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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 September 30, 2004. or o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from to Commission File Number 0-29185 SAVE THE WORLD AIR, INC. (Exact name of registrant as specified in its charter)
 Nevada
    
    52-2088326(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 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 September 30, 2004 was
37,015,821 shares. DOCUMENTS INCORPORATED BY REFERENCE Transitional Small Business Disclosure Format (Check one): Yes o No þ




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##### Table of Contents



SAVE THE WORLD AIR, INC.
FORM 10-QSB
INDEX PagePART IITEM 1 Financial StatementsITEM 2 Managements Discussion and AnalysisITEM 3 Controls and ProceduresPART IIITEM 1 Legal ProceedingsITEM 2 Changes in SecuritiesITEM 6 Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT INDEXEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32EX-31.1EX-31.2EX-32




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PART I 
 Item 1. Financial Statements SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)NINE MONTHS ENDED SEPTEMBER 30, 2004  CONTENTS PageFinancial statementsBalance sheets
    
    
    1-2Statements of operations
    
    
    3Statements of stockholders deficiency
    
    
    4-7Statements of cash flows
    
    
    7-9Notes to financial statements
    
    
    10-21




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SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETSSEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003  Sept. 30, 2004
    
    December 31,(unaudited)
    
    2003ASSETSCurrent assetsCash
    
    $
    223,102
    
    
    $
    926,052Prepaid expenses
    
    
    50,000
    
    
    
    Total current assets
    
    
    273,102
    
    
    
    926,052Property and equipment, net of accumulated depreciation
    
    
    39,839
    
    
    
    35,244$
    312,941
    
    
    $
    961,296
 See notes to condensed financial statements. 1




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SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS  ContinuedSEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003  Sept. 30, 2004
    
    December 31,(unaudited)
    
    2003LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilitiesIncome taxes payable
    
    $
    
    
    
    $
    5,991Payables to related parties
    
    
    36,478
    
    
    
    57,903Accrued professional fees
    
    
    787,463
    
    
    
    551,582Finders fees payable
    
    
    35,063
    
    
    
    128,916Other accrued liabilities
    
    
    
    
    
    
    33,082Total current liabilities
    
    
    859,004
    
    
    
    777,474Due to founding executive officer
    
    
    1,017,208
    
    
    
    1,017,208Commitments and contingenciesStockholders deficiencyCommon stock, $.001 par value: 200,000,000
shares authorized, 37,015,821 and
34,128,261 shares issued and
outstanding at September 30, 2004 and
December 31, 2003, respectively
    
    
    37,015
    
    
    
    34,128Common stock to be issued
    
    
    235,000
    
    
    
    6,250Additional paid-in capital
    
    
    13,270,211
    
    
    
    10,162,177Deferred compensation
    
    
    (175,760
    )
    
    
    (708,333
    )Deficit accumulated during the development
stage
    
    
    (14,929,737
    )
    
    
    (10,327,608
    )Total stockholders deficiency
    
    
    (1,563,271
    )
    
    
    (833,386
    )$
    312,941
    
    
    $
    961,296
 See notes to condensed financial statements. 2




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SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (UNAUDITED)THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 and 2003 AND FOR THE PERIOD FROM INCEPTION (FEBRUARY
18, 1998) TO SEPTEMBER 30, 2004  Three months ended
    
    Nine months ended
    
    CumulativeSeptember 30,
    
    September 30,
    
    since2004
    
    2003
    
    2004
    
    2003
    
    inceptionNet sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses
    
    
    918,310
    
    
    
    385,127
    
    
    
    2,574,713
    
    
    
    1,207,137
    
    
    
    12,117,052Research and development expenses
    
    
    162,458
    
    
    
    141,778
    
    
    
    445,727
    
    
    
    365,417
    
    
    
    1,225,489Non-cash settlement cost
    
    
    1,585,266
    
    
    
    
    
    
    
    1,585,266
    
    
    
    
    
    
    
    1,585,266Loss before other income
    
    
    (2,666,034
    )
    
    
    (526,905
    )
    
    
    (4,605,706
    )
    
    
    (1,572,554
    )
    
    
    (14,927,807
    )Other incomeInterest income
    
    
    
    
    
    
    
    
    
    
    514
    
    
    
    
    
    
    
    954Loss before provision for income taxes
    
    
    (2,666,034
    )
    
    
    (526,905
    )
    
    
    (4,605,192
    )
    
    
    (1,572,554
    )
    
    
    (14,926,853
    )Provision (benefit) for income taxes
    
    
    (4,063
    )
    
    
    
    
    
    
    (3,063
    )
    
    
    1,020
    
    
    
    2,884Net loss
    
    $
    (2,661,971
    )
    
    $
    (526,905
    )
    
    $
    (4,602,129
    )
    
    $
    (1,573,574
    )
    
    $
    (14,929,737
    )Net loss per share, basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.13
    )
    
    $
    (0.06
    )Weighted average shares outstanding,
basic and diluted
    
    
    36,599,887
    
    
    
    28,400,734
    
    
    
    35,328,591
    
    
    
    24,683,423
 See notes to condensed financial statements. 3




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO SEPTEMBER 30, 2004  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
    
    
    
    
    
    
    
    
    
    
    
    9,541Stock issued for filing services on December 20, 2000
    
    
    0.50
    
    
    
    5,172
    
    
    
    5
    
    
    
    
    
    
    
    2,581
    
    
    
    
    
    
    
    
    
    
    
    2,586
 See notes to condensed financial statements. 4




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS DEFICIENCY  Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO SEPTEMBER 30, 2004  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 services on April 2, 2004
    
    
    0.25
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    16,185
    
    
    
    
    
    
    
    
    
    
    
    16,250Debt converted to stock on April 2, 2004
    
    
    0.25
    
    
    
    60,000
    
    
    
    60
    
    
    
    
    
    
    
    14,940
    
    
    
    
    
    
    
    
    
    
    
    15,000Stock issued 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
    
    
    0.25
    
    
    
    600,000
    
    
    
    600
    
    
    
    
    
    
    
    149,400
    
    
    
    
    
    
    
    
    
    
    
    150,000Stock 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 consulting services on September 22, 2004
    
    
    1.24
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    24,780
    
    
    
    
    
    
    
    
    
    
    
    24,800Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,928
    )
    
    
    
    
    
    
    
    
    
    
    (64,928
    )Common stock paid for, but not issued (235,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235,000Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    359,582
    
    
    
    (359,582
    )
    
    
    
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,120
    
    
    
    (60,120
    )
    
    
    
    
    
    
    Fair value of warrants issued for settlement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,585,266
    
    
    
    
    
    
    
    
    
    
    
    1,585,266Amortization of deferred comp
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    952,275
    
    
    
    
    
    
    
    952,275Net loss for nine months ended September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,602,129
    )
    
    
    (4,602,129
    )Balance, September 30, 2004 (unaudited)
    
    
    
    
    
    
    37,015,821
    
    
    $
    37,015
    
    
    $
    235,000
    
    
    $
    13,270,211
    
    
    $
    (175,760
    )
    
    $
    (14,929,737
    )
    
    $
    (1,563,271
    )
 See notes to condensed financial statements. 7




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##### Table of Contents



SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (UNAUDITED)NINE MONTHS ENDED SEPTEMBER 30, 2004 AND2003 AND FOR THE PERIOD FROM
INCEPTION (FEBRUARY 18, 1998) TO SEPTEMBER 30, 2004  CumulativeSept. 30,
    
    Sept. 30,
    
    since2004
    
    2003
    
    inceptionCash flows from operating activitiesNet loss
    
    $
    (4,602,129
    )
    
    $
    (1,573,574
    )
    
    $
    (14,929,737
    )Adjustments to reconcile net loss to net cash
used in operating activities:Write off of intangible assets
    
    
    
    
    
    
    
    
    
    
    505,000Fair value of options issued for services
    
    
    
    
    
    
    
    
    
    
    142,318Issuance of common stock for services
    
    
    269,050
    
    
    
    45,877
    
    
    
    4,146,923Amortization of deferred compensation
    
    
    952,275
    
    
    
    651,226
    
    
    
    2,898,850Depreciation
    
    
    6,323
    
    
    
    3,724
    
    
    
    12,055Non-cash settlement cost
    
    
    1,585,266
    
    
    
    
    
    
    
    1,585,266Changes in operating assets and liabilities:Prepaid expenses
    
    
    (50,000
    )
    
    
    
    
    
    
    (50,000
    )Income taxes payable
    
    
    (5,991
    )
    
    
    1,064
    
    
    
    Accrued expenses
    
    
    157,999
    
    
    
    (131,230
    )
    
    
    558,998Net cash used in operating activities
    
    
    (1,687,207
    )
    
    
    (1,002,913
    )
    
    
    (5,130,327
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (10,918
    )
    
    
    (1,672
    )
    
    
    (48,344
    )Net cash used in investing activities
    
    
    (10,918
    )
    
    
    (1,672
    )
    
    
    (48,344
    )Cash flows from financing activitiesIncrease (decrease) in payables to related parties
    
    
    (6,425
    )
    
    
    (21,146
    )
    
    
    547,928Advances from founding executive officer
    
    
    
    
    
    
    
    
    
    
    517,208Issuance of common stock for cash
    
    
    766,600
    
    
    
    1,441,068
    
    
    
    4,101,637Common stock issuable
    
    
    235,000
    
    
    
    187,500
    
    
    
    235,000Net cash provided by financing activities
    
    
    995,175
    
    
    
    1,607,422
    
    
    
    5,401,773Net increase (decrease) in cash
    
    
    (702,950
    )
    
    
    602,837
    
    
    
    223,102Cash, beginning of period
    
    
    926,052
    
    
    
    107,489
    
    
    
    Cash, end of period
    
    $
    223,102
    
    
    $
    710,326
    
    
    $
    223,102
 See notes to condensed financial statements. 8




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##### Table of Contents



SAVE THE WORLD AIR, INC.(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS  Continued (UNAUDITED)NINE MONTHS ENDED SEPTEMBER 30, 2004 and 2003 AND FOR THE PERIOD FROM
INCEPTION (FEBRUARY 18, 1998) TO SEPTEMBER 30, 2004  CumulativeSept. 30,
    
    Sept. 30,
    
    since2004
    
    2003
    
    inceptionSupplemental disclosures of cash flow
informationIncome taxes
    
    $
    2,400
    
    
    $
    
    
    
    $
    2,400Non-cash investing and financing
activitiesAcquisition of intangible asset through
advance from related party and issuance
of common stock
    
    $
    
    
    
    $
    
    
    
    $
    505,000Deferred compensation for stock options
issued for services
    
    
    419,702
    
    
    
    
    
    
    
    3,074,611Purchase of property and equipment
financed by advance from related party
    
    
    
    
    
    
    
    
    
    
    3,550Conversion of related party debt to equity
    
    
    15,000
    
    
    
    500,000
    
    
    
    515,000Issuance of common stock in settlement of
payable
    
    
    113,981
    
    
    
    
    
    
    
    113,981Common stock, previously paid for
    
    
    6,250
    
    
    
    
    
    
    
    Fees accrued for issuance of common stock
    
    
    64,928
    
    
    
    153,509
    
    
    
    377,510
 See notes to condensed financial statements. 9




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##### Table of Contents



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




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation- Continued  Description of business  Save the World Air, Inc. (the Company) was incorporated in Nevada on February 18, 1998
under the name Mandalay Capital Corp. The Company changed its name to Save the World
Air, Inc. on February 11, 1999 following the signing of an agreement by and between the
Company and Jeffrey Alan Muller, the Companys founding executive officer and director,
with respect to the Companys purchase of the Zero Emission Fuel-Saving Device (the
Agreement). Under the terms of the Agreement, the Company issued 5,000,000 shares of
its common stock to Mr. Muller and agreed to pay him a total of $500,000 for the
marketing and distribution rights of the device, and a $10 royalty for every unit of the
device sold (see additional discussion in the Significant Matters section of this note).
The Company acquired the worldwide exclusive manufacturing, marketing and distribution
rights for the Zero Emission Fuel-Saving Device (ZEFS) by entering into the Agreement.
The ZEFS is a product, which is fitted to an internal combustion engine and is expected
to reduce carbon monoxide hydrocarbons and toxic exhaust emissions. The ZEFS is
currently undergoing testing to determine the achievable levels of reduced emissions and
commercial viability.  Significant matters  On December 19, 2001, the SEC filed civil charges in the United States Federal District
Court, Southern District of New York, against us, our former President and then sole
board 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 continues against Mr.
Muller and others. 11




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation- Continued  Significant matters  Continued  On July 2, 2002, after an investigation by our newly constituted board of directors, we
filed a cross-complaint in the SEC action against Mr. Muller and others seeking
injunctive relief, disgorgement 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
SWA; 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 our stock; and entered into various undisclosed arrangements
regarding the control, voting and disposition of their stock. We contend that we are
entitled to a judgment canceling all of the approximately 8,716,710 shares of our common
stock which we believe are controlled, directly or indirectly, by Mr. Muller; divesting
Mr. Muller of any right to exercise options for 10,000,000 shares of our stock,
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 Muller and
others in the amount of several million dollars. SWA is also seeking cancellation of the
previous royalty arrangement with Mr. Muller.On July 30, 2002, the U.S. Federal District Court, Southern District of New York, granted
our application for a preliminary injunction against Mr. Muller and others, which
prevents Mr. Muller and other cross-defendants from selling, transferring, or encumbering
any assets and property previously acquired from SWA, 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. 12




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation- Continued  Significant matters  Continued  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 Jeffrey
Muller and SWA 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 SWA all
international marketing, manufacturing and distribution rights to the ZEFS device. Those
rights were disputed because an original inventor of the ZEFS device contested Mullers
legal ability to have conveyed those rights. In Australia, 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 the
Muller bankruptcy trustee, the trustee transferred all ownership and legal rights to this
international patent application for the ZEFS device to us.Both the SEC and SWA 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 Jeffrey A. Muller and the cross-defendants. Muller has filed a
response contending that the actions against him should be dismissed. A decision on
these motions would potentially terminate the ongoing litigation. Further proceedings
for all pretrial motions have been assigned to U.S. Magistrate Frank Maas. An initial
decision will be made by Judge Maas after a hearing on the Motions which is expected to
occur within the next 60 days. Should Judge Maas determine that there are material
issues in dispute the case could be continued for a final disposition by a trial.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 the company. 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. 13




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   1.
    
    Organization and basis of presentation- Continued  Development stage enterprise  The Company is a development stage enterprise as defined by Statement of Financial
Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage
Enterprises. All losses accumulated since the inception of the Company have been
considered as part of the Companys development stage activities.A team has been assembled for the research and development of the technology and
potential markets for the ZEFS and to establish relationships with potential customers.
Significant design work has been completed, and patent applications have been filed in 64
countries. There is no assurance that any of the filed patents will be granted. The
Company is continuing in its product development efforts and several studies are underway
to evaluate the effectiveness of the ZEFS in eliminating pollutants and emissions from
internal combustion engines. The Company has had no sales to date.As such, the Company continues to remain a development stage enterprise. The ability of
the Company to commercialize its products will depend on, among other things, the
Companys ability to demonstrate the merits of the ZEFS and develop markets and
distribution channels.  2.
    
    Net loss per share  Basic earnings (loss) per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution, using the treasury
stock method, that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company. In computing diluted earnings per
share, the treasury stock method assumes that outstanding options and warrants are
exercised and the proceeds are used to purchase common stock at the average market price
during the period. Options and warrants will have a dilutive effect under the treasury
stock method only when the average market price of the common stock during the period
exceeds the exercise price of the options and warrants. For the three and nine months
ended September 30, 2004 and 2003, the dilutive impact of outstanding stock options of
15,168,652 and 14,000,000, respectively, and 14,117,414 and 10,252,414 warrants have been
excluded because their impact on the loss per share is antidilutive. 14




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




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   4.
    
    Certain relationships and related transactions- Continued  Due to founding executive officer  Continued  In connection with the Companys legal proceedings against Mr. Muller, the Company is
attempting to obtain a judgment that will relieve the Company of $1,017,208, which has
been reflected as a long-term liability in the accompanying balance sheet and represents
all amounts due to Muller. These amounts include the $500,000 due for the marketing and
distribution rights of the ZEFS and the working capital advances of $517,208. As
described in the Significant Matters section of Note 1, the Company has already been
relieved of the $10 royalty interest that Mr. Muller held for each unit sold. In
addition, the Company is also attempting to obtain a judgment that will cancel the
options to purchase 10,000,000 shares granted to Mr. and Mrs. Muller, collectively.Based on the status of current legal proceedings, the Company does not believe that it
will have to pay Mr. Muller the $500,000 for the rights to the ZEFS device and the
$517,208 of advances. The Company also believes that the option Mr. Muller holds to
purchase 10,000,000 shares of the Companys stock will be cancelled and no longer valid.  Due to related parties  Masry & Vititoe, a law firm in which Edward Masry is a partner, has advanced $36,478 and
$57,903 as of September 30, 2004 and December 31, 2003 to the Company for working capital
purposes. The advances payable to Masry & Vititoe were allocations to the Company for
shared expenses, primarily payroll. These advances are unsecured, non-interest bearing,
and are due on demand. In April 2004, accounts payable due this firm totaling $15,000
was converted to 60,000 shares of common stock. 16




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   5.
    
    Stock options and warrants  The Company issues stock options to employees, directors and consultants under no formal
plan. Employee options vest according to the terms of the specific grant and expire from 5
to 10 years from date of grant. Non-employee option grants to date are vested upon
issuance or up to one year. The weighted average remaining contractual life of employee
options outstanding at September 30, 2004 was 7.32 years. Stock option activity for the
year ended December 31, 2003 and nine months ended September 30, 2004, was as follows: Weighted Avg.Options
    
    Exercise PriceOptions outstanding, January 1, 2003
    
    
    14,000,000
    
    
    $
    0.13Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, December 31, 2003
    
    
    14,000,000
    
    
    
    0.13Options granted
    
    
    1,172,652
    
    
    
    1.04Options exercised
    
    
    (4,000
    )
    
    
    0.40Options cancelled
    
    
    
    
    
    
    Options, September 30, 2004
    
    
    15,168,652
    
    
    $
    0.20
  For the nine months ended September 30, 2004, 4,000 options were exercisedOptions outstanding at September 30, 2004 and the related weighted average exercise price
and remaining life information is as follows: TotalWeighted
    
    weighted
    
    
    
    
    
    WeightedRange of
    
    Total
    
    average
    
    average
    
    
    
    
    
    averageexercise
    
    options
    
    remaining
    
    exercise
    
    Options
    
    exerciseprices
    
    outstanding
    
    life in years
    
    price
    
    exercisable
    
    price$
    0.10
    
    
    
    10,000,000
    
    
    
    N/A
    
    
    $
    0.10
    
    
    
    10,000,000
    
    
    $
    0.100.10
    
    
    
    3,000,000
    
    
    
    5.09
    
    
    
    0.10
    
    
    
    2,000,000
    
    
    
    0.100.40
    
    
    
    746,000
    
    
    
    7.05
    
    
    
    0.40
    
    
    
    746,000
    
    
    
    0.400.50
    
    
    
    150,000
    
    
    
    1.95
    
    
    
    0.50
    
    
    
    150,000
    
    
    
    0.501.00
    
    
    
    100,000
    
    
    
    2.50
    
    
    
    1.00
    
    
    
    100,000
    
    
    
    1.00.98
    
    
    
    900,000
    
    
    
    4.25
    
    
    
    .98
    
    
    
    
    
    
    
    1.15
    
    
    
    193,912
    
    
    
    4.25
    
    
    
    1.15
    
    
    
    
    
    
    
    1.27
    
    
    
    78,740
    
    
    
    4.25
    
    
    
    1.27
    
    
    
    
    
    
    
    $
    0.10 - $1.27
    
    
    
    15,168,652
    
    
    
    5.04
    
    
    $
    0.20
    
    
    
    12,996,000
    
    
    $
    0.25
 17




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   5.
    
    Stock options and warrants- Continued  The 10,000,000 options exercisable at $0.10 per share in the table above are held by Mr.
Muller. The options have been accounted for as employee stock options under the provisions
of APB No. 25. Accordingly, no compensation expense has been recorded in the statements of
operations. However, the $1,000,000 fair value of the options has been reflected in the
pro forma net loss below. The 10,000,000 options do not have an expiration date and vested
in 1999. For purposes of computing fair value method stock-based employee compensation
expense for the 10,000,000 employee options above, a ten-year life was used in the
Black-Scholes option-pricing model, as ten years is the longest term for other option
grants.The following table summarizes certain information about the companys stock purchase
warrants. Weighted Avg.Warrants
    
    Exercise PriceWarrants outstanding, January 1, 2003
    
    
    1,850,000
    
    
    $
    0.06Warrants granted
    
    
    11,517,414
    
    
    
    0.46Warrants exercised
    
    
    
    
    
    
    Warrants cancelled
    
    
    
    
    
    
    Warrants outstanding, December 31, 2003
    
    
    13,367,414
    
    
    
    0.52Warrants granted
    
    
    1,700,000
    
    
    
    0.14Warrants exercised
    
    
    (950,000
    )
    
    
    (0.01
    )Warrants cancelled
    
    
    
    
    
    
    Warrants outstanding, September 30, 2004
    
    
    14,117,414
    
    
    $
    0.59
  During the three months ended September 30, 2004, the Company issued 1,000,000 ten-year warrants to
acquire 1,000,000 shares of the Company's common stock. The warrants require a payment of $1 for each share purchased. The
warrants were issued to
finalize a settlement with the bankruptcy trustee and others who had claims to ZEFS
technology in exchange for the full release of their claims. The Company valued the
warrants at $1,585,265 and expensed the amount as settlement costs during the three
months ended September 30, 2004. The warrants were issued in July 2004 when the
Company became current in its SEC filings. The warrants were valued by the Company
using the Black-Scholes pricing model using a ten year term (statutory term), 46.2% volatility,
no annual dividends, and a discount rate of 4.57%. The trustee and the other individuals will
also receive royalties when the product is sold. There are no minimum royalties required.  Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires goods or
services from non-employees in exchange for equity instruments. SFAS No. 123 also
encourages, but does not require companies to record compensation cost for stock-based
employee compensation. SFAS No. 123 was amended by SFAS No. 148, which now requires
companies to disclose in interim financial statements the pro forma effect on net income
(loss) and net income (loss) per common share of the estimated fair market value of stock
options or warrants issued to employees. The Company has chosen to continue to account
for stock-based compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
with pro forma disclosures of net income (loss) as if the fair value method had been
applied. Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair market price of the Companys stock at the date of grant over the amount
an employee must pay to acquire the stock. 18




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   5.
    
    Stock options and warrants- Continued  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 nine months ended September 30, 2004, $952,275 and
$45,000, respectively of employee-deferred compensation and non-employee deferred
compensation, respectively was amortized and recognized as expense. The remaining
deferred compensation expense will be recognized over the remaining vesting periods of
the employee options through 2004.The Company has elected to account for stock-based compensation using the intrinsic value
method prescribed in APB No. 25 and related interpretations, and follow the pro forma
disclosure requirements of SFAS No. 123. Accordingly, no compensation expense has been
recognized related to the granting of stock options, except as noted above. The
following table illustrates the effect on net income as if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. CumulativeSept. 30,
    
    Sept. 30,
    
    since2004
    
    2003
    
    inceptionNet loss, as reported
    
    $
    (4,602,129
    )
    
    $
    (1,573,575
    )
    
    $
    (14,929,737
    )Add: total fair value method
stock-based employee
compensation expense
    
    
    (1,721,718
    )
    
    
    (712,483
    )
    
    
    (3,930,000
    )Less: deferred compensation
amortization for below
market employee options
    
    
    907,185
    
    
    
    637,500
    
    
    
    2,798,852Pro forma net loss
    
    $
    (5,416,662
    )
    
    $
    (1,648,558
    )
    
    $
    (16,060,885
    )Pro forma loss per share
    
    $
    (0.15
    )
    
    $
    (0.07
    )
 19




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   6.
    
    Research and development  We have established a research and development facility in Queensland, Australia. We have
purchased test vehicles, test engines and testing equipment. We have completed testing on
ZEFS devices for the VW Beetle and Ford Mustangs, which has been provided to RAND for
evaluation. Through September 30, 2004, we have continued research on devices for the two
and four-stroke engines and thin line two and four barrel carbureted devices. We have
expanded research and development to include applications of the ZEFS technology to diesel
engines, motorbikes and boats. No proceeds were spent on research and development prior to
2002. We spent $445,727 and $365,417 for the nine months ended September 30, 2004 and 2003,
respectively, and $162,458 and $141,778 for the three months ended September 30, 2004 and
2003, respectively, on research and development.  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 $4,602,129 and, a negative cash flow from operations of
$1,687,207 for the nine months ended September 30, 2004 and had a working capital
deficiency of $585,902 and a stockholders deficiency of $1,563,271 as of September 30,
2004. The ability of the Company to continue as a going concern is dependent on the
Companys ability to raise additional funds and implement its business plan. The financial
statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.The Company believes that it has sufficient cash to fund its operations through at least
the end of the fourth quarter of 2004. In order to meet its operational needs, the Company
is raising additional capital in a private offering. However, there can be no assurance
that additional financing will be available or, if it is available, that it will be
available on terms that are favorable to the Company. If the Company is unable to obtain
additional capital, it may be required to delay, reduce the scope of, or eliminate its
research and development programs, or relinquish rights to technologies that it might
otherwise seek to develop or commercialize. 20




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS  Continued
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)   8.
    
    Subsequent events  On October 1, 2004 the Company entered into a representation agreement with an individual
who will represent and introduce the Company to key personnel in India. The representative
will be granted 50,000 warrants at $1.00 upon signing of the agreement. Once all duties
have been performed, the representative will receive an additional 50,000 warrants at the
medium price of stock traded on March 31, 2005 at a discount of 30%, plus 2% royalty on
gross receipts from contracts that are signed from his contract. The fair value of the
50,000 warrants issued upon signing is $24,428 using the black-scholes pricing model. 21




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Item 2. Managements Discussion and Analysis This Quarterly Report on Form 10-QSB contains forward-looking statements. These
forward-looking statements include predictions regarding our future:  
    
    research and development expenses;
    
    scientific test results;
    
    general and administrative expenses;
    
    liquidity and sufficiency of existing cash;
    
    technology;
    
    the outcome of pending or threatened litigation. You can identify these and other forward-looking statements by the use of words such as may,
will, expects, anticipates, believes, estimates, continues, or the negative of such
terms, or other comparable terminology. Forward-looking statements also include the assumptions
underlying or relating to any of the foregoing statements. Such statements, which include statements concerning future revenue sources and
concentrations, selling, general and administrative expenses, research and development expenses,
capital resources, additional financings and additional losses, are subject to risks and
uncertainties, including, but not limited to, those discussed elsewhere in this Form 10-QSB, that
could actual results to differ materially from those projected. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below under the heading Risk
Factors in our Annual Report on Form 10-KSB for the year ended December 31, 2003. All
forward-looking statements included in this document are based on information available to us on
the date hereof. We assume no obligation to update any forward-looking statements. The forward-looking statements set forth in this Form 10-QSB are as of September 30, 2004, and
we undertake no duty to update this information.




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Overview The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the Financial Statements and notes thereto included in Part I,
Item 1 of this Form 10-QSB and the Financial Statements and notes thereto contained in our Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2003. We are a development stage company that has not yet commenced operations and does not generate
revenue. Our current focus is on research and development of proprietary devices that can be
installed on motor vehicles and which are designed to reduce harmful emissions, improve fuel
efficiency and improve performance. Utilizing our test vehicles, motorcycles, engines and equipment
at our research and development facilities in Australia and the United States, we have created
prototype devices for one-, two- and four-barrel carbureted engines and multiple devices for fuel
injection engines that we call ZEFS. We have devoted the bulk of our efforts to complete the
design and development of our production models and raise the financing required to do so and to
fund our expenses. We have also recently developed devices for use on two- and four-stroke motorcycles,
generators and lawnmower engines, which we call CAT-MATE. On June 4, 2004, we filed a New
Provisional Patent Application for an Inline Exhaust Device to Improve Efficiency of a Catalytic
Converter. We have also trademarked the name CAT-MATE. We anticipate that our research and development efforts will continue for at least the
remainder of 2004. We do not envision generating any significant revenue in 2004, although limited
marketing activities later in 2004 could produce nominal revenue. We are in the process of raising
additional capital to fund continuing research and development activities and meet our operating
expenses, including marketing activities, for the remainder of 2004. In July 2004, we announced that we were joined by Erin Brockovich, who assumed a position with
our management team as our Vice President of Environmental Affairs. In October 2004, we retained
Dr. Gurminder Singh to act as our representative in India to develop ties between our company and
leading members of the Indian government, business community and academia. Results of Operations To date, we have not generated any revenues and our business is in the development stage. Our operating costs and expenses consist primarily of
general and administrative expenses. We expect our operating costs to increase once we begin to
manufacture and market the ZEFS and CAT-MATE devices, which we do not expect to occur earlier than
the fourth quarter of 2004. Our general and administrative expenses include compensation expenses related to executive and
other administrative personnel, facility lease, the costs of our insurance, consulting fees and legal and accounting
support. We expect our general and administrative expenses to increase as we expand our
infrastructure in support of our anticipated increased operations, which we do not expect to occur
earlier than the fourth quarter of 2004. Our research and development expenses include contractual payments to
RAND Corporation, consultants fees, capital expenditures, cost of services and supplies. We expect
our research and development costs to increase as we continue to develop the ZEFS and CAT-MATE
devices and develop new applications of our technology. Our non-cash settlement costs consist of the value of
warrants to purchase an aggregate of 1,000,000 shares of common stock issued in payment of settlement
fees, as determined by the Black-Scholes pricing model. We do not expect to incur further non-cash settlement costs. We had a net loss of $2,661,971 for the three months ended September 30, 2004, compared to a
net loss of $526,905 for the three months ended September 30, 2003. We had a net loss of $4,602,129
for the nine months ended September 30, 2004, compared to a net loss of $1,573,574 for the nine
months ended September 30, 2003. These increases in loss are primarily attributable to an increase
in research and




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development expenses as a result of the agreement we entered into with RAND Corporation in December
2002, as amended. We expect an increase in net loss through 2004 attributable to increased research
and development, and general and administrative expenses, as well as the commencement of marketing
activities. Liquidity and Capital Resources We have incurred negative cash flow from operations in the developmental stage since our
inception in 1998. As of September 30, 2004 we had cash of $223,102 and an accumulated deficit of
$14,929,737. Our 2004 negative operating cash flows have been funded primarily through the net
proceeds of a private financing that we commenced in November 2002 and completed in October 2003.
Because of our current cash position, the Company does not have sufficient cash on hand to continue
to fund operations for any significant period of time. Accordingly, we commenced another private
offering in late July 2004, which is ongoing. As of the date of the filing of this report, we have
raised in excess of $1 million in this offering. We anticipate additional operating losses, which
may increase, through at least the remainder of 2004 as we expand our research and development
program, provide for general and administrative expenses and commence marketing activities, without
the benefit of revenue. The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. As reflected in the accompanying financial statements, for the nine
month period ended September 30, 2004, the Company had a net loss of $4,602,129 and a negative cash
flow from operations of $1,687,207, and as of September 30, 2004 had a working capital deficiency
of $585,902 and a stockholders deficiency of $1,563,271. These factors raise concerns about the
Companys ability to continue as a going concern. The ability of the Company to continue as a going
concern is dependent on the Companys ability to raise additional funds and implement its business
plan. The financial statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern. We believe that we have sufficient cash to fund our operations through at least the fourth
quarter of 2004. In order to meet our operational needs, we are raising additional capital in a
private offering as described above. However, there can be no assurance that additional financing
will be available or, if it is available, that is will be available on terms that are favorable to
the Company. If we are unable to obtain additional capital, we may be required to delay, reduce the
scope of, or eliminate our research and development programs, or relinquish rights to technologies
that we might otherwise seek to develop or commercialize. In the action by the Securities and Exchange Commission (the SEC) against Jeffrey Muller,
the founder and former sole director of the Company, and others, we seek, among other relief, the
cancellation of all shares of our common stock controlled, directly or indirectly, by Mr. Muller
and his affiliates, options to purchase an additional 10,000,000 shares of our common stock, and
Mr. Mullers original royalty agreement. See Part II, Item 1, Legal Proceedings. The cancellation
of these shares and options would have a significant positive effect on our capitalization. Critical Accounting Policies Our discussion and analysis of financial condition and results of operations is based upon our
Financial Statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these Financial Statements and related
disclosures requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on
an on-going basis, our estimates and judgments, including those related to the useful life of the
assets. We base our estimates on historical experience and assumptions that we believe to be
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form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates. The methods, estimates and judgments we use in applying our most critical accounting policies
have a significant impact on the results that we report in our Financial Statements. The SEC
considers an entitys most critical accounting policies to be those policies that are both most
important to the portrayal of a companys financial condition and results of operations and those
that require managements most difficult, subjective or complex judgments, often as a result of the
need to make estimates about matters that are inherently uncertain at the time of estimation. We
believe the following critical accounting policies, among others, require significant judgments and
estimates used in the preparation of our Financial Statements: Stock-Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), establishes a fair value method of accounting for stock-based compensation plans
and for transactions in which an entity acquires goods or services from non-employees in exchange
for equity instruments. SFAS No. 123 also encourages, but does not require companies to record
compensation cost for stock-based employee compensation. SFAS No. 123 was amended by SFAS No. 148,
which now requires companies to disclose in interim financial statements the pro forma effect on
net income (loss) and net income (loss) per common share of the estimated fair market value of
stock options or warrants issued to employees. The Company has chosen to continue to account for
stock-based compensation utilizing the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, with pro forma disclosures of net
income (loss) as if the fair value method had been applied. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair market price of the Companys stock at
the date of grant over the amount an employee must pay to acquire the stock. We account for stock option and warrant grants issued to non-employees using the guidance of
SFAS No. 123, Accounting for Stock-Based Compensation and EITF No. 96-18: Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, whereby the fair value of such option and warrant grants is determined using
the Black- Scholes option pricing model at the earlier of the date at which the non-employees
performance is completed or a performance commitment is reached. Estimates The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the
reported amounts of revenues and expenses during the reporting period. Certain significant
estimates were made in connection with preparing our financial statements as described in Note 1 of
our Financial Statements. See Item 1, Part I, Financial Statements. Actual results could differ
from those estimates. New Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). The provisions of SFAS No. 150 are
effective for financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities., which are subject to the
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December 15, 2004. The Company believes that the adoption of SFAS No. 150 will not have an impact
on its financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), which clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, relating to consolidation of certain entities. In December
2003, the FASB issued a revised version of FIN 46 (FIN 46R) that replaced the original FIN 46.
FIN 46R requires identification of a companys participation in variable interest entities
(VIEs), which are defined as entities with a level of invested equity that is not sufficient to
fund future activities to permit it to operate on a standalone basis. For entities identified as a
VIE, FIN 46R sets forth a model to evaluate potential consolidation based on an assessment of which
party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to
gain from a majority of its expected returns. FIN 46R also sets forth certain disclosures regarding
interests in VIEs that are deemed significant even if consolidation is not required. The Company is
not currently participating in, or invested in, any VIEs, as defined in FIN 46R. The implementation
of the provisions of FIN 46R in 2003 did not have a significant effect on the Companys
consolidated financial statement presentation or disclosures. 
 Item 3. Controls and Procedures (a) Evaluation of disclosure controls and procedures: Our management evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this Quarterly Report on
Form 10-QSB. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. It should be noted that the design of any system of controls
is based in part upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. (b) Changes in internal control over financial reporting: There was no change in our internal
control over financial reporting that occurred during the period covered by this Quarterly Report
on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 
 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 board 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 continues against Mr. Muller and
others. On July 2, 2002, after an investigation by our newly constituted board of directors, we filed
a cross-complaint in the SEC action against Mr. Muller and others seeking injunctive relief,
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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 SWA; 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 our stock; and entered into various undisclosed arrangements regarding the control, voting
and disposition of their stock. We contend that we are entitled to a judgment cancelling all of the
approximately 8,716,710 shares of our common stock which we believe are controlled, directly or
indirectly, by Mr. Muller; divesting Mr. Muller of any right to exercise options for 10,000,000
shares of our stock, 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 Muller and
others in the amount of several million dollars. SWA is also seeking cancellation of the previous
royalty arrangement with Mr. Muller. On July 30, 2002, the U.S. Federal District Court, Southern District of New York, granted our
application for a preliminary injunction against Mr. Muller and others, which prevents Mr. Muller
and other cross-defendants from selling, transferring, or encumbering any assets and property
previously acquired from SWA, 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 Jeffrey Muller and SWA 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 SWA all international marketing, manufacturing and
distribution rights to the ZEFS device. Those rights were disputed because an original inventor of
the ZEFS device contested Mullers legal ability to have conveyed those rights. In Australia,
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 the Muller bankruptcy
trustee, the trustee transferred all ownership and legal rights to this international patent
application for the ZEFS device to us. Both the SEC and SWA 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 Jeffrey A. Muller and the cross-defendants. Muller has filed a response contending that
the actions against him should be dismissed. A decision on these motions would potentially
terminate the ongoing litigation. Further proceedings for all pretrial motions have been assigned
to U.S. Magistrate Frank Maas. An initial decision will be made by Judge Maas after a hearing on
the Motions which is expected to occur within the next 60 days. Should Judge Maas determine that
there are material issues in dispute the case could be continued for a final disposition by a
trial. 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 the company.
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.




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Item 2. Changes in Securities In
July 2004, the Company issued warrants to purchase an aggregate of 500,000
shares of common stock to an advisor and his designees for settlement costs. The
Company is also obligated to issue warrants to purchase an aggregate
of 500,000 shares of common stock to the trustee in the Muller litigation for additional
settlement costs. In September 2004, the Company issued an aggregate of 50,000 shares of common stock to an advisor and his designees in exchange
for advisory services provided to the Company. In September 2004, the Company issued 20,000 shares of common stock to an individual in exchange
for services rendered to the Company. From
July 2004 to September 2004, the Company issued an
aggregate of 575,000 shares of
common stock and warrants to purchase an aggregate of 575,000 shares of common stock to accredited
investors. The aggregate consideration paid to the Company in connection with such issuances was
$575,000. From
July 2004 to September 2004, the Company sold, but did not issue, an
aggregate of 125,000 shares of common stock to accredited investors. The shares were
issued in November 2004. In connection with the investors purchase, the Company
issued warrants to purchase an aggregate of 125,000 shares of common stock. The aggregate consideration
paid to the Company for such shares and warrants was $125,000. In August 2004, the Company issued 4,000 shares of common stock to an individual in connection
with the exercise of warrants previously issued to him. The aggregate gross and net proceeds to the
Company in connection with such exercises were $2,000. The issuance of the shares described above was made in reliance on the exemptions from
registration set forth in Section 4(2) of the Securities Act of 1933, as amended. We made no public
solicitation in connection with the issuance of the above-mentioned securities. We relied on
representation from the purchasers of the securities that they purchased the securities for
investment only and not with a view to any distribution thereof and that they were aware of our
business affairs and financial condition and had sufficient information to reach an informed and
knowledgeable decision regarding their acquisition of the securities. 
 Item 6. Exhibits and Reports on Form 8-K (a) 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).
 (b) Reports onForm 8-K. On July 12, 2004, we filed a Current Report on Form 8-K with the SEC, in connection with
certain recent business developments.




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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: December 3, 2004
    By:
    /s/ Edward L. MasryEdward L. MasryChief Executive Officer




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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).