    
    113,981
    
    
    
    
 See notes to condensed financial statements. 9




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 3005 (UNAUDITED) 
  1.
    Organization and basis of presentation  Basis of presentation  The accompanying interim condensed financial statements are unaudited, but in the opinion
of management of Save the World Air, Inc. (the Company), contain all adjustments, which
include normal recurring adjustments, necessary to present fairly the financial position
at March 31, 2005, the results of operations for the three months ended March 31, 2005 and
2004, and cash flows for the three months ended March 31, 2005 and 2004. The balance
sheet as of December 31, 2004 is derived from the Companys audited financial statements.Certain information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission, although management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information presented
therein not misleading. For further information, refer to the financial statements and the
notes thereto included in the Companys Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, as filed with the Securities and Exchange Commission.The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expense during
the reporting period. Actual results could differ from those estimates. The results of
operations for the three months ended March 31, 2005 are not necessarily indicative of the
results of operations to be expected for the full fiscal year ending December 31, 2005. 10




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  1.
    Organization and basis of presentation - continued  Description of business  Save the World Air, Inc. (the Company) was incorporated in Nevada on February 18, 1998
under the name Mandalay Capital Corp. The Company changed its name to Save the World Air,
Inc. on February 11, 1999 following the purchase of the worldwide exclusive manufacturing,
marketing and distribution rights for the ZEFS device. The ZEFS is a device which is
fitted to an internal combustion engine and is expected to reduce carbon monoxide
hydrocarbons and nitrous oxide emissions. During the past three years, the Company has
been acquiring new technologies, developing prototype products using the Companys
technologies and conducting scientific tests regarding the technologies and prototype
products. In 2003, the Company acquired worldwide intellectual property and patent rights
to technologies which reduce carbon monoxide, hydrocarbons and nitrous oxide emissions in
two- and four-stroke motorcycles, fuel-injection engines, generators and small engines.
The Company has also developed prototype products and named them CAT-MATE.  Development stage enterprise  The Company is a development stage enterprise as defined by Statement of Financial
Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage
Enterprises. All losses accumulated since the inception of the Company have been
considered as part of the Companys development stage activities.The Companys focus is on research and development 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
any revenues. The prototype devices are called ZEFS and CAT-MATE. The Company has put
forth efforts to complete the design, the development of production models and the
promotion of products in the market place worldwide. Expenses have been funded through
the sale of company stock. The Company has taken actions to secure the intellectual
property rights to the ZEFS and CAT-MATE devices. In addition, the Company has initiated
marketing efforts to international governmental entities in cooperation with the United
Nations Environmental Programme (UNEP) and various original equipment manufacturers
(OEMs), to eventually sell or license the ZEFS and CAT-MATE products and technology. 11




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  2.
    Net loss per share  Basic earnings (loss) per share is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution, using the treasury
stock method, that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. In computing diluted earnings per share, the
treasury stock method assumes that outstanding options and warrants are exercised and the
proceeds are used to purchase common stock at the average market price during the period.
Options and warrants will have a dilutive effect under the treasury stock method only when
the average market price of the common stock during the period exceeds the exercise price
of the options and warrants. For the three months ended March 31, 2005 and 2004, the
dilutive impact of outstanding stock options of 14,422,652 and 13,250,000 respectively,
and 16,093,914 and 14,117,414 warrants have been excluded because their impact on the loss
per share is antidilutive.  3.
    Recent accounting pronouncements  In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151,
Inventory Costs. This Statement amends the guidance in ARB No. 43 Chapter 4 Inventory
Pricing, to require items such as idle facility costs, excessive spoilage, double freight
and rehandling costs to be expensed in the current period, regardless if they are abnormal
amounts or not. This Statement will become effective for us in the first quarter of 2006.
The adoption of SFAS No. 151 is not expected to have a material impact on our financial
condition, results of operations, or cash flows.In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123R), which revises SFAS No. 123. SFAS 123R also supersedes APB No. 25 and amends SFAS
No. 95, Statement of Cash Flows. In general, the accounting required by SFAS 123R is
similar to that of SFAS No. 123. However, SFAS No. 123 gave companies a choice to either
recognize the fair value of stock options in their income statements or disclose the pro
forma income statement effect of the fair value of stock options in the notes to the
financial statements. SFAS 123R eliminates that choice and requires the fair value of all
share-based payments to employees, including the fair value of grants of employee stock
options, be recognized in the income statement, generally over the option vesting period.
SFAS 123R must be adopted no later than July 1, 2005 (or December 31, 2005 for small
business issuers). Early adoption is permitted. 12




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)  3.
    New accounting pronouncements - continued  The Company is currently evaluating the timing and manner in which it will adopt SFAS
123R. As permitted by SFAS 123, the Company currently accounts for share-based payments
to employees using APB 25s intrinsic value method. Accordingly, adoption of SFAS 123Rs
fair value method will have an effect on results of operations, although it will have no
impact on overall financial position. The impact of adoption of SFAS 123R cannot be
predicted at this time because it will depend on levels of share-based payments granted in
the future. However, had SFAS 123R been adopted in prior periods, the effect would have
approximated the SFAS 123 pro forma net loss and loss per share disclosures as shown
above. SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating
cash flow as currently required, thereby reducing net operating cash flows and increasing
net financing cash flows in periods after adoption.  4.
    Certain relationships and related transactions  Advances from founding executive officer  All of the marketing and manufacturing rights for the ZEFS were acquired from Mr. Muller,
for 5,000,000 shares of common stock, $500,000 and a $10 royalty for each unit sold (see
discussion below), pursuant to the Agreement entered into in December 1998, by and between
the Company and Mr. Muller. Working capital advances in the amount of $517,208 and
payment in the amount of $500,000 for marketing and distribution rights of the ZEFS are
due to Mr. Muller. Such amounts are interest free and do not have any due dates for
payment.In January 2000, the Company entered into an agreement offering Mr. Muller and Lynne
Muller, Mr. Mullers wife, the option to purchase 5,000,000 shares each at $0.10 per share
as consideration for work performed for the Company. Mrs. Muller subsequently transferred
her option to Mr. Muller. 13




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  4.
    Certain relationships and related transactions - continued  Advances from founding executive officer - continued  In connection with the Companys legal proceedings against Mr. Muller, the Company is
attempting to obtain a judgment that will relieve the Company of $1,017,208, which
represents all amounts due Mr. Muller. These amounts include the $500,000 due for the
marketing and distribution rights of the ZEFS and the working capital advances of
$517,208. The Company has been relieved of the $10 royalty interest that Mr. Muller held
for each unit sold. In addition, the Company is also attempting to obtain a judgment that
will divest and prevent any subsequent holders of the right to exercise options previously
held by Mr. Muller for 10,000,000 shares of the Companys common stock. Based on the
status of current legal proceedings, the Company does not believe that it will have to pay
Mr. Muller the $500,000 for the rights to the ZEFS device and the $517,208 of advances.
The Company has not made any adjustments for the above in its financial statements as the
matters have not yet been finalized and may change.  Due to related parties  Masry & Vititoe, a law firm in which Edward Masry, the Companys Chief Executive Officer,
is a partner, has advanced $136,478 and $36,478 as of March 31, 2005 and 2004,
respectively, to the Company for working capital purposes. Advances by Masry and Vititoe
were unsecured, non-interest bearing, and were due on demand. In April 2004, the Company
issued 60,000 shares of common stock to convert $15,000 of an outstanding loan made to the
Company by the wife of Edward Masry. The shares issued were valued at the current market
price at the date of issuance of $91,800 resulting in additional charge to expense of
$76,800, which was reflected in the financial statements for the year ended December 31,
2004.  Lease agreement  In June 2004, the Company amended its sublease of a portion of a building in North
Hollywood, California from an entity that is owned by a director of the Company. The
lease term is from November 1, 2003 through October 31, 2005 and carries an option to
renew for two additional years with a 10 percent increase in the rental rate. Monthly
rent is currently $3,400 per month under this lease. 14




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  5.
    Capital stock  Sale of equity securities  During the three months ended March 31, 2005, the Company sold 565,000 units consisting of
one share of common stock and one warrant to acquire a share of common stock at an
exercise price of $1.50 per share, for net proceeds of $565,000. The 565,000 warrants
issued to investors as part of an equity agreement and were not ascribed any value in the
accompanying financial statements.During the three months ended March 31, 2005, the Company issued 100,000 shares (of which
50,000 relates to the exercise of warrants) of common stock for which payment was
previously received.  Intrinsic value of employee options  During the years ended December 31, 2001 and 2004, certain employee options were granted
with exercise prices less the than fair market value of the Companys stock at the date of
grant. As the grants were to employees, the intrinsic value method, as allowed under APB
No. 25, was used to calculate the related compensation expense. For the three months
ended March 31, 2005, no employee options were granted and $76,068 and $212,500 of
deferred compensation costs was amortized and recognized as expense in the three months
ended March 31, 2005 and 2004 respectively.  6.
    Research and development  The Company has established a research and development facility in Queensland, Australia.
The Company has expanded research and development to include applications of the ZEFS and
CAT-MATE technology to diesel engines, motorbikes, boats, generators, lawnmowers and other
small engines. The Company has also purchased test vehicles, test engines and testing
equipment. The Company completed testing on ZEFS and CAT-MATE devices for multiple
automobiles, trucks, motorcycles, off-road vehicles and stationary engines, the results of
which have been provided to RAND Corporation (RAND) for evaluation. During 2004, RAND
expanded its role with the Company and now oversees the Companys research and development
facility in Australia. The Company also uses third party research and development
facilities in Los Angeles and San Jose, California for the development of our ZEFS and
CAT-MATE devices. For the three months ended March 31, 2005 and 2004, the Company has spent
$401,485 and $109,807, respectively, on research and development. 15




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  7.
    Going concern  The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments in
the normal course of business. As reflected in the accompanying financial statements, the
Company had a net loss of $1,065,056 and a negative cash flow from operations of $649,711
for the three months ended March 31, 2005, and had a working capital deficiency of
$1,456,452 and a stockholders deficiency of $2,440,331 March 31, 2005. These factors raise
substantial doubt about its ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent on the Companys ability to raise
additional funds and implement its business plan. The financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as a going
concern.  8.
    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 its 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
for 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. The SECs charges of fraud and stock manipulation continue against
Mr. Muller and others. 16




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  8.
    Commitments and contingencies - continued  Legal matters - continued  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 filings required under federal securities laws;
engaged in self-dealing and entered into various undisclosed related-party transactions;
misappropriated for their own use proceeds from sales of the Companys stock; and entered
into various undisclosed arrangement regarding the control, voting and disposition of
their stock. The Company contends that it is entitled to a judgment canceling all of the
approximately 8,716,710 shares of the Companys common stock that were previously obtained
and controlled, directly or indirectly, by Mr. Muller; divesting and preventing any
subsequent holders of the right to exercise options previously held by Mr. Muller for
10,000,000 shares of the Companys common stock, conversion of an existing preliminary
injunction to a permanent injunction to prevent Mr. Muller from any involvement with the
Company and a monetary judgment against Mr. Muller and others in the amount of several
million dollars.On July 30, 2002, the U.S. Federal District Court, Southern District of New York, granted
the Companys application for a preliminary injunction against Mr. Muller and others,
which prevented Mr. Muller and other cross-defendants from selling, transferring, or
encumbering any assets and property previously acquired from the Company, from selling or
transferring any of the Companys stock that they may own or control, or from taking any
action to injure the business and from having any direct contact with the Companys
shareholders. The injunctive order also prevents Mr. Muller from engaging in any effort
to exercise control over the Company and from serving as an officer or director of the
Company. The Company believes that they have valid claims, there can be no assurance that
an adverse result or settlement would not have a material adverse effect on the Companys
financial position or cash flow. 17




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  8.
    Commitments and contingencies - continued  Legal matters - continued  In the course of the litigation, the Company has obtained ownership control over Mr.
Mullers claimed patent rights to the ZEFS device. Under a Buy-Sell Agreement between Mr.
Muller and dated December 29, 1998, Mr. Muller, who was listed on the ZEFS devise patent
application as the inventor of the ZEFS device, purported to grant us all international
marketing, manufacturing and distribution rights to the ZEFS device. Those rights were
disputed because an original inventor of the ZEFS device contested Mr. Mullers legal
ability to have conveyed those rights.In Australia, Mr. Muller entered into a bankruptcy action seeking to overcome the
Companys claims for ownership of the ZEFS device. In conjunction with these litigation
proceedings, a settlement agreement was reached whereby the $10 per unit royalty
previously due to Mr. Muller under his contested Buy-Sell Agreement was terminated and
replaced with a $.20 per unit royalty payable to the bankruptcy trustee. On November 7,
2002, under a settlement agreement executed with the Mr. Mullers bankruptcy trustee, the
trustee transferred to the Company all ownership and legal rights to this international
patent application for the ZEFS device.Both the SEC and the Company have filed Motions for Summary Judgment contending that there
are no material issues of fact in contention and as a matter of law, the Court should
grant a judgment against Mr. Muller and the cross-defendants. Mr. Muller has filed a
response contending the motions are without merit or substance. A final decision on these
motions, which potentially would terminate the ongoing litigation, is still pending.
Should the Court not grant summary judgment in favor of the Company, the case will be
scheduled for final disposition in a trial.Mr. Muller and several of the defendants filed a Motion to Dismiss the complaint filed by
the Company and moved for summary judgment in their favor. On December 21, 2004, Judge
George B. Daniels, denied the cross-defendants motion to dismiss the Companys
cross-complaint, denied the request to vacate the July 2, 2002 preliminary injunction and
denied the request for damages against the Company. The court also refused to grant a
summary judgment in favor of the cross-defendants and dismissed Mr. Mullers claims
against the Company for indemnification for his legal costs and for damages resulting from
the litigation. Neither Mr. Muller nor any of the cross-defendants have filed any
cross-claims against the Company and the Company is not exposed to any liability as a
result of the litigation, except for possibly incurring legal fees and expenses should the
Company lose the litigation. 18




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  8.
    Commitments and contingencies - continued  Legal matters - continued  Although the outcome of this litigation cannot be predicted with any degree of certainty,
the Company is optimistic that the Courts ruling will either significantly narrow the
issues for any later trial or will result in a final disposition of the case in a manner
favorable to the Company. The Company believes that they have valid claims, however,
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.After the end of the period covered by this report, the Company received notice that
Jeffrey A. Muller, the Companys former sole director and executive officer, has filed a
lawsuit in the Federal District Court for the Central District of California, seeking
declaratory and injunctive relief and alleging unfair competition in connection with a
claimed prior patent interest in the ZEFS device and stock option rights. In seeking
declaratory relief, Mr. Muller is seeking to have the patent rights in the ZEFS device
that were previously transferred to the Company by Mr. Mullers bankruptcy trustee
declared null and void.This recent lawsuit brought by Mr. Muller arises out of the same claims that are the
subject of ongoing litigation in the Federal District Court for the Southern District of
New York, in which has previously obtained a preliminary injunction against Mr. Muller
barring him from any involvement with the Company and preventing Mr. Muller, his agents or
assigns, from exercising any claimed rights to the Companys assets or stock. Mr. Muller
previously filed the same complaint in the Federal District Court for the Southern
District of New York, which claim is pending dismissal. On December 28, 2004, Federal
District Court Judge George B. Daniels issued a decision dismissing motions filed by Mr.
Muller against the Companys cross-claims. The dismissal of those motions involved
similar causes of action as those contained in Mr. Mullers recent lawsuit commenced in
the Federal District Court for the Central District of California. Since the case in New
York is still pending, the filing of the new lawsuit in California is subject to various
defenses which should result in the dismissal of the new lawsuit. 19




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) 
  8.
    Commitments and contingencies - continued  Legal matters - continued  The Company intends to vigorously defend against any bifurcation of the lawsuit that is
ongoing in New York and will move to dismiss and/or to transfer the recently filed
complaint to Judge Daniels in New York for any eventual decision. While the Company
believes that it has valid claims, 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 financial position or cash flow of the Company.The Company was named as a defendant in a complaint filed before the Los Angeles Superior
Court, Civ. No. BC 312401, by Terracourt Pty Ltd, an Australian corporation, claiming
breach of contract and related remedies from promises allegedly made by the former
president of the Company in 1999. The plaintiff is seeking specific performance of the
former presidents alleged promises to transfer to the plaintiff an aggregate 480,000
shares of the Companys common stock for office consultant and multimedia services. The
complaint was filed on March 18, 2004. The plaintiff also filed a Statement of Damages
seeking costs of the lawsuit and general damages of $2 million. Due to a late date of
service of the complaint upon the Company and other preliminary legal procedures, the
Companys answer was not filed until October 20, 2004. The Company is opposing the
plaintiffs causes of action and has asserted that the Company has no liability for the
claims asserted. The trial on this lawsuit concluded in late April 2005 and has been
taken under submission by the judge, whose ruling is expected by late-May 2005.  9.
    Subsequent event  The Company was named as a defendant in an unsettled patent infringement suit (see Note
8). 20




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Item 2. Managements Discussion and Analysis or Plan of Operations This Quarterly Report on Form 10-QSB contains forward-looking statements. These
forward-looking statements include predictions regarding our future:  
    revenues and profits;
    customers;
    research and development expenses and efforts;
    scientific 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 elsewhere in this Report and
under the heading Risk Factors in our Annual Report on Form 10-KSB for the year ended December
31, 2004. 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 financial condition and results of operations
should be read in conjunction with the Financial Statements and notes thereto included in Part I,
Item 1 of this Form 10-QSB and the Financial Statements and notes thereto contained in our Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2004. We are a development stage company that has not yet generated revenues. The companys focus is
on research and development 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. Our prototype devices are called ZEFS and CAT-MATE. We have devoted the
bulk of our efforts to the completion of the design, the development of our production models and
the promotion of our products in the market place worldwide. Expenses have been funded through the
sale of company stock. We have taken actions to secure our intellectual property rights to the ZEFS
and CAT-MATE devices. During the first quarter of 2005, certain developments occurred which we hope will expedite
our transition from research and development into production and marketing. 21




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In January 2005, the Vehicle Certification Agency (VCA), an agency of the Department for
Transport in the United Kingdom, certified the testing of our CAT-MATE prototypes at VCAs
independent Hong Kong Exhaust Emissions Laboratory. Those tests confirmed significant reduction
of carbon monoxide, nitrous oxides and total hydrocarbons in the 2-stroke motorcycles and
generators that were tested. VCA is one of four internationally recognized testing authorities,
which includes the United States Environmental Protection Agency (EPA), for the certification of
motor vehicles, parts, systems and after-market devices. Also in January, the United States Patent Office issued a Notice of Allowance for our Mark I
ZEFS prototype. Testing of our Mark I ZEFS device will soon be conducted at an approved EPA
facility. In March 2005, the Company attended and exhibited its devices at a United Nations
Environmental Programme (UNEP) sponsored Summit in Lake Toba, North Sumatra, Indonesia. At the
conclusion of the summit, we entered into a joint communique with the Governor of North Sumatra and
the Sultan of Yogyakarta, announcing an emissions control pilot program utilizing our devices on
10,000 motorcycles at universities in Medan and Yogyakarta, Indonesia. In addition, we have initiated marketing efforts to international governmental entities in
cooperation with UNEP and various original equipment manufacturers (OEMs), to eventually sell or
license our ZEFS and CAT-MATE products and technology. We anticipate that these efforts will
continue during 2005 and that we will begin selling our devices by late 2005. We do not envision
generating significant revenue in 2005. We will need to raise additional capital during 2005 to
fund our research and development efforts and other expenses. See Liquidity and Capital
Resources below. Results of Operations To date, we have not generated any revenues and our business continues in the development
stage. We have focused our efforts on verifying and developing our technologies and devices and
commencing marketing efforts for their license or sale. We expect to begin selling our devices in
late 2005. General and administrative expenses were $661,595 for the three-month period ended March 31,
2005, compared to $666,163 for the three-month period ended March 31,2004, a decrease of $4,568.
This net decrease is primarily attributable to an increase in travel expense, which was more than
offset by a decrease in the valuation of warrants issued as a non-cash item. Research and development expenses were $401,485 for the three-month period ended March 31,
2005, compared to $109,807 for the three-month period ended March 31, 2004, an increase of
$291,678. This increase is primarily attributable to an increase in the scope of the work
performed for us by the RAND Corporation to include the oversight of our research and development
facility in Australia. We expect our operating costs to increase during the balance of fiscal year 2005, primarily as
a result of anticipated increases in research and development expenses, general and administrative
expenses and marketing expenses as we approach production and sales activities during late 2005. We had a net loss of $1,065,056, or $.03 per share, for the three-month period ended March 31,
2005, compared to a net loss of $776,570, or $02 per share, for the three-month period ended March
31, 2004. We have relied upon our 2004 Stock Option Plan to compensate consultants and employees
who have assisted in developing and executing our business plan. This reliance, together with
issuances of stock by us in connection with our ongoing private offering of stock and warrants,
has significantly narrowed the loss per share by increasing the total number of the Companys
outstanding common stock. See Liquidity and Capital Resources below. We expect an increase in
net loss in the fiscal year ending December 31, 2005, primarily attributable to increased general and administrative expenses and
marketing-related expenditures, without the benefit of any revenue for most of the year. 22




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Liquidity and Capital Resources We have incurred negative cash flow from operations in the developmental stage since our
inception in 1998. As of March 31, 2005 we had cash of $90,915 and an accumulated deficit of
$18,195,944. Our negative operating cash flow since inception (October 2001) has been funded
primarily through the sale of common stock and, to a lesser degree, by proceeds we received from
the exercise of options and warrants. The financial statements accompanying this 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 financial statements, we had a
net loss of $1,065,056 and a negative cash flow from operations of $649,711 for the three-month
period ended March 31, 2005, and had a working capital
deficiency of $1,456,452 and a stockholders deficiency
of $2,440,331 as of March 31, 2005.
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 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. From July 2004 through the date of filing this report, we have engaged in a private offering
of units comprised of shares of our common stock and one-year warrants to purchase an equal number
of shares of common stock at an exercise price of $1.50 per share. From January 1, 2005 through
March 31, 2005, we received aggregate gross proceeds of $615,000 and aggregate net proceeds of
$580,600 in connection with the sale of 615,000 shares of our common stock to 18 purchasers. The
offering is ongoing. In addition, we received $44,000 for which the related 44,000 shares of
common stock and warrants to purchase a similar number of shares of common stock had not been
issued by March 31, 2005. We also received $50,200 in connection with the exercise of warrants
which were exercised during the three-month period ended March 31, 2005 (warrants for 50,000 shares
exercised at $1.00 per share and warrants for 500 shares exercised at $.40 per share). See Note 6
to Notes to Financial Statements and Part II, Item 2, Unregistered Sales of Equity Securities and
Use of Proceeds. We believe that we have sufficient cash to fund our operations through the second quarter of
2005 based on current cash on hand. For all of 2005, we will need to raise additional capital or
incur new debt to fund our operations. We believe that exercises of in-the-money options and
warrants, with various expiration dates during 2005, will provide some of the proceeds needed to
meet our capital requirements during 2005, together with additional sales of our common stock in
the private offering. In addition, we are actively exploring additional sources of financing, including borrowings
from one or more of our directors and officers. During the three-month period ended March 31, 2005,
Masry & Vititoe PC, a law firm in which Edward L. Masry, our Chief Executive Officer, is a
shareholder, loaned the Company $100,000, for working capital
purposes. The loan is unsecured,
non-interest bearing and is due on demand. However, there can be no assurance that additional equity or debt financing will be available
or available on terms favorable to us. If we are unable to obtain additional capital, we may be
required to delay, reduce the scope of, or eliminate, our research and development programs, reduce
any marketing activities or relinquish rights to technologies that we might otherwise seek to
develop or commercialize. Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations is based upon our
Financial Statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these Financial Statements and related
disclosures requires us to make estimates and judgments that affect the reported amounts of assets, 23




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liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on
an on-going basis, our estimates and judgments, including those related to the useful life of the
assets. We base our estimates on historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. The methods, estimates and judgments we use in applying our most critical accounting policies
have a significant impact on the results that we report in our Financial Statements. The SEC
considers an entitys most critical accounting policies to be those policies that are both most
important to the portrayal of a companys financial condition and results of operations and those
that require managements most difficult, subjective or complex judgments, often as a result of the
need to make estimates about matters that are inherently uncertain at the time of estimation. We
believe the following critical accounting policies, among others, require significant judgments and
estimates used in the preparation of our Financial Statements: The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Certain significant estimates were made in connection with preparing our financial statements as
described in Note 1 to Notes to Financial Statements. See Item 7, Financial Statements. Actual
results could differ from those estimates.  Stock-Based Compensation We account for stock-based compensation to employees as defined by using the intrinsic-value
method prescribed in Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued
to Employees. We account for stock option and warrant grants issued to non-employees using the guidance of
SFAS No. 123, Accounting for Stock-Based Compensation and EITF No. 96-18: Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, whereby the fair value of such option and warrant grants is determined using
the Black-Scholes option pricing model at the earlier of the date at which the non-employees
performance is completed or a performance commitment is reached. New Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 151, Inventory Costs. This Statement amends the guidance in
ARB No. 43 Chapter 4 Inventory Pricing, to require items such as idle facility costs, excessive
spoilage, double freight and rehandling costs to be expensed in the current period, regardless if
they are abnormal amounts or not. This Statement will become effective for us in the first quarter
of 2006. The adoption of SFAS No. 151 is not expected to have a material impact on our financial
condition, results of operations, or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123R), which revises SFAS No. 123. SFAS 123R also supersedes APB No. 25 and amends SFAS No. 95,
Statement of Cash Flows. In general, the accounting required by SFAS 123R is similar to that of
SFAS No. 123. However, SFAS No. 123 gave companies a choice to either recognize the fair value
of stock options in their income statements or disclose the pro forma income statement effect of
the fair value of stock options in the notes to the financial statements. SFAS 123R eliminates that
choice and requires the fair value of all share-based payments to employees, including the fair
value of grants of employee stock 24




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options, be recognized in the income statement, generally over
the option vesting period. SFAS 123R must be adopted no later than July 1, 2005 (December 15, 2005
for small business filers). Early adoption is permitted. The Company is currently evaluating the timing and manner in which it will adopt SFAS 123R. As
permitted by SFAS 123, the Company currently accounts for share-based payments to employees using
APB 25s intrinsic value method. Accordingly, adoption of SFAS 123Rs fair value method will have
an effect on results of operations, although it will have no impact on overall financial position.
The impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However, had SFAS 123R been adopted in prior
periods, the effect would have approximated the SFAS 123 pro forma net loss and loss per share
disclosures as shown above. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather than as an operating
cash flow as currently required, thereby reducing net operating cash flows and increasing net
financing cash flows in periods after adoption. 
 Item 3. Controls and Procedures (a) Evaluation of disclosure controls and procedures:Our management evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this Quaterly Report on
Form 10-QSB. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) are inadequate 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. We are developing a plan to ensure that all information will be recorded, processed,
summarized and reported on a timely basis. This plan is dependent, in part, upon reallocation of
responsibilities among various personnel, possibly hiring additional personnel and additional
funding. It should also be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions, regardless
of how remote. (b) Changes in internal control over financial reporting:There was no change in our internal
control over financial reporting that occurred during the period covered by this Quarterly Report
on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 25




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PART II 
 Item 1. Legal Proceedings On December 19, 2001, the SEC filed civil charges in the United States Federal District Court,
Southern District of New York, against us, our former President and then sole director Jeffrey A.
Muller, and others, alleging that we and the other defendants were engaged in a fraudulent scheme
to promote our stock. The SEC complaint alleged the existence of a promotional campaign using press
releases, Internet postings, an elaborate website, and televised media events to disseminate false
and materially misleading information as part of a fraudulent scheme to manipulate the market for
stock in our corporation, which was then controlled by Mr. Muller. On March 22, 2002, we signed a
Consent to Final Judgment of Permanent Injunction and Other Relief in settlement of this action as
against the corporation only, which the court approved on July 2, 2002. Under this settlement, we
were not required to admit fault and did not pay any fines or restitution. The SECs charges of
fraud and stock manipulation continue against Mr. Muller and others. On July 2, 2002, after an investigation by our newly constituted board of directors, we filed
a cross-complaint in the SEC action against Mr. Muller and others seeking injunctive relief,
disgorgement of monies and stock and financial restitution for a variety of acts and omissions in
connection with sales of our stock and other transactions occurring between 1998 and 2002. Among
other things, we alleged that Mr. Muller and certain others sold Company stock without providing
adequate consideration to us; sold insider shares without making proper disclosures and failed to
make necessary filing required under federal securities laws; engaged in self-dealing and entered
into various undisclosed related-party transactions; misappropriated for their own use proceeds
from sales of our stock; and entered into various undisclosed arrangement regarding the control,
voting and disposition of their stock. We contend that we are entitled to a judgment canceling all
of the approximately 8,716,710 shares of our common stock that was previously obtained and
controlled, directly or indirectly, by Mr. Muller; divesting and preventing any subsequent holders
of the right to exercise options previously held by Mr. Muller for 10,000,000 shares of our common
stock, conversion of an existing preliminary injunction to a permanent injunction to prevent Mr.
Muller from any involvement with the Company and a monetary judgment against Mr. Muller and others
in the amount of several million dollars. On July 30, 2002, the U.S. Federal District Court, Southern District of New York, granted our
application for a preliminary injunction against Mr. Muller and others, which prevented Mr. Muller
and other cross-defendants from selling, transferring, or encumbering any assets and property
previously acquired from us, from selling or transferring any of our stock that they may own or
control, or from taking any action to injure us or our business and from having any direct contact
with our shareholders. The injunctive order also prevents Mr. Muller from engaging in any effort to
exercise control over our corporation and from serving as an officer or director of our company.
While we believe that we have valid claims, there can be no assurance that an adverse result or
settlement would not have a material adverse effect on our financial position or cash flow. In the course of the litigation, we have obtained ownership control over Mr. Mullers claimed
patent rights to the ZEFS device. Under a Buy-Sell Agreement between Mr. Muller and dated December
29, 1998, Mr. Muller, who was listed on the ZEFS devise patent application as the inventor of the
ZEFS device, purported to grant us all international marketing, manufacturing and distribution
rights to the ZEFS device. Those rights were disputed because an original inventor of the ZEFS
device contested Mr. Mullers legal ability to have conveyed those rights. In Australia, Mr. Muller entered into a bankruptcy action seeking to overcome our claims for
ownership of the ZEFS device. In conjunction with these litigation proceedings, a settlement
agreement was reached whereby the $10 per unit royalty previously due to Mr. Muller under his
contested Buy-Sell Agreement was terminated and replaced with a $.20 per unit royalty payable to
the bankruptcy trustee. On November 7, 2002, under a settlement agreement executed with Mr.
Mullers bankruptcy trustee, the 26




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trustee transferred to us all ownership and legal rights to this international patent
application for the ZEFS device. Both the SEC and we have filed Motions for Summary Judgment contending that there are no
material issues of fact in contention and as a matter of law, the Court should grant a judgment
against Mr. Muller and the cross-defendants. Mr. Muller has filed a response contending the motions
are without merit or substance. A final decision on these motions, which potentially would
terminate the ongoing litigation, is still pending. Should the Court not grant summary judgment in
our favor, the case will be scheduled for final disposition in a trial. Mr. Muller and several of the defendants filed a Motion to Dismiss the complaint filed by us
and moved for summary judgment in their favor. On December 28, 2004, Judge George B. Daniels,
denied the cross-defendants motion to dismiss our cross-complaint, denied the request to vacate
the July 2, 2002 preliminary injunction and denied the request for damages against us. The court
also refused to grant a summary judgment in favor of the cross-defendants and dismissed Mr.
Mullers claims against us for indemnification for his legal costs and for damages resulting from
the litigation. Neither Mr. Muller nor any of the cross-defendants have filed any cross-claims
against us and we are not exposed to any liability as a result of the litigation, except for
possibly incurring legal fees and expenses should we lose the litigation. Although the outcome of this litigation cannot be predicted with any degree of certainty, we
are optimistic that the Courts ruling will either significantly narrow the issues for any later
trial or will result in a final disposition of the case in a manner favorable to us. While we
believe that we have valid claims, there can be no assurance that an adverse result or outcome on
the pending motions or a trial of this case would not have a material adverse effect on our
financial position or cash flow. After the end of the period covered by this report, we received notice that Jeffrey A. Muller,
the Companys former sole director and executive officer, has filed a lawsuit in the Federal
District Court for the Central District of California, seeking declaratory and injunctive relief
and alleging unfair competition in connection with a claimed prior patent interest in the ZEFS
device and stock option rights. In seeking declaratory relief, Mr. Muller is seeking to have the
patent rights in the ZEFS device that were previously transferred to us by Mr. Mullers bankruptcy
trustee declared null and void. This recent lawsuit brought by Mr. Muller arises out of the same claims that are the subject
of ongoing litigation in the Federal District Court for the Southern District of New York, in which
we have previously obtained a preliminary injunction against Mr. Muller barring him from any
involvement with the Company and preventing Mr. Muller, his agents or assigns, from exercising any
claimed rights to our assets or stock. Mr. Muller previously filed the same complaint in the
Federal District Court for the Southern District of New York, which claim is pending dismissal.
On December 28, 2004, Federal District Court Judge George B. Daniels issued a decision dismissing
motions filed by Mr. Muller against our cross-claims. The dismissal of those motions involved
similar causes of action as those contained in Mr. Mullers recent lawsuit commenced in the Federal
District Court for the Central District of California. Since the case in New York is still
pending, we believe that the filing of the new lawsuit in California is subject to various defenses
which should result in the dismissal of the new lawsuit. We intend to vigorously defend against any bifurcation of the lawsuit that is ongoing in New
York and will move to dismiss and/or to transfer the recently filed complaint to Judge Daniels in
New York for any eventual decision. While we believe that we have valid claims and defenses, there
can be no assurance that an adverse result or outcome on the pending motions or a trial of this
case would not have a material adverse effect on our financial position or cash flow. We were named as a defendant in a complaint filed before the Los Angeles Superior Court, Civ.
No. BC 312401, by Terracourt Pty Ltd, an Australian corporation (Terracourt), claiming breach of
contract and related remedies from promises allegedly made by the former president of the Company
in 1999. Terracourt is seeking specific performance of the former presidents alleged promises to
transfer to Terracourt an aggregate 480,000 shares of our common stock for office consultant and
multimedia services. The complaint was filed on March 18, 2004. Terracourt also filed a Statement
of Damages seeking costs of 27




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the lawsuit and general
damages of $2 million. Due to a late date of service of the
complaint upon us and other preliminary legal procedures, our answer was not filed until October
20, 2004. We are opposing the plaintiffs causes of action and have asserted that we have no
liability for the claims asserted. The trial on this lawsuit concluded in late April 2005 and has
been taken under submission by the judge, whose ruling is expected by late-May 2005. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three-month period ended March 31, 2005, the Company issued an aggregate 615,000
shares of common stock and warrants to purchase 615,000 additional shares of common stock at $1.00
per share, to certain investors in connection with the Companys private offering. Gross proceeds
to the Company in connection with these issuances were $615,000 and net proceeds were $580,600. In
addition, we received $44,000 for which the related 44,000 shares of common stock and warrants to
purchase a similar number of shares of common stock had not been issued by March 31, 2005. During the three-month period ended March 31, 2005, the Company issued an aggregate 50,500
shares of common stock in connection with the exercise of warrants by certain persons. Gross and
net proceeds to the Company in connection with these exercises were $50,200. The issuances of shares and warrants described above were made in reliance on the exemptions
from registration set forth in Section 4(2) of the Securities Act of 1933 (the Act), as amended,
or Regulations D or S promulgated thereunder. 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 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 1350.32
    
    Certification of Chief Executive Officer and Chief
Financial Officer of Quarterly Report pursuant to Rule
13(a)-15(e) or Rule 15(d)-15(e).
 28




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this
report to be signed on its behalf by the undersigned, hereunto duly authorized. SAVE THE WORLD AIR, INC.Date: May 20, 2005
    By:
    /s/      EDWARD L. MASRYEdward L. MasryChief Executive Officer 29




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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 1350.32
    
    Certification of Chief Executive Officer and Chief Financial
Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or
Rule 15(d)-15(e).