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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-KSB þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5125 Lankershim Boulevard
North Hollywood, California 91601(Address, including zip code, of principal executive offices) (818) 487-8000(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: None. Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value. Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of Registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o Registrants revenues for its most recent fiscal year: None. The aggregate market value of voting and non-voting common equity held by non-affiliates of
the Registrant was approximately $ 33,155,221 as of March 31,
2005, based upon the average of the high and low prices
on the Pink Sheets reported for such date. This calculation does not reflect a determination that
certain persons are affiliates of the Registrant for any other purpose. The number of shares of the Registrants Common Stock outstanding as of March 31, 2005 was
38,450,321 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants Proxy Statement for its 2004 Annual Meeting of Stockholders (the
Proxy Statement), to be filed with the Securities and Exchange Commission, are incorporated by
reference into Part III of this Form 10-KSB. Transitional Small Business Disclosure Format (Check one): Yes o No þ




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SAVE THE WORLD AIR, INC.
FORM 10-KSB INDEX  
 PagePART IItem 1
    
    Business
    
    
    1Item 2
    
    Properties
    
    
    11Item 3
    
    Legal Proceedings
    
    
    12Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5
    
    Market for Common Equity and Related Stockholder Matters
    
    
    14Item 6
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    15Item 7
    
    Financial Statements
    
    
    19Item 8
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    48Item 8A
    
    Controls and Procedures
    
    
    48Item 8B
    
    Other Information
    
    
    48PART IIIItem 9
    
    Directors and Executive Officers of Registrant
    
    
    49Item 10
    
    Executive Compensation
    
    
    49Item 11
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    49Item 12
    
    Certain Relationships and Related Transactions
    
    
    49Item 13
    
    Exhibits
    
    
    49Item 14
    
    Principal Accountant Fees and Services
    
    
    51SIGNATURES
    
    
    52Exhibit 10.2Exhibit 10.14Exhibit 10.16Exhibit 10.18Exhibit 10.19Exhibit 10.20Exhibit 10.21Exhibit 10.22Exhibit 10.23Exhibit 10.24Exhibit 10.25Exhibit 10.27Exhibit 10.28Exhibit 10.29Exhibit 10.30Exhibit 10.31Exhibit 10.32Exhibit 10.33Exhibit 10.34Exhibit 10.35Exhibit 14.1Exhibit 14.2Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
 i




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PART I 
 Forward-Looking Statements This Annual Report on Form 10-KSB contains forward-looking statements. These forward-looking
statements include predictions regarding our future:  
    revenues and profits;
    customers;
    research and development expenses and efforts;
    scientific test results;
    sales and marketing expenses and efforts;
    liquidity and sufficiency of existing cash;
    technology and products;
    the outcome of pending or threatened litigation; and
    the effect of recent accounting pronouncements on our financial condition and results of operations. You can identify these and other forward-looking statements by the use of words such as may,
will, expects, anticipates, believes, estimates,, continues, or the negative of such
terms, or other comparable terminology. Forward-looking statements also include the assumptions
underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below under the heading Risk
Factors. 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. Item 1.Business General Overview We are a development stage company that has not yet generated revenues. The companys focus
is on research and development of proprietary devices that are designed to reduce harmful
emissions, and improve fuel efficiency and engine performance on equipment and vehicles driven by
internal combustion engines. Our prototype devices are called ZEFS (Zero Emission Fuel-Savings
Device) and CAT-MATE. We have devoted the bulk of our efforts to the completion of the design,
the development of our production models and the promotion of our products in the market place
worldwide. Expenses have been funded through the sale of company stock. We have taken actions to
secure our intellectual property rights to the ZEFS and CAT-MATE devices. In addition, we have
initiated marketing efforts to international governmental entities in cooperation with the United
Nations Environmental Programme (UNEP) and various original equipment manufacturers (OEMs), to
eventually sell or license our ZEFS and CAT-MATE products and technology. We anticipate that these efforts will continue during 2005 and that we will begin selling our
devices by late 2005. We do not envision generating significant revenue in 2005. We will need to
raise additional capital during 2005 to fund our research and development efforts and other
expenses. Our company was incorporated on February 18, 1998, as a Nevada corporation under the name
Mandalay Capital Corporation. We changed our name to Save the World Air, Inc. on February 11, 1999
following the acquisition of marketing and manufacturing rights of the ZEFS device. We acquired the
worldwide manufacturing and marketing rights to the ZEFS device from its inventors. During the past
three years, we have been acquiring new technologies, developing products using our technologies
and conducting scientific tests regarding our technologies and prototype products. In late 2003,
the Company acquired worldwide intellectual property and patent rights to technologies which reduce
carbon monoxide, hydrocarbon and nitrous oxide emissions in two- and
four-stroke motorcycles, fuel-injection engines, generators and small
engines. The Company has developed
prototype products and named them CAT-MATE. 1




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Our mailing address and executive offices are located at 5125 Lankershim Boulevard, North
Hollywood, California, 91601. Our telephone number is (818) 487-8000. Our corporate website is
www.savetheworldair.com. Information contained on the website is not deemed part of this Annual
Report. Background Our principal business focus currently rests with development and planned distribution of
devices designed to solve the complex problems caused by pollution from automobile and other
equipment driven by internal combustion engines and to improve the performance of those engines.
We have designed and tested multiple versions of the ZEFS and CAT-MATE devices for use on
carbureted and fuel injection gasoline engines and are currently in the process of adapting this
technology to work on engines that use diesel fuels. The incomplete and inefficient burning of fossil fuel in an automobile engine and other
equipment driven by internal combustion engines results in unburned gases, such as hydrocarbons and
carbon monoxide being expelled as harmful emission as a by-product from the engines exhaust. These
emissions from automobile engines have contributed to significant air pollution and depletion of
the ozone layer that protects the worlds atmosphere from harmful ultraviolet radiation. As a
result, the world has experienced significant deterioration to its air quality since the beginning
of the 20th century and, because of the added use of internal combustion engines, the problem has
gotten progressively worse with each passing year. Forecasts published by the World Resources
Institute indicate that this trend will continue to accelerate. By the year 2010, the number of
automobiles in operation worldwide are expected to exceed 800 million. ZEFSdevices work to enhance the atomization of the fuel by affecting the viscosity of that
fuel. The effect is achieved by the use of specific and complex magnetic flux orientations that
have the ability to influence fuel at the molecular level. These devices alter the fuel atomization process by changing the size of the molecular
structure of the fuel. The devices create a more efficient burn rate, thus lowering the production
of carbon monoxide, hydrocarbons and nitrous oxide. ZEFS devices are easily fitted to the base
plates of carburetors and fuel injection systems; the devices are compact, there are no moving
parts. CAT-MATEdevices function together with a catalytic converter and are configured in the
exhaust system. The Cat-Mate is fundamentally a device that greatly enhances the efficiency of
catalytic converters in particular applications where use of other emission control devices is not
feasible. Specifically, CAT-MATE is designed for use on two- and four-stroke motorcycles, off-road and
marine vehicles, generators, lawn mowers, on stationary implements and on carbureted and fuel
injection motor vehicles. Testing by the Companys R&D as well as by independent sources has demonstrated the use of
ZEFS and CAT-MATE products generate significant reductions in hydrocarbon, nitrous oxide and carbon
monoxide emissions and, in most cases, improves gas consumption and mileage performance. Our Business Strategy Governmental Mandates to Reduce Air Pollution Governments internationally recognize the serious effects caused by air pollution and have
enacted legislation to mandate that automobile manufacturers be required to reduce exhaust
emissions caused by their products. The approach used by auto makers to address this mandate has
thus far generally taken the form of installing catalytic converters, which work on the principle
of super heating gases within the exhaust manifold after the damaging gases have been created
through internal combustion. We anticipate that further government mandates may pressure automobile
manufacturers to adopt better solutions to reducing emissions. 2




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Technology Transfer We are actively continuing our research on the ZEFS and CAT-MATE devices for use on
gasoline-powered engines and have taken steps to finalize the development of versions of the device
to fit on carbureted, center point, and multi-port fuel injection systems. We have used these
prototype devices as demonstration units, during presentations, before manufacturers. It is our
long-term objective to facilitate the adoption of this technology by engine, carburetor, muffler
and exhaust manufacturers. We adopted this strategy of technology transfer because automobile and engine manufacturers
will require time to fully inspect, test and integrate the ZEFS and CAT-MATE devices into their new
designs, as well as to adapt them to their legacy vehicles. Since the ZEFS technology is presently
protected by international patent, and we have patent applications on file for the CAT-MATE
technology, we view technology transfer strategy as the most viable option to gain widespread
adoption of the technology by manufacturers, without compromising our ownership of the technology.
We intend to assist these manufacturers with the full integration of our technology, by not only
supporting the required engineering and system integration efforts, but also by reducing costs
associated with such process so that they may not pose an unnecessary time constraint to the
endeavor. We have successfully developed multiple ZEFS and CAT-MATE devices for use on one-, two- and
four-barrel carbureted engines and created production CAD drawings for these devices and produced
multiple samples using cast aluminum housings. We have also created several prototype devices for
use on fuel injection engines. Extensive R&D testing of our carbureted and fuel injection ZEFS and
CAT-MATE devices has been positive. Because of the complexity and enormity of the task of designing variants of ZEFS and CAT-MATE
devices to fit every make and model, we intend to rely on the cooperation of manufacturers to
support this function, including engineering, marketing, and installation of the devices.
Additionally, we are cognizant that in order to preserve the integrity of the warranties provided
by manufacturers, they must be involved in the process of designing and installing the ZEFS and
CAT-MATE devices on legacy vehicles. We envision that a cooperative venture between manufacturers
and us will result in the most optimal mechanism for the installation of ZEFS and CAT-MATE devices
on the greatest percentage of vehicles possible, through agreements between the company,
manufacturers and their dealerships. We are also engaged in the development of ZEFS and CAT-MATE devices for use on diesel engines,
such as those used on trucks, buses, heavy equipment and generators. Because these types of
vehicles use engines provided from Cummins, Caterpillar, or Detroit Diesel almost exclusively, the
number of ZEFS and CAT-MATE variants needed to service these fleets is considerably less than the
number required to satisfy the automobile market. This fact alone makes entry into the diesel
engine market extremely attractive for our business, offering a large number of potential customers
with a minimum of expense for research and development of product variants. Research and Development We have a research and development facility in Queensland, Australia. We have expanded
research and development to include applications of the ZEFS and CAT-MATE technology to diesel
engines, motorbikes, boats, generators, lawnmowers and other small engines. We have purchased test
vehicles, test engines and testing equipment. We have completed testing on ZEFS and CAT-MATE
devices for multiple automobiles, trucks, motorcycles, off-road vehicles and stationary engines,
the results of which have been provided to RAND Corporation (RAND) for evaluation. During 2004,
RAND expanded its role with us and now oversees our research and development facility in Australia.
We also use third party research and development facilities in Los Angeles and San Jose,
California for the development of our ZEFS and CAT-MATE devices. We spent approximately $629,000
in fiscal year 2003 and $1,873,000 in fiscal 2004 on research and development. Please see Item 6,
Managements Discussion and Analysis of Financial Condition and Results of Operation  Results of
Operations and Note 8 to Notes to Financial Statements for a more complete understanding of our
research and development expense in 2004. 3




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Independent Laboratory and Scientific Testing We have performed independent laboratory testing of the ZEFS and CAT-MATE devices in order to
gain better market acceptance by manufacturers and governmental regulatory officials. Research and
testing using government standard test equipment in the United States has demonstrated that the
ZEFS and CAT-MATE devices may lead to reduced engine emissions, such as carbon monoxide, mitrous
oxide and hydrocarbons, and improve gas consumption and mileage performance. In December 2002, we retained RAND to study the validity and market potential of our
technology. RAND determined then that sufficient theoretical basis exists to warrant entry into a
comprehensive product-testing program. As a result, in May 2003, we entered into an arrangement in
which RAND would coordinate and supervise both a theoretical scientific study of the concepts
underlying the ZEFS device as well as an empirical study. In tests conducted at the Northern California Diagnostics Laboratory in Napa, California,
the ZEFS device reduced carbon monoxide, hydrocarbons, and nitrous oxide fume levels and increased
gas mileage for the test vehicle. In tests conducted at Automotive Testing and Development
Services, Inc. in Ontario, California, the ZEFS and CAT-MATE devices reduced carbon monoxide,
hydrocarbons, and nitrous oxide fume levels and increased mileage performance for the test
vehicles. Motorcycle and Generator tests of our CAT-MATE conducted by Hong Kong Exhaust Emissions
Laboratory (HKEEL) showed that CAT-MATE devices reduce emissions of carbon monoxide, nitrous oxide
and hydrocarbons. The test results were certified by United Kingdoms Vehicle Certification Agency
(VCA) on January 20, 2005. Marketing In October 2004, we commenced marketing efforts for our emission control and
performance-enhancing ZEFS and CAT-MATE technologies. We are focused on selling or licensing our
technologies and devices domestically and internationally to automobile, carburetor,
fuel-injection, diesel, exhaust and muffler original equipment manufacturers (OEMs) and the
after-market. We have presented our ZEFS and CAT-MATE technologies to OEMs in the United States
and Asia. We intend to pursue this market sector and create strategic alliances and partnerships
during 2005. Harmful exhaust emissions from automobiles and motorcycles in developing countries is at the
highest levels because of the continued widespread use of older model automobiles and motorcycles
with either no or malfunctioning catalytic converters. We work with governments worldwide at all levels, together with industry, to capitalize on our
technology to achieve what we know to be common global environmental objectives. In November 2004,
management met with UNEP in New York to enlist its aid with this objective. By UNEP invitation,
we participated in a UNEP-sponsored meeting in Bali , Indonesia in December 2004, which resulted in
the initiation of informal negotiations with United Nations and government officials to explore the
possibility of pilot programs using our technology in Indonesia, Kenya , Mexico, Thailand, Brazil
and Sri Lanka. We have also since participated in a United Nations sponsored Summit in Lake Toba, North
Sumatra, Indonesia in March 2005. This resulted in an announcement by the Lake Toba Summit Chair,
Nico Barito, endorsed by HRH Sri Sultan Hamengkubowono X of Yogyakarta and the Governor of North
Sumatra, Razil Nurdin, of two pilot programs intended to minimize carbon monoxide emissions,
hydrocarbons and nitrous oxide, by installing our devices on 10,000 student motorcycles at
universities in Yogyakarta and Medan in Indonesia. Competition The automotive and motor engine industry is highly competitive. We have many competitors in
the United States and throughout the world developing technologies to make engines more
environmentally friendly and fuel efficient. Many of our competitors have greater financial,
research, marketing and staff resources than we do. For instance, automobile manufacturers have
already developed catalytic converters on automobiles, in order to reduce emissions. While we
believe that our technology has greater benefits, it may be unable to gain market acceptance.
Further, research and development throughout the world is constantly uncovering new technologies.
Although we are 4




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unaware of any, there can be no assurance that no existing or future technology is currently
or will be superior to the ZEFS and CAT-MATE devices. Government Regulation Our research and development activities are not subject to any governmental regulations that
would have a significant impact on our business to date and we believe that we are in compliance
with all applicable regulations that apply to our business as it is presently conducted. Depending
upon whether we manufacture or license our devices in the future and in which countries such
devices are manufactured or sold, we may be subject to regulations, including environmental
regulations at such time. Intellectual Property In December 1998, the Company acquired all of the marketing and manufacturing rights to the
ZEFS technology from the purported inventor of the technology in exchange for 5,000,000 shares of
our common stock, $500,000 and $10 royalty for each unit sold. In November 2002, under our
settlement with the bankruptcy trustee for the estate of the inventor and his wife, the trustee
transferred all ownership and legal rights to the international patent application for the ZEFS
device to us. In exchange for these rights, we gave the bankruptcy trustee an option to purchase
500,000 shares of our common stock at $1.00 share and $0.20 royalty on each device we sell. See
Part I, Item 3. Legal Proceedings and Note 1 to Notes to Financial Statements below. In May 2002, we settled a dispute with Kevin Pro Hart, who claimed proprietary rights to the
ZEFS technology. He assigned to us all his rights to the ZEFS technology in exchange for an option
to purchase 500,000 shares of our common stock at $1.00 share and a $0.20 royalty on each device we
sell. Mr. Hart currently serves as a member of our Advisory Board. See Advisory Board below. The CAT-MATE technology was created by Adrian Menzell, a member of our research team in
Australia. On August 20, 2003, Mr. Menzell filed preliminary Australian patent application
#2004900192 for the CAT-FLAP. This technology was enhanced and on June 4, 2004, Mr. Menzell filed
preliminary Australian patent application #2004903000 for the CAT-MATE. On September 1, 2003, we
had entered into an Assignment Agreement with Mr. Menzell, pursuant to which this technology was
assigned to us in exchange for 20,000 shares of our common stock and a royalty of $.25 for each
CAT-MATE device sold. On June 26, 2004, we received a deed of assignment from Mr. Menzell and each
pending patent application was transferred to our name. ZEFS Patent Applications We obtained the patent application for the ZEFS MK1 device [PCT/AU1/00585] originally filed in
Australia on May 19, 2000. The International Filing Application for our ZEFS MK1 technology was
filed on May 21, 2001 (Official No. 10/275946) [PCT/AU1/00585] and modified as ZEFS MK2 on July 9,
2003. On November 4, 2003 we filed for our ZEFS MK3 (#2003906094). The United States Patent and
Trademark Office issued a Notice of Allowance of Patent dated January 24, 2005.
The
duration of the patent is 20 years from the date the original application was filed. Prior to the
issuance of such patent, we relied solely on trade secrets, proprietary know-how and technological
innovation to develop our technology and the designs and specifications for the ZEFS technology.
Overall, we have applied for a patent on an international basis in approximately 64 countries
worldwide. ZEFS MK1Device For Saving Fuel and Reducing Emissions.Thisfuel saving device has a disk
like nonmagnetic body provided with a central opening and a number of permanent magnets having
opposed polarities positioned about the central opening to provide multidirectional magnetic
fields. The device is positioned in a fuel air mixture to reduce emissions. 5




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The following table summarizes the status of the ZEFS MK1 patent application in the following
countries: Country
    
    Number
    
    Filing Date
    
    StatusAustralia
    

    2001 258057
    
    
    May 21, 2001
    
    Under examination Deadline 14 June 2005Bosnia & Heregovina
    
    BAP 021290A
    
    May 21, 2001
    
    Short Term Patent Grant RequestedBrazil
    

    0.111.365-8
    
    
    May 21, 2001
    
    Examination requested 5 September 2003Bulgaria
    

    107391
    
    
    May 21, 2003
    
    Awaiting examinationCanada
    

    2409195
    
    
    May 21, 2001
    
    Examination to be requested by 21 May 2006China
    

    01809802.9
    
    
    May 21, 2001
    
    Under examination Deadline 27 Feb 2005Columbia
    

    02.115.018
    
    
    May 21, 2001
    
    Examination requested 23 July 2004Croatia
    

    P20020982A
    
    
    May 21, 2001
    
    Awaiting examinationCzech Republic
    
    PV 2002-4092
    
    May 21, 2001
    
    Examination requested 23 July 2004Eurasian(1)
    

    200201237
    
    
    May 21, 2001
    
    Under examinationEurope(2)
    

    019331222.2
    
    
    May 21, 2001
    
    Awaiting examinationGeorgia (3)
    

    4098/01-2002
    
    
    May 21, 2001
    
    Under examinationHong Kong
    

    04100327.0
    
    
    May 21, 2001
    
    Automatic grant upon grant by ChinaHungary
    

    P 03 01796
    
    
    May 21, 2001
    
    Awaiting examinationIndia (3)
    
    IN/PCT/2002/01523
    
    May 21, 2001
    
    Awaiting examinationIndonesia
    
    WO0200202844
    
    May 21, 2001
    
    Examination requested November 2003Israel
    

    152902
    
    
    May 21, 2001
    
    Under examinationJapan
    

    586731/2001
    
    
    May 21, 2001
    
    Must request Examination by May 21, 2008Mexico
    
    PA/A/2002/11365
    
    May 21, 2001
    
    Awaiting examinationMorocco
    
    PV/26.964
    
    May 21, 2001
    
    GrantedNew Zealand
    

    523113
    
    
    May 21, 2001
    
    GrantedNorway
    

    20025531
    
    
    May 21, 2003
    
    Awaiting examinationPoland
    

    P 358837
    
    
    May 21, 2001
    
    Awaiting examinationSerbia/Montenegro
    

    P-870/02
    
    
    May 21, 2001
    
    Examination requested December 2002Sri Lanka (3)
    

    12918
    
    
    May 21, 2001
    
    Awaiting examinationSingapore
    

    200206064.7
    
    
    May 21, 2001
    
    Grant fees paid-awaiting grantSouth Africa
    

    2002/10013
    
    
    May 21, 2001
    
    GrantedSouth Korea
    

    2002 7015531
    
    
    May 21, 2001
    
    Must request Examination by May 21, 2006Trinidad & Tobago
    
    TT/A2002/00213
    
    May 21, 2001
    
    Under examinationUkraine (3)
    

    20021210144
    
    
    May 21, 2001
    
    Examination requested October 2003United States (3)
    

    10/275946
    
    
    May 21, 2001
    
    Notice of Allowance issued January 24, 2005Vietnam
    

    1-2002-01168
    
    
    May 21, 2001
    
    Under examination
   (1)
    
    Eurasian patent application covers the countries of Azerbaijan, Armenia, Belarus, Georgia,
Kazakhstan, the Kyrgyz Republic, Moldova, the Russian Federation, Tajikistan, Ukraine and
Turkmenistan.(2)
    
    Europe patent application covers the countries of Austria, Belgium, Switzerland,
Lichtenstein, Cyprus, Germany, Denmark, Spain, Finland, France, Great Britain, Greece,
Ireland, Italy, Luxembourg, Netherlands, Portugal, Sweden, Turkey, Lithuania, Latvia,
Slovenia, Romania and Macedonia.(3)
    
    In the process of being assigned to the Company. ZEFS MK2Device for Saving Fuel and Reducing Emissions.This fuel saving device similar to
that of the MK1 except that a central magnet can be provided in the opening and the peripheral
magnets extend only partially through the depth of the body and stop short of the top wall to
provide the option of moving the magnetic field further away from the base of the carburetor to
increase the area of magnetic influence between the point of fuel atomization and the point of
cessation of magnetic influence. The priority date is July 19, 2003 from Australian patent application 2003903626. 6




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The following table summarizes the status of the ZEFS MK2 patent application in the following
countries: Country
    
    Number
    
    Filing Date
    
    StatusTaiwan
    

    92134811
    
    
    July 19, 2003
    
    Under examinationInternational
    
    PCT/AU2004/000950
    
    July 15, 2004
    
    Clear International Search
Report Issued. Request for
International Preliminary
Examination due Feb 15, 2005
 One hundred twenty five countries are covered by the PCT. National Patent Applications are
due by January 15, 2006. ZEFS MK3Emission Control Devices.This emission control device is particularly suited for
fuel injection systems which has an elongate body formed with one or more channels and a number of
permanent magnets is positioned in the channels. The device sits on a fuel rail. The priority date is November 4, 2003 from Australia patent application 2003906094. The following table summarizes the status of the ZEFS MK3 patent application in the following
countries: Country
    
    Number
    
    Filing Date
    
    StatusThailand
    

    095155
    
    
    November 3, 2004
    
    Awaiting ExaminationInternational
    
    PCT/AU2004/001518
    
    November 4, 2004
    
    Awaiting International Search Report
 Approximately 125 countries are covered by the PCT. National Patent Applications are due by
May 4, 2006 CAT-MATE Patent Applications CAT-FLAP (Afterburner) Improvements in or Relating to Emission Control Systems.A catalytic
converter is provided in an engine exhaust flow to reduce emissions. A valve is provided
downstream from the catalytic converter. The valve is in a closed position when the exhaust flow
volume is low to keep the hot exhaust gas around the catalytic converter to keep the catalytic
converter within its operational temperatures. When the exhaust flow volume is high (e.g. the
engine is revving) the catalyst is kept at its operational temperature by normal gas flow and valve
is opened to not impede exhaust flow. A simple hinge flap is one method by which this can be
achieved. The priority date is January 6, 2004 from Australian patent application 2004900192. Approximately 125 countries are covered by the PCT. National Patent Applications are due by
July 8, 2006. CAT-MATEInline Exhaust Device to Improve Efficiency of a Catalytic Converter.A set of rings
is placed downstream from the catalytic converter to re-radiate heat to the catalytic converter to
keep the converter working at a warmer temperature and therefore greater efficiency. The priority date is June 4, 2004 from Australian patent application 2004903000. This invention was incorporated into the specifications filed pursuant to the CAT-FLAP
invention. We have entered into agreements with certain employees and consultants, which limit access to,
and disclosure or use of, our technology. There can be no assurance, however, that the steps we
have taken to deter misappropriation of our intellectual property or third party development of our
technology and/or processes will be adequate, that others will not independently develop similar
technologies and/or processes or that secrecy will not be breached. In addition, although
management believes that our technology has been independently developed and does not infringe on
the proprietary rights of others, there can be no assurance that our technology does not and will
not so infringe or that third parties will not assert infringement claims against us in the future.
Management believes that the steps they have taken to date will provide some degree of protection,
however, no assurance can be given that this will be the case. Employees As
of December 31, 2004, we had four full-time employees, including
two members of senior
management, and five part-time employees. As of such date, we also
utilized the services of three full-time
consultants in our R&D facility in Australia and three additional part-time consultants to assist
us with various matters, including marketing. In order to maintain salaries at a minimum without 7




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compromise to the companys functional capacity, we
adopted the practice of engaging consultants for services needed not on a full-time basis. We
intend to hire additional personnel to provide services when they are needed on a full-time basis.
We recognize that our efficiency largely depends, in part, on our ability to hire and retain
additional qualified personnel as and when needed and we have adopted procedures to assure our
ability to do so. Executive Officers The following table sets forth certain information regarding our executive officers as of
December 31, 2004: Name
    
    Age
    
    PositionEdward
L. Masry, Esq.
    
    
    72
    
    
    Chairman of the Board and Chief Executive OfficerEugene E. Eichler, CPA
    
    
    78
    
    
    President, Chief Financial Officer and TreasurerBruce H. McKinnon
    
    
    63
    
    
    Chief Operating Officer and Executive Vice
President of Business DevelopmentNathan Shelton
    
    
    55
    
    
    Vice President of Marketing and DistributionErin
Brockovich
    
    
    44
    
    
    Vice President of Environmental AffairsJanice Holder
    
    
    59
    
    
    Corporate Secretary
 Edward L. Masry, Esq.has served as our Chairman of the Board and Chief Executive Officer
since October 2001 and served as our President from October 2001 until March 2004. Mr. Masry has
been a member of the law firm of Masry & Vititoe since 1986 and was Mayor of Thousand Oaks City and
currently a member of the City Council. From 1960 to 1986, he was a partner of various law firms.
Mr. Masry was corporate director of Merlin Olsen Porsche Audi from 1970 to 1988 and corporate
director of Gabriel Olsen Volkswagen from 1969 to 1973. Mr. Masry received a J.D. from Loyola Law
School, Los Angeles. Eugene E. Eichler, CPA,has served as our President since March 2004, our Chief Operating
Officer and Chief Financial Officer and Treasurer since October 2001 and as a director since May
2002. Mr. Eichler was the Chief Financial Officer and Firm Administrator of the law firm Masry &
Vititoe from 1982 to October 2001. From 1974 to 1982, Mr. Eichler provided financial consulting
services to Foundation for HMOs, Acne Care Medical Clinics and Earth Foods, Inc. From 1960 to
1974, Mr. Eichler headed financial consulting services for Milburn Industries and Brown, Eichler &
Company. From 1953 to 1960, he held the position of Chief Budgets and Forecasts at North American
Aviation. From 1951 to 1953, Mr. Eichler held various audit positions at the Atomic Energy
Commission. Mr. Eichler received a B.A. from University of Montana. Bruce H. McKinnonhas served as a director since May 2002, our Executive Vice-President of
Business Development since December 2003 and our Chief Operating Officer since March 2004. Mr.
McKinnon served as Chief Executive Officer and President of KZ Golf, Inc., an international golf
equipment company, from 1994 to 2004. From 1990 to 1994, he was President and Chief Executive
Officer of TTL Corporation and Novaterra, Inc., environmental remediation and technology
corporations. Prior to 1990, Mr. McKinnon was an owner, Chairman and Chief Executive Officer of
several international trading and manufacturing corporations. Nathan Sheltonhas served as our Vice President of Marketing and Distribution since 2003. From
2002 until present, he operates his own consulting firm. He was the Chief Executive Officer and
Chief Marketing Officer at K&N Engineering from 1984 to 2002 and was also Chairman of the Specialty
Equipment Market Association, a trade association of automotive after market manufacturers and
distributors. Erin Brockovichserved on our Board of Advisors from 2002 until August 2004, when she was
appointed Vice President, Environmental Affairs. Since 1992, Ms. Brockovich has also served as
Director of Environmental Research with the law firm of Masry and Vititoe and her exploits were the
basis of the movie, Erin Brockovich.
Ms. Brockovich is an environmental activist and a research expert with respect to complex
environmental matters and has received multiple awards and honors for her work with the
environment. She has written a book with Marc Eliot entitled, Take It From Me, Lifes a Struggle
But You Can Win and lectures around the world on environmental matters. 8




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Janice Holderhas
served as our Corporate Secretary since October 2001. From 1964 through
1984, Ms. Holder managed various medical facilities in Orange County. Since 1984, she has been the
Office Manager for the Law Offices of Masry & Vititoe. On September 1, 2004,
the Company entered into an employment agreement with Erin Brockovich, pursuant to which she serves as our Vice President
of Environmental Affairs. The initial term of the agreement expires on September 30, 2005 and renews automatically for additional
one-year terms unless either party has given notice of non-extension prior to the end of a term. The agreement provides for a base
 compensation of $60,000, which amount is reviewable by the Board of Directors in subsequent years of the term. Ms. Brockovich is
eligible to participate in the Companys incentive and benefit plans, including eligibility to receive grants of stock options under
the 2004 Plan. If Ms. Brockovichs employment
 is terminated by us without cause or as a result of her disability or death, she, or her estate as the case may be, will be entitled
to receive an amount equal to the base compensation paid to her for the remainder of the term, except that in the case of a change of
control of the Company, the payment shall be the base compensation in effect immediately prior to the date of termination, for a period
 of one year beginning on the date of termination. If Ms. Brockovichs employment is terminated by us for cause or by her for any reason,
she will be entitled to receive all accrued and unpaid base salary and vacation compensation earned through the date of termination. The
agreement also contains standard confidentiality and non-solicitation provisions. Advisory Board Our Advisory Board provides specific
expertise in areas of research and development relevant
to our business and meets with our management personnel from time to time to discuss our present
and long-term research and development activities. Advisory Board members include: Sir Jack Brabham, Triple
 Formula One World Champion and Twice Formula One World Constructors
Champion, is an expert in the areas of racing car design. Kevin Pro Hart,
is a famous Australian artist and inventor of the ZEFS device. Jack Reader, Ph.D., Director,
 BIFS Technologies Corporation. Mr. Reader is a systems engineer
and an expert in business management and energy conservation. Bobby Unser, Jr., Founder,
 Unser Driving, Inc. Mr. Unser is an expert in motor racing and
stunt driving. Risk Factors We expect to incur future losses and may not be able to
 achieve profitability. We have not yet generated any
revenue from operations and, accordingly, we have incurred net
losses every year since our inception in 1998. Although we expect to generate revenue eventually
from sales of our ZEFS and CAT-MATE devices, we anticipate net losses and negative cash flow to
continue for the foreseeable future until such time as our products are brought to market. As
planned, we have significantly expanded our research and development efforts during the past year.
Consequently, we will need to generate significant additional revenue to fund our operations. This
has put a proportionate corresponding demand on capital. Our ability to achieve profitability is
entirely dependent upon our research and development efforts to deliver a viable product and the
companys ability to successfully bring it to market. Although our management is optimistic that
we will succeed with marketing the ZEFS and CAT-MATE devices we cannot be certain as to timing or
whether we will generate sufficient revenue to be able to operate profitably. If we cannot achieve
or sustain profitability, we may not be able to fund our expected cash needs or continue our
operations. We will need additional capital to meet our operating
needs, and we cannot be sure that additional
financing will be available. As of December 31,
2004 and thereafter, our expenses ran, and are expected to continue to run,
at a burn rate of approximately $200,000 per month. Our capital resources, as of April 2005, will
be sufficient to fund operations only through the second quarter of 2005, and we will require
additional capital in order to operate beyond this date. In order to fund our capital needs for
the foreseeable future, we began a private offering in July 2004 for the sale of our common stock
for a maximum of $10,000,000. This offering is ongoing as of the date of the filing of this Annual
Report. Management cannot predict with certainty that the offering will be sufficiently successful
to provide adequate funds to complete the research and development process or to profitably bring
our devices to market. Moreover, additional capital may not be available on favorable terms to us,
or at all. If we cannot obtain needed capital, our research and development, and marketing plans,
business and financial condition and our ability to reduce losses and generate profits are likely
to be materially and adversely affected. As a company in the development stage and with an unproven business
 strategy, our limited history
of operations makes evaluation of our business and prospects difficult. Our business prospects are
 difficult to predict because of our limited operating history,
early stage of development and unproven business strategy. Since our incorporation in 1998, we have
been and continue to be involved in development of products using our technology, establishing
manufacturing and marketing of these products to consumers and industry partners. 9




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Although we believe our technology and products
in development have significant profit potential, we may not attain profitable operations and our
management may not succeed in realizing our business objectives. If we are not able to devote adequate resources to product development and commercialization, we
may not be able to develop our products. Our business strategy is to develop, manufacture and market ZEFS and CAT-MATE products using
our technology. We believe that our revenue growth and profitability, if any, will substantially
depend upon our ability to:  
    raise additional needed capital for research and development;
    complete development of our products in development; and
    successfully introduce and commercialize our new products. Certain of our products are still under various stages of development. Because we have limited
resources to devote to product development and commercialization, any delay in the development of
one product or reallocation of resources to product development efforts that prove unsuccessful may
delay or jeopardize the development of other product candidates. Although our management believes
that it can finance our product development through private placements and other capital sources,
if we do not develop new products and bring them to market, our ability to generate revenues will
be adversely affected. The commercial viability of the ZEFS and CAT-MATE devices are unproven and we may not be able to
attract customers. To the best of our knowledge, no consumer or automobile manufacturer has used the ZEFS or
CAT-MATE devices to reduce motor vehicle emissions to date. Accordingly, the commercial viability
of our devices are not known at this time. If commercial opportunities are not realized from the
use of the ZEFS and CAT-MATE devices, our ability to generate revenue would be adversely affected. If our products and services do not gain market acceptance, it is unlikely that we will become
profitable. The market for products that reduce harmful motor vehicle emissions is evolving and we have
many successful competitors. Automobile manufacturers have historically used various technologies,
including catalytic converters, to reduce exhaust emissions caused by their products. At this time,
our technology is unproven, and the use of our technology by others is limited. The commercial
success of our products will depend upon the adoption of our technology by auto manufacturers and
consumers as an approach to reduce motor vehicle emissions. Market acceptance will depend on many
factors, including:  
    the willingness and ability of consumers and industry partners to adopt new technologies;
    the willingness of governments to mandate reduction of motor vehicle emissions;
    our ability to convince potential industry partners and consumers that our technology
is an attractive alternative to other technologies for reduction of motor vehicle
emissions;
    our ability to manufacture products and provide services in sufficient quantities with
acceptable quality and at an acceptable cost; and
    our ability to place and service sufficient quantities of our products. If our products do not achieve a significant level of market acceptance, demand for our
products will not develop as expected and it is unlikely that we will become profitable. 10




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Any revenues that we may earn in the future are unpredictable, and our operating results are
likely to fluctuate from quarter to quarter. We believe that our future operating results will fluctuate due to a variety of factors,
including:  
    delays in product development;
    market acceptance of our new products;
    changes in the demand for, and pricing, of our products;
    competition and pricing pressure from competitive products;
    manufacturing delays; and
    expenses related to, and the results of, proceedings relating to our intellectual property. A large portion of our expenses, including expenses for our facilities, equipment and
personnel, is relatively fixed and not subject to significant reduction. In addition, we expect our
operating expenses will continue to increase significantly in 2005 as we further increase our
research and development, production and marketing activities. Although we expect to generate
revenues from sales of our products in the future, revenues may decline or not grow as anticipated
and our operating results could be substantially harmed for a particular fiscal period. Moreover,
our operating results in some quarters may not meet the expectations of stock market analysts and
investors. In that case, our stock price most likely would decline. If we lose our key personnel or are unable to attract and retain additional personnel, we may be
unable to achieve profitability. Our future success is substantially dependent on the efforts of our senior management,
particularly Edward L. Masry, Eugene Eichler and Bruce McKinnon. The loss of the services of
members of our senior management may significantly delay or prevent the achievement of product
development and other business objectives. Because of the scientific nature of our business, we
depend substantially on our ability to attract and retain qualified marketing, scientific and
technical personnel. There is intense competition among specialized automotive companies for
qualified personnel in the areas of our activities. If we lose the services of, or do not
successfully recruit key marketing, scientific and technical personnel, the growth of our business
could be substantially impaired. We do not maintain key man insurance for any of these individuals. We may face costly intellectual property disputes. Our ability to compete effectively will depend in part on our ability to develop and maintain
proprietary aspects of our technology and either to operate without infringing the proprietary
rights of others or to obtain rights to technology owned by third parties. Our pending patent
applications, specifically patent rights of the ZEFS and CAT-MATE devices, may not result in the
issuance of any patents or any issued patents that will offer protection against competitors with
similar technology. Patents we receive may be challenged, invalidated or circumvented in the future
or the rights created by those patents may not provide a competitive advantage. We also rely on
trade secrets, technical know-how and continuing invention to develop and maintain our competitive
position. Others may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets. Our common stock is subject to penny stock regulation, which may make it more difficult for us to
raise capital. Our common stock is considered penny stock under SEC regulations. It is subject to rules that
impose additional sales practice requirements on broker-dealers who sell our securities. For
example, broker-dealers must make a suitability determination for the purchaser, receive the
purchasers written consent to the transaction prior to sale, and make special disclosures
regarding sales commissions, current stock price quotations, recent price information and
information on the limited market in penny stock. Because of these additional obligations, some
broker-dealers may not effect transactions in penny stocks, which may adversely affect the
liquidity of our common stock and shareholders ability to sell our common stock in the secondary
market. This lack of liquidity may make it difficult for us to raise capital in the future. 
 Item 2.Properties Our principal facility consists of leased office space in North Hollywood, California. We
sublease this space from KZ Golf, Inc., pursuant to a lease we entered into on October 16, 2003 and
which expires on October 16, 2005. Through May 31, 2004, the rent was $2,000 per month for
approximately 1,000 square feet. Effective June 1, 2004, we amended the lease to add approximately
225 square feet of office space and to have provided expanded comprehensive services, including
reception, parking and conference facilities, for a total rent of $3,400 per month. 11




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The lease, as amended, is renewable, at our option, for an additional two-year term at $3,760
per month. One of our directors, Bruce H. McKinnon, is an owner of KZ Golf, Inc. Management
believes that the terms of the lease with KZ Golf, Inc. are no less favorable than what we would
have had to pay for equivalent space and comparable services with an unaffiliated party. We
believe that our North Hollywood facility is adequate for our current and planned administrative
activities. Our research and development facility located in Queensland, Australia is leased. We entered
into the lease for this facility on November 15, 2003 and the lease is for a term of two years. The
rent is AUD $1,292 (approximately US $1,000) per month and is renewable, at our option, for an
additional two-year term at an increase of the greater of 5% or the increase in the then-current
Australian consumer price index. We believe that our present research and development facility is
adequate for our current and planned activities and that suitable additional or replacement
facilities in the Queensland area are readily available on commercially reasonable terms should
such facilities be needed in the future. 
 Item 3.Legal Proceedings On December 19, 2001, the SEC filed civil charges in the United States Federal District Court,
Southern District of New York, against us, our former President and then sole director Jeffrey A.
Muller, and others, alleging that we and the other defendants were engaged in a fraudulent scheme
to promote our stock. The SEC complaint alleged the existence of a promotional campaign using
press releases, Internet postings, an elaborate website, and televised media events to disseminate
false and materially misleading information as part of a fraudulent scheme to manipulate the market
for stock in our corporation, which was then controlled by Mr. Muller. On March 22, 2002, we
signed a Consent to Final Judgment of Permanent Injunction and Other Relief in settlement of this
action as against the corporation only, which the court approved on July 2, 2002. Under this
settlement, we were not required to admit fault and did not pay any fines or restitution. The
SECs charges of fraud and stock manipulation continue against Mr. Muller and others. On July 2, 2002, after an investigation by our newly constituted board of directors, we filed
a cross-complaint in the SEC action against Mr. Muller and others seeking injunctive relief,
disgorgement of monies and stock and financial restitution for a variety of acts and omissions in
connection with sales of our stock and other transactions occurring between 1998 and 2002. Among
other things, we alleged that Mr. Muller and certain others sold
Company stock without providing
adequate consideration to us; sold insider shares without making proper disclosures and failed to
make necessary filing required under federal securities laws; engaged in self-dealing and entered
into various undisclosed related-party transactions; misappropriated for their own use proceeds
from sales of our stock; and entered into various undisclosed arrangement regarding the control,
voting and disposition of their stock. We contend that we are entitled to a judgment canceling all
of the approximately 8,716,710 shares of our common stock that was previously obtained and
controlled, directly or indirectly, by Mr. Muller; divesting and preventing any subsequent holders
of the right to exercise options previously held by Mr. Muller for 10,000,000 shares of our common
stock, conversion of an existing preliminary injunction to a permanent injunction to prevent Mr.
Muller from any involvement with the Company and a monetary judgment against Mr. Muller and others
in the amount of several million dollars. On July 30, 2002, the U.S. Federal District Court, Southern District of New York, granted our
application for a preliminary injunction against Mr. Muller and others, which prevented Mr. Muller
and other cross-defendants from selling, transferring, or encumbering any assets and property
previously acquired from us, from selling or transferring any of our stock that they may own or
control, or from taking any action to injure us or our business and from having any direct contact
with our shareholders. The injunctive order also prevents Mr. Muller from engaging in any effort
to exercise control over our corporation and from serving as an officer or director of our company.
While we believe that we have valid claims, there can be no assurance that an adverse result or
settlement would not have a material adverse effect on our financial position or cash flow. In the course of the litigation, we have obtained ownership control over Mr. Mullers claimed
patent rights to the ZEFS device. Under a Buy-Sell Agreement between Mr. Muller and dated
December 29, 1998, Mr. Muller, who was listed on the ZEFS devise patent application as the inventor
of the ZEFS device, purported to grant us all international marketing, manufacturing and
distribution rights to the ZEFS device. Those rights were disputed because an original inventor of
the ZEFS device contested Mr. Mullers legal ability to have conveyed those rights. 12




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In Australia, Mr. Muller entered into a bankruptcy action seeking to overcome our claims for
ownership of the ZEFS device. In conjunction with these litigation proceedings, a settlement
agreement was reached whereby the $10 per unit royalty previously due to Mr. Muller under his
contested Buy-Sell Agreement was terminated and replaced with a $.20 per unit royalty payable to
the bankruptcy trustee. On November 7, 2002, under a settlement agreement executed with Mr.
Mullers bankruptcy trustee, the trustee transferred to us all ownership and legal rights to this
international patent application for the ZEFS device. Both the SEC and we have filed Motions for Summary Judgment contending that there are no
material issues of fact in contention and as a matter of law, the Court should grant a judgment
against Mr. Muller and the cross-defendants. Mr. Muller has filed a response contending the
motions are without merit or substance. A final decision on these motions, which potentially would
terminate the ongoing litigation, is still pending. Should the Court not grant summary judgment in
our favor, the case will be scheduled for final disposition in a trial. Mr. Muller and several of the defendants filed a Motion to Dismiss the complaint filed by us
and moved for summary judgment in their favor. On December 21, 2004, Judge George B. Daniels,
denied the cross-defendants motion to dismiss our cross-complaint, denied the request to vacate
the July 2, 2002 preliminary injunction and denied the request for damages against us. The court
also refused to grant a summary judgment in favor of the cross-defendants and dismissed Mr.
Mullers claims against us for indemnification for his legal costs and for damages resulting from
the litigation. Neither Mr. Muller nor any of the cross-defendants have filed any cross-claims
against us and we are not exposed to any liability as a result of the litigation, except for
possibly incurring legal fees and expenses should we lose the litigation. Although the outcome of this litigation cannot be predicted with any degree of certainty, we
are optimistic that the Courts ruling will either significantly narrow the issues for any later
trial or will result in a final disposition of the case in a manner favorable to us.. While we
believe that we have valid claims, there can be no assurance that an adverse result or outcome on
the pending motions or a trial of this case would not have a material adverse effect on our
financial position or cash flow. We were named as a defendant in a complaint filed before the Los
Angeles Superior Court, Civ. No. BC 312401, by
Terracourt Pty Ltd, an Australian corporation, claiming breach of
contract and related remedies from promises allegedly made by the
former president of the Company in 1999. The plaintiff is seeking
specific performance of the former presidents alleged promises
to transfer to the plaintiff an aggregate 480,000 shares of our common stock for office consultant and multimedia
services. The complaint was filed on March 18, 2004. Due to a
late date of service of the complaint upon us and other
preliminary legal procedures, our answer was not filed
until October 20, 2004. We are opposing the
plaintiffs causes of action and have asserted that we have no liability for the claims asserted. The matter has been
scheduled for further motion and trial proceedings in late April 2005
and is expected to be concluded by early June 2005. 
 Item 4.Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of fiscal
2004. 13




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PART II 
 Item 5.Market for Common Equity and Related Stockholder Matters Our common stock is traded on the Pink Sheets under the symbol ZERO. The following table
sets forth the high and low closing prices of the common stock for the quarters indicated as quoted
on the Pink Sheets. 2003
    
    
    2004High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    $
    0.55
    
    
    $
    0.30
    
    
    $
    1.50
    
    
    $
    0.95Second Quarter
    
    $
    0.70
    
    
    $
    0.33
    
    
    $
    2.05
    
    
    $
    1.20Third Quarter
    
    $
    0.95
    
    
    $
    0.40
    
    
    $
    2.05
    
    
    $
    1.24Fourth Quarter
    
    $
    2.50
    
    
    $
    0.85
    
    
    $
    1.90
    
    
    $
    1.16
 According to the records of our transfer agent, we had 1,009 stockholders of record of our
common stock at December 31, 2004. We do not pay a dividend on our common stock and we currently intend to retain future cash
flows to finance our operations and fund the growth of our business. Any payment of future
dividends will be at the discretion of our Board of Directors and will depend upon, among other
things, our earnings, financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that our Board of Directors
deems relevant. Issuances of Unregistered Securities in Last Fiscal Year From July 2004 through the date of filing this report, we have engaged in a private offering
of units, comprised of shares of our common stock and one-year warrants to purchase an equal number
of shares of our common stock at an exercise price of $1.50 per share. This effort is ongoing. During
2004, we sold an aggregate of 1,272,500 of such units, amounting to 1,272,500 shares of
common stock and one-year warrants to purchase 1,272,500 shares of common stock exercisable at
$1.50 per share. For the sale of such units, we received aggregate gross proceeds of $1,272,500
and net proceeds of $ 1,192,180. In addition, during 2004 we sold 119,000 of such units and received
$119,000 of gross and net proceeds for those units, but did not issue the stock and warrant certificates until 2005. Also during 2004, we issued ten-year warrants to purchase 1,000,000 shares of common stock in
connection with patent acquisition agreements with two individuals. These warrants are exercisable
at $1.00 per share. In addition, we issued one-year warrants to purchase 50,000 shares of common
stock pursuant to a distribution agreement with Gurminder Singh, which warrants are exercisable at
$1.00 per share. During 2004, we issued 960,500 shares of common stock to 12 persons in connection with
the exercise, at various exercise prices, of previously-issued warrants. We received aggregate
gross and net proceeds of $194,200 in connection with such exercises. During 2004, we issued an aggregate of 850,000 shares of common stock to six individuals who
are advisors or consultants to the Company and certain of their designees in exchange for advisory
and consulting services rendered to the Company. Of such shares, 250,000 shares vested upon
issuance thereof, 300,000 of such shares vested on April 1, 2004 and the remainder vested on April
1, 2005. In February 2004, we issued 488,560 shares of common stock to five individuals who provided
services to the Company in connection with a private offering of our common stock, which offering
was conducted between November 2002 and October 2003. In April 2004, we issued 60,000 shares of common stock in consideration of the cancellation of
a loan in the amount of $15,000 made to us by Joette Masry, the wife
of our Chief Executive Officer,
Edward L. Masry. 14




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During 2004, the Company issued options to purchase 1,172,652 shares of common stock to
certain of our directors, officers and employees. These options have an aggregate intrinsic value
of $304,272. In our Quarterly Report on Form 10-Q-SB for the quarter ended March 31, 2004, we also
disclosed that we had sold 25,000 shares of common stock to one individual on October 14, 2003, but
that a certificate for such shares was not issued until February 3, 2004. The issuances of shares and warrants described above were made in reliance on the exemptions
from registration set forth in Section 4(2) of the Securities Act of 1933 (the Act), as amended,
or Regulations D or S promulgated thereunder. 
 Item 6.Managements Discussion and Analysis or Plan of Operation The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the Financial Statements and supplementary data referred to in
Item 7 of this Form 10-KSB. This discussion contains forward-looking statements that involve risks and uncertainties. Such
statements, which include statements concerning future revenue sources and concentration, 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 above in Item 1 and elsewhere in this Form 10-KSB, particularly in
Risk Factors, that could cause actual results to differ materially from those projected. Unless
otherwise expressly indicated, the information set forth in this Form 10-KSB is as of December 31,
2004, and we undertake no duty to update this information. Overview We are a development stage company that has not yet generated revenues. The companys focus
is on research and development of proprietary devices that are designed to reduce harmful
emissions, improve fuel efficiency and engine performance for installation on equipment and
vehicles driven by internal combustion engines. Our prototype devices are called ZEFS and
CAT-MATE. We have devoted the bulk of our efforts to the completion of the design, the
development of our production models and the promotion of our products in the market place
worldwide. Expenses have been funded through the sale of company stock. We have devoted the bulk
of our efforts to the completion of the design, the development of our production models. We anticipate that these efforts will continue during 2005 and that we will begin selling our
devices by late 2005. We do not envision generating significant revenue in 2005. We will need to
raise additional capital during 2005 to fund our research and development and marketing efforts and
other expenses. Results of Operation To date, we have not generated any revenues and our business continues in the development
stage. We have focused our efforts on verifying and developing our technologies and devices and
commencing marketing efforts for their license or sale. We expect to begin selling our devices in
late 2005. General
and administrative expenses were $3,323,030 for the fiscal year ended December 31,
2004, compared to $6,046,651 for the fiscal year ended December 31, 2003, an increase of
$1,476,379. This increase is attributable to payroll expense which increased by $460,826,
primarily as a result of additional personnel; consulting expense which increased by $228,314,
primarily as a result of additional consulting services; corporate expense which increased by
$239,161, primarily as a result of costs associated with financial printing, public relations,
transfer agent and website design; professional expense which increased by $144,094, primarily as a
result of legal and accounting fees associated with SEC reporting, our private offering that
commenced in July 2004 and general corporate functions; and travel and other expense which
increased in the aggregate by $335,324, primarily as a result of the expansion of our R&D
activities worldwide. A significant portion of the total increase in general and administrative
expense is the result of non-cash items in the aggregate amount of $1,195,210 in the fiscal year
ended December 31, 2004 compared to $899,668 in the fiscal year ended December 31, 2003, an
increase of $295,542. 15




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Research and development expenses were $1,873,464 for the fiscal year ended December 31, 2004,
compared to $628,832 for the fiscal year ended December 31, 2003, an increase of $1,244,632. Our
research and development expenses include contractual payments to RAND, consultants fees, capital
expenditures, cost of services and supplies. The increase in research and development expenses is
primarily attributable to the valuation of $1,210,450 placed on the common stock that we issued as
compensation in lieu of cash to our R&D consultants in Australia and the United States under
two-year agreements with those individuals; and increases in actual R&D expenses. Patent
settlement costs were $1,610,066 in the fiscal year ended December 31, 2004, attributable to Black-Scholes valuation placed on
1,000,000 warrants that we issued in connection with our acquisition of certain of our intellectual
property. Non-cash items were $4,015,726 for the fiscal year ended December 31, 2004, compared to
$899,668 for the fiscal year ended December 31, 2003. This increase is attributable to increases
in general and administrative expense in the amount of $295,542, research and development expense
in the amount of $1,210,450 and patent settlement costs in the amount of $$1,610,066. We had a net loss of $6,803,280, or $.19 per share, for the year ended December 31, 2004,
compared to a net loss of $2,476,063, or $.09 per share, for the year ended December 31, 2003. We
expect an increase in net loss in the fiscal year ending December 31, 2005, primarily attributable
to increased general and administrative expenses and marketing-related expenditures, without the
benefit of any revenue for most of the year. Liquidity and Capital Resources We have incurred negative cash flow from operations in the developmental stage since our
inception in 1998. As of December 31, 2004 we had cash of $84,826 and an accumulated deficit of
$17,130,888. Our negative operating cash flows in 2004 were funded primarily through the sale of
common stock and, to a lesser degree, by proceeds we received from the exercise of options and
warrants. The financial statements accompanying this Annual Report have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of our business. As reflected in the accompanying financial
statements, the we had a net loss of $6,803,280 and a negative cash flow from operations of
$2,411,464 for the year ending December 31, 2004, and a stockholders deficiency of $2,007,144 as
of December 31, 2004. These factors raise substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is dependent on our ability to raise
additional funds and implement our business plan. The financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going concern. From July 2004 through the date of filing this report, we have engaged in a private offering
of units comprised of shares of our common stock and one-year warrants to purchase an equal number
of shares of common stock at an exercise price of $1.50 per share. From July 2004 through December
31, 2004, we received aggregate gross proceeds of $1,272,500 and aggregate net proceeds of
$1,167,180 in connection with the sale of 1,272,500 shares of our common stock to 27 purchasers.
The offering is ongoing. See Note 6 to Notes to Financial
Statements. We believe that we have sufficient cash to fund our operations through the second quarter of
2005 based on current cash on hand. For all of 2005, we will need to raise additional capital or
incur new debt to fund our operations. We believe that exercises of in-the-money options and
warrants, with various expiration dates during 2005, will provide some of the proceeds needed to
meet our capital requirements during 2005, together with additional sales of our common stock in
the private offering. In addition, we are actively exploring additional sources of financing, including borrowings
from one or more of our directors and officers However, there can be no assurance that additional
equity or debt financing will be available or available on terms favorable to us. If we are unable
to obtain additional capital, we may be required to delay, reduce the scope of, or eliminate, our
research and development programs, reduce any marketing activities or relinquish rights to
technologies that we might otherwise seek to develop or commercialize. 16




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##### Table of Contents



Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations is based upon our
Financial Statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these Financial Statements and related
disclosures requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on
an on-going basis, our estimates and judgments, including those related to the useful life of the
assets. We base our estimates on historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. The methods, estimates and judgments we use in applying our most critical accounting policies
have a significant impact on the results that we report in our Financial Statements. The SEC
considers an entitys most critical accounting policies to be those policies that are both most
important to the portrayal of a companys financial condition and results of operations and those
that require managements most difficult, subjective or complex judgments, often as a result of the
need to make estimates about matters that are inherently uncertain at the time of estimation. We
believe the following critical accounting policies, among others, require significant judgments and
estimates used in the preparation of our Financial Statements: The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Certain significant estimates were made in connection with preparing our financial statements as
described in Note 1 to Notes to Financial Statements. See Item 7, Financial Statements. Actual
results could differ from those estimates. Stock-Based Compensation We account for stock-based compensation to employees as defined by using the intrinsic-value
method prescribed in Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued
to Employees. We account for stock option and warrant grants issued to non-employees using the guidance of
SFAS No. 123, Accounting for Stock-Based Compensation and EITF No. 96-18: Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, whereby the fair value of such option and warrant grants is determined using
the Black-Scholes option pricing model at the earlier of the date at which the non-employees
performance is completed or a performance commitment is reached. New Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 151, Inventory Costs. This Statement amends the guidance in
ARB No. 43 Chapter 4 Inventory Pricing, to require items such as idle facility costs, excessive
spoilage, double freight and rehandling costs to be expensed in the current period, regardless if
they are abnormal amounts or not. This Statement will become effective for us in the first quarter
of 2006. The adoption of SFAS No. 151 is not expected to have a material impact on our financial
condition, results of operations, or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123R), which revises SFAS No. 123. SFAS 123R also supersedes APB No. 25 and amends SFAS No. 95,
Statement of Cash Flows. In general, the accounting required by SFAS 123R is similar to that of
SFAS No. 123. However, SFAS No. 123 gave companies a choice to either recognize the fair value of
stock options in their income statements or disclose the pro forma income statement effect of the
fair value of stock options in the notes to the financial statements. SFAS 123R eliminates that
choice and requires the fair value of all share-based payments to employees, including the fair
value of grants of employee stock options, be recognized in the income statement, generally over
the option vesting period. SFAS 123R must be adopted no later than
July 1, 2005 (December 15, 2005 for small business filers). Early adoption is
permitted. 17




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##### Table of Contents



The Company is currently evaluating the timing and manner in which it will adopt SFAS 123R.
As permitted by SFAS 123, the Company currently accounts for share-based payments to employees
using APB 25s intrinsic value method. Accordingly, adoption of SFAS 123Rs fair value method
will have an effect on results of operations, although it will have no impact on overall financial
position. The impact of adoption of SFAS 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had SFAS 123R been
adopted in prior periods, the effect would have approximated the SFAS 123 pro forma net loss and
loss per share disclosures as shown above. SFAS 123R also requires the benefits of tax deductions
in excess of recognized compensation cost to be reported as a financing cash flow, rather than as
an operating cash flow as currently required, thereby reducing net operating cash flows and
increasing net financing cash flows in periods after adoption. 18




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##### Table of Contents



Item 7.Financial Statements SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) YEARS ENDED DECEMBER 31, 2004 AND 2003 CONTENTS PageReport of Independent Registered Public Accounting Firm
    
    
    20Balance sheets
    
    
    21Statements of operations
    
    
    22Statements of stockholders deficiency
    
    
    23Statements of cash flows
    
    
    27Notes to financial statements
    
    
    2919




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors
Save the World Air, Inc. We have audited the accompanying balance sheets of Save the World Air, Inc. (a development stage
enterprise) as of December 31, 2004 and 2003 and the related statements of operations, changes in
stockholders deficiency and cash flows for the years then ended and for the period from inception
(February 18, 1998) to December 31, 2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Save the World Air, Inc. (a development stage enterprise) as of
December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then
ended and for the period from inception (February 18, 1998) to December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2 to the financial statements, the Company has a net loss of
$6,803,280 and negative cash flow from operations of $2,411,464 for
the year ended December 31,
2004, and had a working capital deficiency of $1,025,532 and a stockholders deficiency of
$2,007,144 as of December 31, 2004. These factors raise substantial doubt about its ability to
continue as a going concern. Managements plans concerning this
matter are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the
outcome of this uncertainty. WEINBERG & COMPANY, P.A. April 11, 2005
Boca Raton, Florida 20




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS
DECEMBER 31, 2004 AND 2003 2004
    
    
    2003ASSETS
Current assetsCash
    
    $
    84,826
    
    
    $
    926,052Other current assets
    
    
    2,602
    
    
    
    Total current assets
    
    
    87,428
    
    
    
    926,052Property and equipment, net of accumulated depreciation
    
    
    35,596
    
    
    
    35,244TOTAL ASSETS
    
    $
    123,024
    
    
    $
    961,296LIABILITIES
AND STOCKHOLDERS DEFICIENCY
Current liabilitiesAccounts payable
    
    $
    64,089
    
    
    $
    Accrued expenses
    
    
    134,420
    
    
    
    33,082Accrued professional fees
    
    
    876,452
    
    
    
    551,582Income taxes payable
    
    
    
    
    
    
    5,991Loans from
related parties
    
    
    36,478
    
    
    
    57,903Finders fees payable
    
    
    1,521
    
    
    
    128,916Total current liabilities
    
    
    1,112,960
    
    
    
    777,474Advances from founding executive officer
    
    
    1,017,208
    
    
    
    1,017,208Commitments and contingenciesStockholders deficiencyCommon stock, $.001 par value: 200,000,000 shares
authorized, 37,784,821 and 34,128,261 shares
issued and outstanding at December 31, 2004
and 2003, respectively
    
    
    37,784
    
    
    
    34,128Common stock to be issued
    
    
    119,000
    
    
    
    6,250Additional paid-in capital
    
    
    15,043,028
    
    
    
    10,162,177Deferred compensation
    
    
    (76,068
    )
    
    
    (708,333
    )Deficit accumulated during the development stage
    
    
    (17,130,888
    )
    
    
    (10,327,608
    )Total stockholders deficiency
    
    
    (2,007,144
    )
    
    
    (833,386
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIENCY
    
    $
    123,024
    
    
    $
    961,296
 See notes to financial statements. 21




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD FROM INCEPTION (FEBRUARY
18, 1998) TO DECEMBER 31, 2004 CumulativeDecember 31,
    
    
    December 31,
    
    
    since2004
    
    
    2003
    
    
    inceptionNet sales
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses
    
    
    3,323,030
    
    
    
    1,846,651
    
    
    
    12,865,369Research and development expenses
    
    
    1,873,464
    
    
    
    628,832
    
    
    
    2,653,226Non-cash patent settlement cost
    
    
    1,610,066
    
    
    
    
    
    
    
    1,610,066Loss before other income
    
    
    (6,806,560
    )
    
    
    (2,475,483
    )
    
    
    (17,128,661
    )Other
Income
Interest income
    
    
    514
    
    
    
    440
    
    
    
    954Loss before provision for income taxes
    
    
    (6,806,046
    )
    
    
    (2,475,043
    )
    
    
    (17,127,707
    )Provision (benefit) for income taxes
    
    
    (2,766
    )
    
    
    1,020
    
    
    
    3,181Net loss
    
    $
    (6,803,280
    )
    
    $
    (2,476,063
    )
    
    $
    (17,130,888
    )Net loss per common share, basic and diluted
    
    $
    (0.19
    )
    
    $
    (0.09
    )Weighted average common shares outstanding,basic and diluted
    
    
    35,841,225
    
    
    
    26,768,958
 See notes to financial statements. 22




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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 DECEMBER 31, 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
    
    
    
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    
    
    
    
    14,270
    
    
    
    
    
    
    
    
    
    
    
    (21,307
    )
    
    
    2,993Issuance of common stock on May 18, 1999
    
    
    1.00  6.40
    
    
    
    198,003
    
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    516,738
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516,936Issuance of common stock for ZEFS on September 14, 1999
    
    
    .001
    
    
    
    5,000,000
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Stock issued for professional services on May 18, 1999
    
    
    0.88
    
    
    
    69,122
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    49,444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,513Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,075,264
    )
    
    
    (1,075,264
    )Balance, December 31, 1999
    
    
    
    
    
    
    15,297,125
    
    
    
    15,297
    
    
    
    
    
    
    
    
    
    
    
    580,452
    
    
    
    
    
    
    
    
    
    
    
    (1,096,571
    )
    
    
    (500,822
    )Stock issued for employee compensation on February 8, 2000
    
    
    1.03
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20,580
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,600Stock issued for consulting services on February 8, 2000
    
    
    1.03
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    102,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,000Stock issued for professional services on April 18, 2000
    
    
    3.38
    
    
    
    27,000
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    91,233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,260Stock issued for directors fees on April 18, 2000
    
    
    3.38
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    168,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,000Stock issued for professional services on May 19, 2000
    
    
    4.06
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    20,295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,300Stock issued for directors fees on June 20, 2000
    
    
    4.44
    
    
    
    6,000
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    26,634
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,640Stock issued for professional services on June 20, 2000
    
    
    4.44
    
    
    
    1,633
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    7,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,251Stock issued for professional services on June 26, 2000
    
    
    5.31
    
    
    
    1,257
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    6,674
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,675Stock issued for employee compensation on June 26, 2000
    
    
    5.31
    
    
    
    22,000
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    116,798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,820Stock issued for consulting services on June 26, 2000
    
    
    5.31
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    52,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,213Stock issued for promotional services on July 28, 2000
    
    
    4.88
    
    
    
    9,675
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    47,205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,214Stock issued for consulting services on July 28, 2000
    
    
    4.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    47,975
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,985Stock issued for consulting services on August 4, 2000
    
    
    2.13
    
    
    
    35,033
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    74,585
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,620Stock issued for promotional services on August 16, 2000
    
    
    2.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    56,225
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,250Stock issued for consulting services on September 5, 2000
    
    
    2.25
    
    
    
    12,833
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    28,861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,874Stock issued for consulting services on September 10, 2000
    
    
    1.50
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    14,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,750Stock issued for consulting services on November 2, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on November 4, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on December 20, 2000
    
    
    0.50
    
    
    
    19,082
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    9,522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,541
 23




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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 DECEMBER 31, 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 filing services on December 20, 2000
    
    
    0.50
    
    
    
    
    
    
    
    5,172
    
    
    
    5
    
    
    
    
    
    
    
    2,581
    
    
    
    
    
    
    
    
    
    
    
    2,586Stock issued for professional services on December 26, 2000
    
    
    0.38
    
    
    
    
    
    
    
    12,960
    
    
    
    13
    
    
    
    
    
    
    
    4,912
    
    
    
    
    
    
    
    
    
    
    
    4,925Other stock issuance on August 24, 2000
    
    
    2.13
    
    
    
    
    
    
    
    2,000
    
    
    
    2
    
    
    
    
    
    
    
    4,258
    
    
    
    
    
    
    
    
    
    
    
    4,260Common shares cancelled
    
    
    
    
    
    
    
    
    
    
    (55,000
    )
    
    
    (55
    )
    
    
    
    
    
    
    (64,245
    )
    
    
    
    
    
    
    
    
    
    
    (64,300
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,270,762
    )
    
    
    (1,270,762
    )Balance, December 31, 2000
    
    
    
    
    
    
    
    
    
    
    15,645,935
    
    
    
    15,646
    
    
    
    
    
    
    
    1,437,873
    
    
    
    
    
    
    
    (2,367,333
    )
    
    
    (913,814
    )Stock issued for consulting services on January 8, 2001
    
    
    0.31
    
    
    
    
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,038
    
    
    
    
    
    
    
    
    
    
    
    3,048Stock issued for consulting services on February 1, 2001
    
    
    0.33
    
    
    
    
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    3,235
    
    
    
    
    
    
    
    
    
    
    
    3,245Stock issued for consulting services on March 1, 2001
    
    
    0.28
    
    
    
    
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,743
    
    
    
    
    
    
    
    
    
    
    
    2,753Stock issued for legal services on March 13, 2001
    
    
    0.32
    
    
    
    
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    47,850
    
    
    
    
    
    
    
    
    
    
    
    48,000Stock issued for consulting services on April 3, 2001
    
    
    0.25
    
    
    
    
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    2,448
    
    
    
    
    
    
    
    
    
    
    
    2,458Stock issued for legal services on April 4, 2001
    
    
    0.25
    
    
    
    
    
    
    
    30,918
    
    
    
    31
    
    
    
    
    
    
    
    7,699
    
    
    
    
    
    
    
    
    
    
    
    7,730Stock issued for professional services on April 4, 2001
    
    
    0.25
    
    
    
    
    
    
    
    7,040
    
    
    
    7
    
    
    
    
    
    
    
    1,753
    
    
    
    
    
    
    
    
    
    
    
    1,760Stock issued for consulting services on April 5, 2001
    
    
    0.25
    
    
    
    
    
    
    
    132,600
    
    
    
    132
    
    
    
    
    
    
    
    33,018
    
    
    
    
    
    
    
    
    
    
    
    33,150Stock issued for filing fees on April 30, 2001
    
    
    1.65
    
    
    
    
    
    
    
    1,233
    
    
    
    1
    
    
    
    
    
    
    
    2,033
    
    
    
    
    
    
    
    
    
    
    
    2,034Stock issued for filing fees on September 19, 2001
    
    
    0.85
    
    
    
    
    
    
    
    2,678
    
    
    
    2
    
    
    
    
    
    
    
    2,274
    
    
    
    
    
    
    
    
    
    
    
    2,276Stock issued for professional services on September 28, 2001
    
    
    0.62
    
    
    
    
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    92,850
    
    
    
    
    
    
    
    
    
    
    
    93,000Stock issued for directors services on October 5, 2001
    
    
    0.60
    
    
    
    
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    59,900
    
    
    
    
    
    
    
    
    
    
    
    60,000Stock issued for legal services on October 17, 2001
    
    
    0.60
    
    
    
    
    
    
    
    11,111
    
    
    
    11
    
    
    
    
    
    
    
    6,655
    
    
    
    
    
    
    
    
    
    
    
    6,666Stock issued for consulting services on October 18, 2001
    
    
    0.95
    
    
    
    
    
    
    
    400,000
    
    
    
    400
    
    
    
    
    
    
    
    379,600
    
    
    
    
    
    
    
    
    
    
    
    380,000Stock issued for consulting services on October 19, 2001
    
    
    1.25
    
    
    
    
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    187,350
    
    
    
    
    
    
    
    
    
    
    
    187,500Stock issued for exhibit fees on October 22, 2001
    
    
    1.35
    
    
    
    
    
    
    
    5,000
    
    
    
    6
    
    
    
    
    
    
    
    6,745
    
    
    
    
    
    
    
    
    
    
    
    6,751Stock issued for directors services on November 2, 2001
    
    
    0.95
    
    
    
    
    
    
    
    1,000,000
    
    
    
    1,000
    
    
    
    
    
    
    
    949,000
    
    
    
    
    
    
    
    
    
    
    
    950,000Stock issued for consulting services on November 7, 2001
    
    
    0.85
    
    
    
    
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    16,980
    
    
    
    
    
    
    
    
    
    
    
    17,000Stock issued for consulting services on November 20, 2001
    
    
    0.98
    
    
    
    
    
    
    
    43,000
    
    
    
    43
    
    
    
    
    
    
    
    42,097
    
    
    
    
    
    
    
    
    
    
    
    42,140Stock issued for consulting services on November 27, 2001
    
    
    0.98
    
    
    
    
    
    
    
    10,000
    
    
    
    10
    
    
    
    
    
    
    
    9,790
    
    
    
    
    
    
    
    
    
    
    
    9,800Stock issued for consulting services on November 28, 2001
    
    
    0.98
    
    
    
    
    
    
    
    187,000
    
    
    
    187
    
    
    
    
    
    
    
    183,073
    
    
    
    
    
    
    
    
    
    
    
    183,260Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600,000
    
    
    
    (2,600,000
    )
    
    
    
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,318
    
    
    
    
    
    
    
    
    
    
    
    142,318
 24




---



##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS DEFICIENCY  Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 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 deficiencyAmortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,667
    
    
    
    
    
    
    
    191,667Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,735,013
    )
    
    
    (2,735,013
    )Balance, December 31, 2001
    
    
    
    
    
    
    
    
    
    
    18,085,847
    
    
    
    18,086
    
    
    
    
    
    
    
    6,220,322
    
    
    
    (2,408,333
    )
    
    
    (5,102,346
    )
    
    
    (1,272,271
    )Stock issued for directors services on December 10, 2002
    
    
    0.40
    
    
    
    
    
    
    
    2,150,000
    
    
    
    2,150
    
    
    
    
    
    
    
    857,850
    
    
    
    
    
    
    
    
    
    
    
    860,000Common stock paid for, but not issued (2,305,000 shares)
    
    
    0.15-0.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389,875Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,909
    
    
    
    (54,909
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    891,182
    
    
    
    
    
    
    
    891,182Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,749,199
    )
    
    
    (2,749,199
    )Balance, December 31, 2002
    
    
    
    
    
    
    
    
    
    
    20,235,847
    
    
    
    20,236
    
    
    
    389,875
    
    
    
    7,133,081
    
    
    
    (1,572,060
    )
    
    
    (7,851,545
    )
    
    
    (1,880,413
    )Stock issued, previously paid for
    
    
    0.15
    
    
    
    
    
    
    
    1,425,000
    
    
    
    1,425
    
    
    
    (213,750
    )
    
    
    212,325
    
    
    
    
    
    
    
    
    
    
    
    Stock issued, previously paid for
    
    
    0.25
    
    
    
    
    
    
    
    880,000
    
    
    
    880
    
    
    
    (220,000
    )
    
    
    219,120
    
    
    
    
    
    
    
    
    
    
    
    Stock and warrants issued for cash on March 20, 2003
    
    
    0.25
    
    
    
    
    
    
    
    670,000
    
    
    
    670
    
    
    
    
    
    
    
    166,830
    
    
    
    
    
    
    
    
    
    
    
    167,500Stock and warrants issued for cash on April 4, 2003
    
    
    0.25
    
    
    
    
    
    
    
    900,000
    
    
    
    900
    
    
    
    
    
    
    
    224,062
    
    
    
    
    
    
    
    
    
    
    
    224,962Stock and warrants issued for cash on April 8, 2003
    
    
    0.25
    
    
    
    
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    24,900
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock and warrants issued for cash on May 8, 2003
    
    
    0.25
    
    
    
    
    
    
    
    1,150,000
    
    
    
    1,150
    
    
    
    
    
    
    
    286,330
    
    
    
    
    
    
    
    
    
    
    
    287,480Stock and warrants issued for cash on June 16, 2003
    
    
    0.25
    
    
    
    
    
    
    
    475,000
    
    
    
    475
    
    
    
    
    
    
    
    118,275
    
    
    
    
    
    
    
    
    
    
    
    118,750Stock issued for legal services on June 27, 2003
    
    
    0.55
    
    
    
    
    
    
    
    83,414
    
    
    
    83
    
    
    
    
    
    
    
    45,794
    
    
    
    
    
    
    
    
    
    
    
    45,877Debt converted to stock and warrants on June 27, 2003
    
    
    0.25
    
    
    
    
    
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    
    
    
    
    498,000
    
    
    
    
    
    
    
    
    
    
    
    500,000Stock and warrants issued for cash on July 11, 2003
    
    
    0.25
    
    
    
    
    
    
    
    519,000
    
    
    
    519
    
    
    
    
    
    
    
    129,231
    
    
    
    
    
    
    
    
    
    
    
    129,750Stock and warrants issued for cash on September 29, 2003
    
    
    0.25
    
    
    
    
    
    
    
    1,775,000
    
    
    
    1,775
    
    
    
    
    
    
    
    441,976
    
    
    
    
    
    
    
    
    
    
    
    443,751Stock and warrants issued for cash on October 21, 2003
    
    
    0.25
    
    
    
    
    
    
    
    1,845,000
    
    
    
    1,845
    
    
    
    
    
    
    
    459,405
    
    
    
    
    
    
    
    
    
    
    
    461,250Stock and warrants issued for cash on October 28, 2003
    
    
    0.25
    
    
    
    
    
    
    
    1,570,000
    
    
    
    1,570
    
    
    
    
    
    
    
    390,930
    
    
    
    
    
    
    
    
    
    
    
    392,500Stock and warrants issued for cash on November 19, 2003
    
    
    0.25
    
    
    
    
    
    
    
    500,000
    
    
    
    500
    
    
    
    
    
    
    
    124,500
    
    
    
    
    
    
    
    
    
    
    
    125,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,875
    
    
    
    (312,582
    )
    
    
    
    
    
    
    
    
    
    
    (268,707
    )Common stock paid for, but not issued (25,000 shares)
    
    
    0.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,250Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    863,727
    
    
    
    
    
    
    
    863,727Net loss for year ended December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,476,063
    )
    
    
    (2,476,063
    )Balance, December 31, 2003
    
    
    
    
    
    
    
    
    
    
    34,128,261
    
    
    
    34,128
    
    
    
    6,250
    
    
    
    10,162,177
    
    
    
    (708,333
    )
    
    
    (10,327,608
    )
    
    
    (833,386
    )
 25




---



##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS DEFICIENCY  Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 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 deficiencyCommon stock issued, previously paid for
    
    
    0.25
    
    
    
    
    
    
    
    25,000
    
    
    
    25
    
    
    
    (6,250
    )
    
    
    6,225
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for director services on March 31, 2004
    
    
    1.50
    
    
    
    
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    74,950
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued for finders fees on March 31, 2004
    
    
    0.15
    
    
    
    
    
    
    
    82,500
    
    
    
    82
    
    
    
    
    
    
    
    12,293
    
    
    
    
    
    
    
    
    
    
    
    12,375Stock issued for finders fees on March 31, 2004
    
    
    0.25
    
    
    
    
    
    
    
    406,060
    
    
    
    407
    
    
    
    
    
    
    
    101,199
    
    
    
    
    
    
    
    
    
    
    
    101,606Stock issued for services on April 2, 2004
    
    
    1.53
    
    
    
    
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    99,385
    
    
    
    
    
    
    
    
    
    
    
    99,450Debt converted to stock on April 2, 2004
    
    
    1.53
    
    
    
    
    
    
    
    60,000
    
    
    
    60
    
    
    
    
    
    
    
    91,740
    
    
    
    
    
    
    
    
    
    
    
    91,800Stock issued upon exercise of warrants on May 21, 2004
    
    
    0.20
    
    
    
    
    
    
    
    950,000
    
    
    
    950
    
    
    
    
    
    
    
    189,050
    
    
    
    
    
    
    
    
    
    
    
    190,000Stock issued for directors services on June 8, 2004
    
    
    1.70
    
    
    
    
    
    
    
    600,000
    
    
    
    600
    
    
    
    
    
    
    
    1,019,400
    
    
    
    
    
    
    
    
    
    
    
    1,020,000Stock issued for cash on August 25, 2004
    
    
    1.00
    
    
    
    
    
    
    
    550,000
    
    
    
    550
    
    
    
    
    
    
    
    549,450
    
    
    
    
    
    
    
    
    
    
    
    550,000Stock issued
upon exercise of warrants on August 30, 2004
    
    
    0.40
    
    
    
    
    
    
    
    4,000
    
    
    
    4
    
    
    
    
    
    
    
    1,596
    
    
    
    
    
    
    
    
    
    
    
    1,600Stock issued for cash on September 8, 2004
    
    
    1.00
    
    
    
    
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for consulting services on September 15, 2004
    
    
    1.31
    
    
    
    
    
    
    
    50,000
    
    
    
    49
    
    
    
    
    
    
    
    65,451
    
    
    
    
    
    
    
    
    
    
    
    65,500Stock issued for patent settlement on September 22, 2004
    
    
    1.24
    
    
    
    
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    24,780
    
    
    
    
    
    
    
    
    
    
    
    24,800Stock issued for research and development on October 6, 2004
    
    
    1.40
    
    
    
    
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    90,935
    
    
    
    
    
    
    
    
    
    
    
    91,000Stock issued for cash on October 6, 2004
    
    
    1.00
    
    
    
    
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on October 15, 2004
    
    
    1.00
    
    
    
    
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    149,850
    
    
    
    
    
    
    
    
    
    
    
    150,000Stock issued
upon exercise of warrants on October 21, 2004
    
    
    0.40
    
    
    
    
    
    
    
    6,500
    
    
    
    6
    
    
    
    
    
    
    
    2,594
    
    
    
    
    
    
    
    
    
    
    
    2,600Stock issued for cash on November 3, 2004
    
    
    1.00
    
    
    
    
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on November 18, 2004
    
    
    1.00
    
    
    
    
    
    
    
    172,500
    
    
    
    173
    
    
    
    
    
    
    
    172,327
    
    
    
    
    
    
    
    
    
    
    
    172,500Stock issued for cash on December 9, 2004
    
    
    1.00
    
    
    
    
    
    
    
    75,000
    
    
    
    75
    
    
    
    
    
    
    
    74,925
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued for cash on December 23, 2004
    
    
    1.00
    
    
    
    
    
    
    
    250,000
    
    
    
    250
    
    
    
    
    
    
    
    249,750
    
    
    
    
    
    
    
    
    
    
    
    250,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,384
    )
    
    
    
    
    
    
    
    
    
    
    (88,384
    )Common stock paid for, but not issued (119,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,891
    
    
    
    (248,891
    )
    
    
    
    
    
    
    Fair value of options issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,381
    
    
    
    (55,381
    )
    
    
    
    
    
    
    Fair value of warrants issued for settlement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,585,266
    
    
    
    
    
    
    
    
    
    
    
    1,585,266Fair value of warrants issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,872
    
    
    
    
    
    
    
    
    
    
    
    28,872Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936,537
    
    
    
    
    
    
    
    936,537Net loss for year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,803,280
    )
    
    
    (6,803,280
    )37,784,821
    
    
    $
    37,784
    
    
    $
    119,000
    
    
    $
    15,043,028
    
    
    $
    76,068
    
    
    $
    (17,130,888
    )
    
    $
    (2,007,144
    )
 See notes to financial statements. 26




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD FROM INCEPTION
(FEBRUARY 18, 1998) TO DECEMBER 31, 2004 CumulativeDecember 31,
    
    
    December 31,
    
    
    since2004
    
    
    2003
    
    
    inceptionCash flows from operating activitiesNet loss
    
    $
    (6,803,280
    )
    
    $
    (2,476,063
    )
    
    $
    (17,130,888
    )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
    
    
    28,872
    
    
    
    
    
    
    
    171,190Issuance of common stock for services
    
    
    1,427,750
    
    
    
    45,877
    
    
    
    5,280,623Amortization of deferred compensation
    
    
    936,537
    
    
    
    863,727
    
    
    
    2,883,113Depreciation
    
    
    8,685
    
    
    
    5,205
    
    
    
    14,417Non-cash patent settlement cost
    
    
    1,610,066
    
    
    
    
    
    
    
    1,610,066Changes in operating assets and liabilities:Prepaid expenses
    
    
    (2,602
    )
    
    
    
    
    
    
    (2,602
    )Income taxes payable
    
    
    (5,991
    )
    
    
    1,064
    
    
    
    Accrued expenses
    
    
    388,499
    
    
    
    (35,671
    )
    
    
    789,497Net cash used in operating activities
    
    
    (2,411,464
    )
    
    
    (1,595,861
    )
    
    
    (5,879,584
    )Cash flows from investing activities
Purchase of property and equipment
    
    
    (9,037
    )
    
    
    (16,525
    )
    
    
    (46,463
    )Net cash used in investing activities
    
    
    (9,037
    )
    
    
    (16,525
    )
    
    
    (46,463
    )Cash flows from financing activities
Increase (decrease) in loans from related parties
    
    
    (6,425
    )
    
    
    4,881
    
    
    
    547,928Advances from founding executive officer
    
    
    
    
    
    
    
    
    
    
    517,208Issuance of common stock for cash
    
    
    1,466,700
    
    
    
    2,419,818
    
    
    
    4,820,487Cash received for common stock to be issued
    
    
    119,000
    
    
    
    6,250
    
    
    
    125,250Net cash provided by financing activities
    
    
    1,579,275
    
    
    
    2,430,949
    
    
    
    6,010,873Net (decrease) increase in cash
    
    
    (841,226
    )
    
    
    818,563
    
    
    
    84,826Cash, beginning of period
    
    
    926,052
    
    
    
    107,489
    
    
    
    Cash, end of period
    
    $
    84,826
    
    
    $
    926,052
    
    
    $
    84,826
 See notes to financial statements 27




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS  Continued
YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD FROM INCEPTION
(FEBRUARY 18, 1998) TO DECEMBER 31, 2004 CumulativeDecember 31,
    
    
    December 31,
    
    
    since2004
    
    
    2003
    
    
    inceptionSupplemental disclosures of cash flow
informationCash paid
during the year for
Interest
    
    $
    
    
    
    $
    
    
    
    $
    Income 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 from stock options issued
for services
    
    
    304,272
    
    
    
    
    
    
    
    2,959,181Purchase 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
    
    
    113,492
    
    
    
    
    
    
    
    113,492Common stock issued, previously paid for
    
    
    6,250
    
    
    
    
    
    
    
    Fees accrued for issuance of common stock
    
    
    88,384
    
    
    
    312,582
    
    
    
    400,966
 See notes to financial statements. 28




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL
STATEMENTS 1.      Description of business, significant matters and prior period corrections Description of business  Save the World Air, Inc. (the Company) was incorporated in Nevada on February 18, 1998
under the name Mandalay Capital Corp. The Company changed its name to Save the World Air,
Inc. on February 11, 1999 following the purchase of the Zero Emission Fuel-Saving Device
(the Agreement). 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.
During the past three years, the Company has been acquiring new technologies, developing
products using the Companys technologies and conducting scientific tests regarding the
technologies and prototype products. In 2003, the Company acquired worldwide intellectual
property and patent rights to technologies which reduce carbon monoxide, hydrocarbon and
nitrous oxide emissions in two- and four-stroke motorcycles, fuel-injection engines,
generators and small engines. The Company has developed prototype products and named them
CAT-MATE. 2.     Summary of significant accounting policies Development stage enterprise  The Company is a development stage enterprise as defined by Statement of Financial
Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage
Enterprises. All losses accumulated since the inception of the Company have been
considered as part of the Companys development stage activities.The Companys focus is on research and development of proprietary devices that are
designed to reduce harmful emissions, and improve fuel efficiency and engine performance
on equipment and vehicles driven by internal combustion engines and has not yet generated
any revenues. The prototype devices are called ZEFS (Zero Emission Fuel-Savings Device)
and CAT-MATE. The Company has put forth efforts to complete the design, the development
of production models and the promotion of products in the market place worldwide.
Expenses have been funded through the sale of company stock. The Company has taken
actions to secure the intellectual property rights to the ZEFS and CAT-MATE devices. In
addition, the Company has initiated marketing efforts to international governmental
entities in cooperation with the United Nations Environmental Programme (UNEP) and various
original equipment manufacturers (OEMs), to eventually sell or license the ZEFS and
CAT-MATE products and technology. 29




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##### Table of Contents



2.     Summary of significant accounting policies- Continued Liquidity  The Company is subject to the usual risks associated with a development stage enterprise.
These risks include, among others, those associated with product development, acceptance
of the product by users and the ability to raise the capital necessary to sustain
operations. Since its inception, the Company has incurred significant losses. The
Company anticipates increasing expenditures over at least the next year as the Company
continues its product development and evaluation efforts, and begins its marketing
activities. Without significant revenue increases, these expenditures will likely result
in additional losses. The Company is in the process of raising additional funds and raised
$1,378,316 (net of finders fees of $88,384) in 2004 through the sale
of 1,212,500 shares of its common stock in private
placement transactions and the exercise of 960,500 warrants and
options. (See Note 6.) Going concern  The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments
in the normal course of business. As reflected in the accompanying financial statements,
the Company had a net loss of $6,803,280 and a negative cash flow from operations of
$2,411,464 for the year ended December 31, 2004, and had a
working capital deficiency of $1,025,532 and a stockholders deficiency of
$2,007,144 as of December 31, 2004. These factors raise substantial doubt about its
ability to continue as a going concern. The ability of the Company to continue as a going
concern is dependent on the Companys ability to raise additional funds and implement its
business plan. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern. Property and equipment and depreciation  Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based on the estimated useful lives of the assets, generally ranging
from three to ten years. Expenditures for major renewals and improvements that extend the
useful lives of property and equipment are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful life of the asset
or the lease term. 30




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2.     Summary of significant accounting policies- Continued Long-lived assets  The Company accounts for the impairment and disposition of long-lived assets in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In
accordance with SFAS No. 144, long-lived assets to be held are reviewed for events or
changes in circumstances that indicate that their carrying value may not be recoverable.
The Company periodically reviews the carrying value of long-lived assets to determine
whether or not an impairment to such value has occurred. No impairments were recorded
during the period from inception (February 18, 1998) through December 31, 2004. Earnings (loss) per share  Basic earnings (loss) per share is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution, using the treasury
stock method, that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. In computing diluted earnings per share, the
treasury stock method assumes that outstanding options and warrants are exercised and the
proceeds are used to purchase common stock at the average market price during the period.
Options and warrants will have a dilutive effect under the treasury stock method only when
the average market price of the common stock during the period exceeds the exercise price
of the options and warrants. For the years ended December 31, 2004 and 2003, the dilutive
impact of outstanding stock options of 14,422,652 and 13,250,000, respectively, and
15,529,414 and 14,117,414 warrants have been excluded because their impact on the loss per
share is antidilutive. Income taxes  The Company accounts for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, income taxes
are recognized for the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets are recognized for the future tax consequences of
transactions that have been recognized in the Companys financial statements or tax
returns. A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. 31




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2.     Summary of significant accounting policies- Continued  Stock-based compensation  The Company accounts for stock-based compensation issued to employees using the
intrinsic-value method prescribed in Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees.The Company accounts 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.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. CumulativeDecember 31,
    
    
    December 31,
    
    
    since2004
    
    
    2003
    
    
    inceptionNet loss, as reported
    
    $
    (6,803,280
    )
    
    $
    (2,476,063
    )
    
    $
    (17,130,888
    )Add: total fair value method
stock-based employee
compensation expense
    
    
    (1,721,222
    )
    
    
    (949,977
    )
    
    
    (3,929,504
    )Less: deferred compensation
amortization for below market
employee options
    
    
    895,001
    
    
    
    850,000
    
    
    
    2,786,668Pro forma net loss
    
    $
    (7,629,501
    )
    
    $
    (2,576,040
    )
    
    $
    (18,273,724
    )Pro forma loss per share
    
    $
    (0.21
    )
    
    $
    (0.10
    )
 32




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##### Table of Contents



2.     Summary of significant accounting policies- Continued The fair market value of the stock options at the grant date was estimated using the
Black-Scholes pricing model with the following weighted average assumptions: Expected life (years)
    7.32Risk free interest rate


    5.42
    %Volatility


    238.46
    %Expected dividend yield


    0.00
    %
 Business and credit concentrations  The Companys cash balances in financial institutions at times may exceed federally
insured limits. As of December 31, 2004, before adjustments for outstanding checks and
deposits in transit, the Company had $67,718 on deposit with two banks. The deposits are
federally insured up to $100,000 on each bank. Estimates  The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Certain significant estimates were made in connection with
preparing the Companys financial statements. Actual results could
differ from those estimates. Fair value of financial instruments  The carrying amounts of financial instruments, including cash, accounts payable and
accrued expenses, professional fees, and payables to related parties and founding officer approximate fair
value because of their short maturity as of December 31, 2004. 33




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##### Table of Contents



2.     Summary of significant accounting policies- Continued Recent accounting pronouncements  In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151,
Inventory Costs. This Statement amends the guidance in ARB No. 43 Chapter 4 Inventory
Pricing, to require items such as idle facility costs, excessive spoilage, double freight
and rehandling costs to be expensed in the current period, regardless if they are abnormal
amounts or not. This Statement will become effective for us in the first quarter of 2006.
The adoption of SFAS No. 151 is not expected to have a material impact on our financial
condition, results of operations, or cash flows.In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123R), which revises SFAS No. 123. SFAS 123R also supersedes APB No. 25 and amends SFAS
No. 95, Statement of Cash Flows. In general, the accounting required by SFAS 123R is
similar to that of SFAS No. 123. However, SFAS No. 123 gave companies a choice to either
recognize the fair value of stock options in their income statements or disclose the pro
forma income statement effect of the fair value of stock options in the notes to the
financial statements. SFAS 123R eliminates that choice and requires the fair value of all
share-based payments to employees, including the fair value of grants of employee stock
options, be recognized in the income statement, generally over the option vesting period.
SFAS 123R must be adopted no later than July 1, 2005
(December 15, 2005 for small business filers). Early adoption is permitted.The Company is currently evaluating the timing and manner in which it will adopt SFAS
123R. As permitted by SFAS 123, the Company currently accounts for share-based payments
to employees using APB 25s intrinsic value method. Accordingly, adoption of SFAS 123Rs
fair value method will have an effect on results of operations, although it will have no
impact on overall financial position. The impact of adoption of SFAS 123R cannot be
predicted at this time because it will depend on levels of share-based payments granted in
the future. However, had SFAS 123R been adopted in prior periods, the effect would have
approximated the SFAS 123 pro forma net loss and loss per share disclosures as shown
above. SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating
cash flow as currently required, thereby reducing net operating cash flows and increasing
net financing cash flows in periods after adoption. 34




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3.     Certain relationships and related transactions Advances from founding executive officer  All of the marketing and manufacturing rights for the ZEFS were acquired from Mr. Muller,
for 5,000,000 shares of common stock, $500,000 and a $10 royalty for each unit sold (see
discussion below), pursuant to the Agreement entered into in December 1998, by and between
the Company and Mr. Muller. Working capital advances in the amount of $517,208 and
payment in the amount of $500,000 for marketing and distribution rights of the ZEFS are
due to Mr. Muller. Such amounts are interest free and do not have any due dates for
payment (see Note 9).In January 2000, the Company entered into an agreement offering Mr. Muller and Lynne
Muller, Mr. Mullers wife, the option to purchase 5,000,000 shares each at $0.10 per share
as consideration for work performed for the Company. Mrs. Muller subsequently transferred
her option to Mr. Muller.In connection with the Companys legal proceedings against Mr. Muller, the Company is
attempting to obtain a judgment that will relieve the Company of $1,017,208, which
represents all amounts due Mr. Muller. These amounts include the $500,000 due for the
marketing and distribution rights of the ZEFS and the working capital advances of
$517,208. As described in Note 9, the Company has been relieved of the $10 royalty
interest that Mr. Muller held for each unit sold. In addition, the Company is also
attempting to obtain a judgment that will 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. The Company has not made any adjustments for the above
in its financial statements as the matters have not yet been finalized and may change. 35




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3.     Certain relationships and related transactions- Continued Loans
from related parties  Masry & Vititoe, a law firm in which Edward L. Masry, the Companys Chief Executive Officer,
is a partner, has loaned $36,478 and $57,903 as of December 31, 2004 and 2003,
respectively, to the Company for working capital purposes. The loans payable to Masry &
Vititoe were allocations to the Company for shared expenses,
primarily payroll. Loans
by Masry & Vititoe were unsecured, non-interest bearing, and were due on demand. In June
2003, Masry & Vititoe converted $500,000 of its loans due from the Company into
2,000,000 shares of common stock and 2,000,000 warrants (see Note 6). In April 2004,
accounts payable due this firm totaling $15,000 was converted to 60,000 shares of common
stock. The shares issued were valued at the current market price of the date of issuance
of $91,800 resulting in additional charge to expense $76,800, which has been reflected in
the accompanying financial statements ended December 31, 2004.In March 2005, Masry & Vititoe loaned an additional
$100,000 to the Company for working capital purposes. This loan is
unsecured, non-interest bearing and is due on demand. Lease agreement  In October 2003, the Company entered into a lease agreement with an entity to lease office
space for its primary administrative facility. A director of the Company owns the entity
(see Note 9). 4.     Property and equipment At December 31, 2004 and 2003, property and equipment consist of the following: December 31,
    
    
    December 31,2004
    
    
    2003Office equipment
    
    $
    50,013
    
    
    $
    40,976Less accumulated depreciation
    
    
    (14,417
    )
    
    
    (5,732
    )$
    35,596
    
    
    $
    35,244
 Depreciation expense for the year ended December 31, 2004 and 2003 was $8,685 and $5,205,
respectively. 36




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5.     Income taxes  The Company has net operating loss (NOL) carryforwards in the amount of approximately $11.1
million, which begin to expire in 2018. The deferred tax asset related to these NOL
carryforwards has been fully reserved. The provision for income taxes represents the
minimum state income taxes payable plus estimated penalties and interest.The Companys ability to utilize its NOL is dependent upon current filing status with the
Internal Revenue Service (IRS) and is subject to the IRSs statute of limitations.
Currently, the Company has not filed any returns with the IRS.A reconciliation of the Companys tax provision to income taxes at the applicable statutory
rates is shown below. December 31,
    
    
    December 31,2004
    
    
    2003Income taxes at statutory federal rate
    
    $
    (2,316,681
    )
    
    $
    (841,861
    )State income taxes, net of federal benefit
    
    
    (408,197
    )
    
    
    (148,564
    )Valuation allowance
    
    
    2,721,312
    
    
    
    990,425Minimum state income taxes, plus penalties and interest
    
    
    800
    
    
    
    1,020$
    (2,766
    )
    
    $
    1,020
 6.     Stockholders deficiency  As of December 31, 2003, the Company has authorized 200,000,000 shares of its common stock,
of which 37,784,821 shares were issued and outstanding, and 119,000 shares are to be issued.
As described in Note 1, estimates and judgments were used by management to determine the
fair value for certain issuances of the outstanding shares.The Companys significant stockholders are as follows: Number
    
    
    Percentageof shares
    
    
    ownershipMr.Edward Skoda
    
    
    4,000,000
    
    
    
    10.6
    %Mr. Edward Masry
    
    
    3,060,000
    
    
    
    8.1
    %Remaining stockholders
    
    
    30,724,821
    
    
    
    81.3
    %37,784,821
    
    
    
    100.0
    %
 37




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6.     Stockholders deficiency  In connection with the cross complaint the Company has filed against Mr. Muller, the Company
is seeking various legal remedies relating to 8,716,710 shares previously obtained and
controlled, directly or indirectly, by Mr. Muller (see Note 9). The Company is also seeking
the rescission of options to purchase 10,000,000 shares of the Companys stock held by Mr.
Muller (see Notes 3 and 9). Management cannot predict the outcome of any of the pending
matters related to the shares controlled by Mr. Muller, or if the 10,000,000 option shares
will be rescinded.In June 2003, the Company issued 2,000,000 shares of common stock and 2,000,000 warrants to
convert $500,000 of related party debt into equity (see Note 7).In October 2003, the Company sold 25,000 shares of its common stock in a series of private
placement transactions. The Company received proceeds, net of offering costs, in the amount
of $6,250 for the shares prior to December 31, 2003, but did not issue the stock
certificates until February 2, 2004. These shares are shown as common stock to be issued in
the accompanying financial statements.In April 2004, the Company issued 60,000 shares of common stock to convert $15,000 of
an outstanding loan made to us by Joette Masry, the wife of our Chief
Executive Officer, Edward L. Masry (see Note 3). The shares issued were valued at the current
market price of the date of issuance of $91,800 resulting in additional charge to expense
$76,800, which has been reflected in the accompanying financial statements ended December
31, 2004.During 2004, the Company sold 1,272,500 units, consisting of one share of
common stock and one warrant to acquire a share of common stock at $1.50 for $1,272,500.During 2004, the Company issued 960,500 shares of common
stock for $194,200 from the exercise of 960,500 warrants.In November and December 2004, the Company sold 119,000 shares of its common stock in a
series of private placement transactions. The Company received proceeds, net of offering
costs, in the amount of $119,000 for the shares prior to December 31, 2004, but did not
issue the stock certificates until 2005. These shares are shown as common stock to be
issued in the accompanying financial statements. 38




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7.     Stock options and warrants Option agreements  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. The weighted average remaining contractual life of employee options outstanding
at December 31, 2004 was 7.32 years. Stock option activity for the years ended December 31,
2004 and 2003, was as follows: Weighted Avg.
    
    
    Weighted Avg.Options
    
    
    Exercise PriceOptions outstanding, January 1, 2003
    
    
    13,250,000
    
    
    $
    0.11Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, December 31, 2003
    
    
    13,250,000
    
    
    
    0.11Options granted
    
    
    1,172,652
    
    
    
    1.03Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, December 31, 2004
    
    
    14,422,652
    
    
    $
    0.18
 39




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7.     Stock options and warrants- Continued Options outstanding at December 31, 2004 and the related weighted average exercise price and
remaining life information is as follows: Weighted average
    
    
    Total weightedRange of exercise
    
    Total options
    
    
    remaining life in
    
    
    average exercise
    
    
    
    Weighted averageprices
    
    outstanding
    
    
    years
    
    
    price
    
    Options
     exercisable
    
    exercise price$0.10
    
    
    10,000,000
    
    
    
    N/A
    
    
    
    $0.10
    
    10,000,000
    
    $0.100.10
    
    
    3,000,000
    
    
    
    4.84
    
    
    
    0.10
    
    3,000,000
    
    0.100.40
    
    
    250,000
    
    
    
    3.99
    
    
    
    0.40
    
    250,000
    
    0.400.98
    
    
    900,000
    
    
    
    3.99
    
    
    
    0.98
    
    -
    
    -1.15
    
    
    86,956
    
    
    
    3.99
    
    
    
    1.15
    
    -
    
    -1.27
    
    
    185,696
    
    
    
    3.99
    
    
    
    1.27
    
    -
    
    -$0.10-$1.27
    
    
    14,422,652
    
    
    
    4.73
    
    
    
    $0.18
    
    13,250,000
    
    $0.16
  The 10,000,000 options exercisable at $0.10 per share in the table above are held by Mr.
Muller. The options have been accounted for as employee stock options under the provisions
of APB No. 25. Accordingly, no compensation expense has been recorded in the statements of
operations. However, the $1,000,000 fair value of the options has been reflected in the pro
forma net loss below. The 10,000,000 options do not have an expiration date and vested in
1999. For purposes of computing fair value method stock-based employee compensation expense
for the 10,000,000 employee options above, a ten-year life was used in the Black-Scholes
option-pricing model, as ten years is the longest term for other option grants. Intrinsic value of employee options  Certain employee options were granted with exercise prices less the than fair market value
of the Companys stock at the date of grant. As the grants were to employees, the intrinsic
value method, as allowed under APB No. 25, was used to calculate the related compensation
expense. For the years ended December 31, 2004, $248,891 of deferred compensation was
recorded and $936,537 and $863,727 of deferred compensation costs was amortized and
recognized as expense in the years ending December 31, 2004 and 2003 respectively. 40




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7.     Stock options and Warrants- Continued Warrants  The following table summarizes certain information about the companys stock purchase
warrants. Weighted Avg.Warrants
    
    
    Exercise PriceWarrants outstanding, January 1, 2003
    
    
    2,600,000
    
    
    $
    .39Warrants granted
    
    
    11,517,414
    
    
    
    .50Warrants exercised
    
    
    
    
    
    
    Warrants cancelled
    
    
    
    
    
    
    Warrants outstanding, December 31, 2003
    
    
    14,117,414
    
    
    
    .48Warrants granted
    
    
    2,372,500
    
    
    
    1.27Warrants exercised
    
    
    (960,500
    )
    
    
    .20Warrants cancelled
    
    
    
    
    
    
    Warrants outstanding, December 31, 2004
    
    
    15,529,414
    
    
    $
    0.62
  In 2003, 11,517,414 warrants were issued to investors and non-employees. In 2003,
$8,933,483 of the total fair value of $10,173,653 was related to 9,434,000 warrants issued
to private placement investors and $1,240,171 was related to the 2,083,414 warrants issued
in connection with the related party debt settlement and legal services.During the year ended December 31, 2004, the Company issued 1,000,000 10 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 reflected the
amount as patent settlement costs during the year ended December 31, 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 required royalties payable under this agreement for the year ending December
31, 2004.During 2004, the Company issued 100,000 warrants to two consultants and using the Black
Scholes pricing model, the fair value of these warrants was valued at $53,300 and included
as compensation expense. The remaining 1,272,500 warrants issued during 2004 were issued
to investors as part of equity agreement and were not ascribed any valued in the
accompanying financial statements. 41




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8.     Research and development  The Company has established a research and development facility in Queensland, Australia
where test vehicles, test engines and testing equipment were purchased. The Company has
expanded research and development to include applications of the ZEFS and CAT-MATE
technology to diesel engines, motorbikes, boats, generators, lawnmowers and other small
engines. The Company has also purchased test vehicles, test engines and testing equipment.
The Company completed testing on ZEFS and CAT-MATE devices for multiple automobiles,
trucks, motorcycles, off-road vehicles and stationary engines, the results of which have
been provided to RAND Corporation (RAND) for evaluation. During 2004, RAND expanded its
role with the Company and now oversees the Companys research and development facility in
Australia. The Company also uses third party research and development facilities in Los
Angeles and San Jose, California for the development of our ZEFS and CAT-MATE devices.
For the years ended December 31, 2004 and 2003, the Company has spent $1,873,464 and
$628,832, respectively, on research and development. 9.     Commitments and contingencies Legal matters  On December 19, 2001, the SEC filed civil charges in the United States Federal District
Court, Southern District of New York, against its former President and then sole director
Jeffrey A. Muller, and others, alleging that the Company and the other defendants were
engaged in a fraudulent scheme to promote the Companys stock. The SEC complaint alleged
the existence of a promotional campaign using press releases, Internet postings, an
elaborate website, and televised media events to disseminate false and materially
misleading information as part of a fraudulent scheme to manipulate the market for stock
for the Company, which was then controlled by Mr. Muller. On March 22, 2002, the Company
signed a Consent to Final Judgment of Permanent Injunction and Other Relief in settlement
of this action as against the corporation only, which the court approved on July 2, 2002.
Under this settlement, the Company was not required to admit fault and did not pay any
fines or restitution. The SECs charges of fraud and stock manipulation continue against
Mr. Muller and others.On July 2,2002, after an investigation by the Companys
newly constituted board of directors, the Company filed a cross-complaint in the SEC action against Mr. Muller and
others seeking injunctive relief, disgorgement of monies and stock and financial restitution for a variety of acts and
omissions in connection with sales of the Companys stock and other transactions occurring between 1998
and 2002. Among other things, the Company alleged that Mr. Muller and certain others sold company stock without providing adequate consideration to the Company; sold insider shares
without making proper disclosures and failed to make necessary filings required under federal securities laws; engaged in self-dealing
and entered into various undisclosed related-party transactions; misappropriated for their own use proceeds from sales of the Companys
stock; and entered into various undisclosed arrangement regarding the control, voting and disposition of their stock. The Company contends
that it is entitled to a judgment canceling all of the approximately 8,716,710 shares of the Companys common stock that were previously
obtained and controlled, directly or indirectly, by Mr, Muller; divesting and preventing any subsequent holders of the right to exercise
options previously held by Mr. Muller for 10,000,000 shares of the Companys common stock, conversion of an existing preliminary injunction
to a permanent injunction to prevent Mr. Muller from any involvement
with the Company and a monetary judgment against Mr. Muller and others
in the amount of several million dollars. 42




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9.     Commitments and contingencies- Continued Legal matters  Continued  On July 30, 2002, the U.S. Federal District Court, Southern District of New York, granted
the Companys application for a preliminary injunction against Mr. Muller and others,
which prevented Mr. Muller and other cross-defendants from selling, transferring, or
encumbering any assets and property previously acquired from the Company, from selling or
transferring any of the Companys stock that they may own or control, or from taking any
action to injure the business and from having any direct contact with the Companys
shareholders. The injunctive order also prevents Mr. Muller from engaging in any effort
to exercise control over the Company and from serving as an officer or director of the
Company. The Company believes that they have valid claims, there can be no assurance that
an adverse result or settlement would not have a material adverse effect on the Companys
financial position or cash flow.In the course of the litigation, the Company has obtained ownership control over Mr.
Mullers claimed patent rights to the ZEFS device. Under a Buy-Sell Agreement between Mr.
Muller and dated December 29, 1998, Mr. Muller, who was listed on the ZEFS devise patent
application as the inventor of the ZEFS device, purported to grant us all international
marketing, manufacturing and distribution rights to the ZEFS device. Those rights were
disputed because an original inventor of the ZEFS device contested Mr. Mullers legal
ability to have conveyed those rights. In Australia, Mr. Muller entered into a bankruptcy
action seeking to overcome the Companys claims for ownership of the ZEFS device. In
conjunction with these litigation proceedings, a settlement agreement was reached whereby
the $10 per unit royalty previously due to Mr. Muller under his contested Buy-Sell
Agreement was terminated and replaced with a $.20 per unit royalty payable to the
bankruptcy trustee. On November 7, 2002, under a settlement agreement executed with Mr. Mullers bankruptcy trustee, the trustee transferred to the Company all ownership and
legal rights to this international patent application for the ZEFS device.Both the SEC and the Company have filed Motions for Summary Judgment contending that there
are no material issues of fact in contention and as a matter of law, the Court should
grant a judgment against Mr. Muller and the cross-defendants. Mr. Muller has filed a
response contending the motions are without merit or substance. A final decision on these
motions, which potentially would terminate the ongoing litigation, is still pending.
Should the Court not grant summary judgment in favor of the Company, the case will be
scheduled for final disposition in a trial. 43




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9.     Commitments and contingencies- Continued Legal matters  Continued  Mr. Muller and several of the defendants filed a Motion to Dismiss the complaint filed by
the Company and moved for summary judgment in their favor. On December 21, 2004, Judge
George B. Daniels, denied the cross-defendants motion to dismiss the Companys
cross-complaint, denied the request to vacate the July 2, 2002 preliminary injunction and
denied the request for damages against the Company. The court also refused to grant a
summary judgment in favor of the cross-defendants and dismissed Mr. Mullers claims
against the Company for indemnification for his legal costs and for damages resulting from
the litigation. Neither Mr. Muller nor any of the cross-defendants have filed any
cross-claims against the Company and the Company is not exposed to any liability as a
result of the litigation, except for possibly incurring legal fees and expenses should the
Company lose the litigation.Although the outcome of this litigation cannot be predicted with any degree of certainty,
the Company is optimistic that the Courts ruling will either significantly narrow the
issues for any later trial or will result in a final disposition of the case in a manner
favorable to the Company. The Company believes that they have valid claims, however,
there can be no assurance that an adverse result or outcome on the pending motions or a
trial of this case would not have a material adverse effect on the Companys financial
position or cash flow.The Company was named as a defendant in a complaint filed
before the Los Angeles Superior Court, Civ. No. BC 312401,
by Terracourt Pty Ltd, an Australian corporation, claiming breach of
contract and related remedies from promises allegedly made by the
former president of the Company in 1999. The plaintiff is seeking
specific performance of the former presidents alleged promises
to transfer to the plaintiff an aggregate 480,000 shares of the
Companys common stock for office consultant and multimedia
services. The complaint was filed on March 18, 2004. Due to a
late date of service of the complaint upon the Company and other
preliminary legal procedures, the Companys answer was not filed
until October 20, 2004. The Company is opposing the
plaintiffs causes of action and has asserted that the Company
has no liability for the claims asserted. The matter has been
scheduled for further motion and trial proceedings in late April 2005
and is expected to be concluded by early June 2005. Royalty agreements  The Company has entered into various royalty agreements whereby it has agreed to provide
an aggregate of $0.80 per unit for each ZEFS device sold. Certain of these royalty
agreements were reached in exchange for the royalty recipients release of their claims to
the intellectual property rights to the ZEFS.In connection with these royalty agreements, the Company has committed to issue options to
purchase an aggregate of 1,000,000 shares of common stock at $1.00 per share. The options
expire 10 years from the date of grant. These options were granted by the Company on July
1, 2004 when the company became in full compliance with the SEC reporting requirements.Also, in connection with the royalty agreements, the Company has issued an aggregate of
128,000 shares of common stock upon completion of successful ZEFS testing, as defined. On
April 1, 2004, the company issued 600,000 shares at $1.70 per share, to fulfill the terms
of the two-year research and development consulting agreements. 44




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9.     Commitments and contingencies- Continued Royalty agreements  Continued  In July 2004, the Company executed a License Agreement with Temple University in
Philadelphia, Pennsylvania. In consideration of the license granted to Licensee under the
terms of this Agreement, Licensee shall pay to Temple a royalty of two percent (2%) of net
sales for each calendar quarter during the term of this Agreement.In further consideration of the license granted to Licensee under the terms of this
Agreement, Licensee shall pay to Temple, on the first anniversary of the expiration of the
option period, a non-refundable license fee of fifty thousand dollars ($50,000). In
further consideration of the license granted to licensee under the terms of this
Agreement, licensee shall pay to Temple, on the second anniversary of the expiration of
the option period and annually thereafter, a non-refundable license maintenance fee
regardless of or irrespective of actual net sales. The amount of each license maintenance
fee payment shall be as follows: (i) twenty five thousand dollars ($25,000) for the first
through fourth payment, and (ii) fifty thousand dollars ($50,000) for all subsequent
payments.This undertaking relates to commercialization of myriads of products that the Company
hopes will be widely accepted by the petroleum industry. The Company has applied for
patent protection for this new technology. Use of these new SWA products may extend the
life of world oil reserves and be beneficial in reducing future damage to the worlds
ecology, threatened by oil exploration.The Company expects that by mid-2005 the feasibility study, including market assessment
and the theoretical and engineering evaluations, will have been completed. If at that time
the Company determines the products are both practical to engineer and will be accepted by
the petroleum industry, the Company may then proceed with the design of prototypes, a
demonstration program and the commercialization of these products.In October 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 was 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 was $24,428 using the Black-Scholes
pricing model and was reflected as compensation costs in the accompanying financial
statement. 45




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9.     Commitments and contingencies- Continued Royalty agreements  In November 2004, the Company entered into an agreement with an outside consultant to
provide various consulting and management services. In exchange for these services the
Company has agreed to pay a royalty of 1.25% of gross receipts for sales originating in
certain geographic locations paid over a 10 years period. In addition, the company issued
50,000 warrants at $1.00 to the consultant. The fair value of the 50,000 warrants issued
is $28,872 using the Black-Scholes pricing model and was reflected as compensation costs
in the accompanying financial statement. Furthermore, the Company agreed to issue warrants
to purchase 450,000 shares of common stock of the Company, issuable upon the Company
making a formal public announcement that it has entered into a binding joint venture,
strategic alliance or similar agreement with the Strategic Partner. Such warrants shall
have a term of five years and an exercise price of $1.00 per share. Employment agreements  In March 2004, the Company entered into an amendment to the employment agreement dated
December 1, 2003 with an individual to serve as the Companys President. The agreement
expires December 2007, with an automatic extension for one additional year and calls for
annual base compensation of not less than $240,000 for the period ending December 31,
2004. During the employment term, the individual is eligible to participate in certain
incentive plans, stock option plans, and similar arrangements in accordance with the
Companys recommendation at award levels consistent and commensurate with the position and
duties hereunder.In March 2004, the Company entered into an amendment to the employment agreement dated
December 1, 2003 with an individual to serve as the Companys Chief Operating Officer.
The agreement expires December 2007, with an automatic extension for one additional year
and calls for annual base compensation of not less than $192,000 for the period ending
December 31, 2004. During the employment term, the individual is eligible to participate
in certain incentive plans, stock option plans, and similar arrangements in accordance
with the Companys recommendation at award levels consistent and commensurate with the
position and duties hereunder. 46




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9.     Commitments and contingencies- Continued Employment agreements  In September 2004, the Company entered into an employment agreement with an individual to
serve as the Companys Vice President of Environmental Affairs. The agreement expires
September 2005, with an automatic extension for one additional year and calls for annual
base compensation of not less than $60,000 per year. During the employment term, the
individual is eligible to participate in certain incentive plans, stock option plans, and
similar arrangements in accordance with the Companys recommendation at award levels
consistent and commensurate with the position and duties hereunder. Leases  In June 2004, the Company amended its sublease of a portion of a building in North
Hollywood, California from an entity that is owned by a director of the Company. The
lease term is from November 1, 2003 through October 31, 2005 and carries an option to
renew for two additional years with a 10 percent increase in the rental rate. Monthly
rent is $3,400 per month under this lease with the remaining commitment of $34,000 through
October 31, 2005.In November 2003, the Company entered into a lease for a research and development facility
located in Queensland, Australia. The term of the lease is from November 15, 2003 through
November 15, 2005 and carries an option to renew for two additional years with an increase
of the greater of 5% or the increase in the then-current Australian Consumer Price Index.
Monthly rent is AUD $1,292 (approximately US $1,000) per month under this lease with the
remaining commitment of AUD $14,212 through November 15, 2005. 10.     Subsequent events  In 2005, the Company sold 709,500 units, consisting of one
share of common stock and one warrant to acquire common
stock at $1.50 per share for $664,200 in a series of private placements. 47




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Item 8.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure In April 2003, the SEC promulgated rules that no annual or quarterly report submitted to the
SEC may include financial reports audited by independent public accountants unregistered with the
Public Company Accounting Oversight Board (PCAOB). Our prior accountants, Good Swartz Brown &
Berns, LLP, indicated that they would not be registered with the PCAOB, and as such, they resigned
as our independent public accountants. On November 21, 2003, our Board of Directors approved the
dismissal of Good Swartz Brown & Berns, LLP as our independent public accountant and retained
Weinberg & Company, P.A. During the last fiscal year prior to and preceding the resignation of Good Swartz Brown &
Berns, LLP and any subsequent interim period preceding such resignation, there were no
disagreements with Good Swartz Brown & Berns, LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which disagreements, if
not resolved to Good Swartz Brown & Berns, LLPs satisfaction, would have caused it to make
reference to the subject matter of the disagreement in connection with its reports; and there were
no reportable events described under Item 304(a)(1)(iv) of Regulation S-B. During the last two
fiscal years, Good Swartz Brown & Berns did not issue any audit reports containing a disclaimer or
adverse or qualified opinion. We did not consult with Weinberg & Company, P.A. for the year ended December 31, 2002 and
through November 21, 2003, with respect to (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements or (ii) any matter that was the subject of any prior
disagreement between us and our previous independent accountant. 
 Item 8A.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
Annual Report on Form 10-KSB. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)) are inadequate to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms. We are developing a
plan to ensure that all information will be recorded, processed, summarized and reported on
a timely basis. This plan is dependent, in part, upon reallocation of responsibilities
among various personnel, possibly hiring additional personnel and additional funding. It
should also be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.(b)
    Changes in internal control over financial reporting:There was no change in our
internal control over financial reporting that occurred during the period covered by this
Annual Report on Form 10-KSB that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 
 Item 8B. Other Information None. 48




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PART III Certain information required by Part III is incorporated by reference from our Proxy Statement
to be filed with the Securities and Exchange Commission in connection with the solicitation of
proxies for our 2005 Annual Meeting of Stockholders to be held on May 24, 2005 (the Proxy
Statement). 
 Item 9.Directors and Executive Officers of Registrant The information required by this section is incorporated by reference from the section
entitled Proposal 1  Election of Directors in the Proxy Statement. Item 405 of Regulation S-B
calls for disclosure of any known late filing or failure by an insider to file a report required by
Section 16 of the Exchange Act. This disclosure is incorporated by reference to the section
entitled Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement. The
information required by this Item with respect to our executive officers is contained in Item 1 of
Part I of this Annual Report under the heading Business  Executive Officers. 
 Item 10.Executive Compensation The information required by this section is incorporated by reference from the information in
the section entitled Executive Compensation in the Proxy Statement. 
 Item 11.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters The information required by this section is incorporated by reference from the information in
the section entitled Security Ownership of Certain Beneficial Owners and Management in the Proxy
Statement. 
 Item 12.Certain Relationships and Related Transactions The information required by this section is incorporated by reference from the information in
the section entitled Certain Relationships and Related Transactions in the Proxy Statement. 
 Item 13.Exhibits and Reports on Form 8-K  (a)
    The following documents are filed as part of this Form 10-KSB. Financial Statements: Reference is made to the contents to Financial Statements of Save the World Air, Inc. under
Item 7 of this Form 10-KSB.  (b)
    Exhibits: The exhibits listed below are required by Item 601 of Regulation S-B. Exhibit No.
    
    Description3.1(1)
    
    Articles of Incorporation, as amended, of the Registrant.


3.2(1)
    
    Bylaws of the Registrant.10.1(2)
    
    Commercial Sublease dated October 16, 2003 between the Registrant and KZ Golf, Inc.10.2*
    
    Amendment dated June 15, 2004 to Exhibit 10.110.3(2)
    
    General Tenancy Agreement dated November 15, 2003 between the Registrant and Autumlee Pty
Ltd.10.4(3)
    
    Agreement dated December 13, 2002 between the Registrant and RAND.10.5(2)**
    
    Agreement dated May 7, 2003 between the Registrant and RAND.10.6(4)
    
    Modification No. 1 dated as of August 21, 2003 to Exhibit 10.5
 49




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##### Table of Contents



Exhibit No.
    
    Description10.7(4)
    
    Modification No. 2 dated as of October 17, 2003 to Exhibit 10.510.8(4)
    
    Modification No. 3 dated as of January 20, 2004 to Exhibit 10.510.9(5)
    
    Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and
Lynette Anne Muller (Bankrupts).10.10(5)
    
    Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.10.11(6)
    
    Consulting Agreement dated December 1, 2003 between the Registrant and Joseph Helleis.10.12(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and Edward L. Masry.10.13(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and Eugene E. Eichler.10.14*
    
    Amendment dated as of March 2, 2004
to Exhibit 10.1310.15(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and Bruce H. McKinnon.10.16*
    
    Amendment dated as of March 2, 2004
to Exhibit 10.1510.17(7)
    
    Save the World Air, Inc. 2004 Stock
Option Plan10.18*
    
    Form of Incentive Stock Option Agreement under 2004 Stock Option Plan10.19*
    
    Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan10.20*
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant and Adrian Menzell10.21*
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant and Pat Baker10.22*
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant and John Kostic10.23*
    
    Consulting Agreement dated as of
October 1, 2004 between the Registrant and John Fawcett10.24*
    
    Advisory Services Agreement dated as of February 26, 2003 between the Registrant and Kevin
Charles Hart10.25*
    
    Advisory Services Agreement dated as of July 7, 2003 between the Registrant and Sir Jack
Brabham10.26(8)
    
    License Agreement dated as of July 1, 2004 between the Registrant and Temple University 
The Commonwealth System of Higher Education10.27*
    
    Exclusive Capital Raising Agreement dated as of July 29, 2004 between the Registrant and
London Aussie Marketing, Ltd.10.28*
    
    Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.10.29*
    
    Employment Agreement dated September 1, 2004 with Erin Brockovich10.30*
    
    Representation Agreement dated as of October 1, 2004 between the Registrant and Gurminder
Singh10.31*
    
    Advisory Services Agreement dated
as of August , 2002 between the Registrant and Bobby Unser, Jr.10.32*
    
    Advisory Services Agreement dated
as of August , 2002 between the Registrant and Jack Reader10.33*
    
    Advisory Services Agreement dated
as of August , 2002 between the Registrant and Nate Sheldon10.34*
    
    Assignment of Patent Rights dated
as of September 1, 2003 between the Registrant and Adrian Menzell10.35*
    
    Global Deed of Assignment dated
June 26, 2004 between the Registrant and Adrian Menzell14.1*
    
    Code of Business Conduct and Ethics14.2*
    
    Code of Ethics for Senior
Executives and Financial Officers23.1*
    
    Consent of Weinberg & Co.24*
    
    Power of Attorney (included on Signature Page)31.1*
    
    Certification of Chief Executive Officer of Annual Report Pursuant to Rule 13(a)15(e) or
Rule 15(d)15(e).31.2*
    
    Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section 1350.32.1*
    
    Certification of Chief Executive Officer and Chief Financial Officer of Annual Report
pursuant to Rule 13(a)15(e) or Rule 15(d)15(e).
 
 *
    
    Filed herewith.**
    
    Confidential treatment previously requested.
    
    Management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference from Registrants Registration Statement on Form 10-SB
(Registration Number 000-29185), as amended, filed on March 2, 2000. 50




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##### Table of Contents



(2)
    
    Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December
31, 2002.(3)
    
    Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.(4)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31,
2004.(5)
    
    Incorporated by reference from Registrants Form 8-K filed on November 12, 2002.(6)
    
    Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December
31, 2003.(7)
    
    Incorporated by reference from Appendix C of Registrants Schedule 14A filed on April 30,
2004, in connection with its Annual Meeting of Stockholders held on May 24, 2004.(8)
    
    Incorporated by reference from Registrant Form 8-K filed on July 12, 2004. 
 Item 14.Principal Accountant Fees and Services The information required by this section is incorporated by reference from the information in
the section entitled Proposal 3  Ratification of Appointment of Independent Auditors in the
Proxy Statement. 51




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##### Table of Contents



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.By:

/s/ EDWARD L. MASRYEdward L. MasryDate: April 25, 2005
    
    Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints, jointly and severally, Eugene E. Eichler and Bruce H. McKinnon, and each
of them, as his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place and stead, in any and
all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB, and to file
the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause
to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Name
    
    Title
    
    Date/s/ EDWARD L. MASRY
    
    Chief Executive Officer and Chairman of
the Board
    

April 25, 2005

Edward L. Masry/s/ EUGENE E. EICHLER
    
    President, Chief Financial Officer,
Treasurer and Director
    

April 25, 2005Eugene E. Eichler/s/ BRUCE H. McKINNON
    
    Chief Operating Officer and Director
    

April 25, 2005Bruce H. McKinnon/s/ ROBERT F. SYLK
    
    Director
    

April 25, 2005Robert F. Sylk/s/ J. JOSEPH BROWN
    
    Director
    

April 25, 2005J. Joseph Brown/s/ JOHN F. PRICE
    
    Director
    

April 25, 2005John F. Price/s/ JOSEPH HELLEIS
    
    Director
    

April 25, 2005Joseph Helleis
 52




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description3.1(1)
    
    Articles of Incorporation, as amended, of the Registrant.


3.2(1)
    
    Bylaws of the Registrant.10.1(2)
    
    Commercial Sublease dated October 16, 2003 between the Registrant and KZ Golf, Inc.10.2*
    
    Amendment dated June 15, 2004 to Exhibit 10.110.3(2)
    
    General Tenancy Agreement dated November 15, 2003 between the Registrant and Autumlee Pty
Ltd.10.4(3)
    
    Agreement dated December 13, 2002 between the Registrant and RAND.10.5(2)**
    
    Agreement dated May 7, 2003 between the Registrant and RAND.10.6(4)
    
    Modification No. 1 dated as of August 21, 2003 to Exhibit 10.510.7(4)
    
    Modification No. 2 dated as of October 17, 2003 to Exhibit 10.510.8(4)
    
    Modification No. 3 dated as of January 20, 2004 to Exhibit 10.510.9(5)
    
    Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and
Lynette Anne Muller (Bankrupts).10.10(5)
    
    Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.10.11(6)
    
    Consulting Agreement dated December 1, 2003 between the Registrant and Joseph Helleis.10.12(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and Edward L. Masry.10.13(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and Eugene E. Eichler.10.14*
    
    Amendment dated as of March 2, 2004
to Exhibit 10.1310.15(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and Bruce H. McKinnon.10.16*
    
    Amendment dated as of March 2, 2004
to Exhibit 10.1510.17(7)
    
    Save the World Air, Inc. 2004 Stock
Option Plan10.18*
    
    Form of Incentive Stock Option Agreement under 2004 Stock Option Plan10.19*
    
    Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan10.20*
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant and Adrian Menzell10.21*
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant and Pat Baker10.22*
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant and John Kostic10.23*
    
    Consulting Agreement dated as of
October 1, 2004 between the Registrant and John Fawcett10.24*
    
    Advisory Services Agreement dated as of February 26, 2003 between the Registrant and Kevin
Charles Hart10.25*
    
    Advisory Services Agreement dated as of July 7, 2003 between the Registrant and Sir Jack
Brabham10.26(8)
    
    License Agreement dated as of July 1, 2004 between the Registrant and Temple University 
The Commonwealth System of Higher Education10.27*
    
    Exclusive Capital Raising Agreement dated as of July 29, 2004 between the Registrant and
London Aussie Marketing, Ltd.10.28*
    
    Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.10.29*
    
    Employment Agreement dated September 1, 2004 with Erin Brockovich10.30*
    
    Representation Agreement dated as of October 1, 2004 between the Registrant and Gurminder
Singh10.31*
    
    Advisory Services Agreement dated
as of August , 2002 between the Registrant and Bobby Unser, Jr.10.32*
    
    Advisory Services Agreement dated
as of August , 2002 between the Registrant and Jack Reader10.33*
    
    Advisory Services Agreement dated
as of August , 2002 between the Registrant and Nate Sheldon10.34*
    
    Assignment of Patent Rights dated
as of September 1, 2003 between the Registrant and Adrian Menzell10.35*
    
    Global Deed of Assignment dated
June 26, 2004 between the Registrant and Adrian Menzell14.1*
    
    Code of Business Conduct and Ethics14.2*
    
    Code of Ethics for Senior
Executives and Financial Officers23.1*
    
    Consent of Weinberg & Co.24*
    
    Power of Attorney (included on Signature Page)31.1*
    
    Certification of Chief Executive Officer of Annual Report Pursuant to Rule 13(a)15(e) or
Rule 15(d)15(e).31.2*
    
    Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section 1350.32.1*
    
    Certification of Chief Executive Officer and Chief Financial Officer of Annual Report
pursuant to Rule 13(a)15(e) or Rule 15(d)15(e).
 
 *
    
    Filed herewith.**
    
    Confidential treatment previously requested.
    
    Management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference from Registrants Registration Statement on Form 10-SB
(Registration Number 000-29185), as amended, filed on March 2, 2000.(2)
    
    Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December
31, 2002.(3)
    
    Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.(4)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31,
2004.(5)
    
    Incorporated by reference from Registrants Form 8-K filed on November 12, 2002.(6)
    
    Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December
31, 2003.(7)
    
    Incorporated by reference from Appendix C of Registrants Schedule 14A filed on April 30,
2004, in connection with its Annual Meeting of Stockholders held on May 24, 2004.(8)
    
    Incorporated by reference from Registrant Form 8-K filed on July 12, 2004.