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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, 2005.
 or
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number 0-29185
 Save the World Air, Inc.
 (Exact name of registrant as specified in its charter)
 Nevada
    
    52-2088326(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5125 Lankershim Boulevard
North Hollywood, California 91601  (Address, including zip code, of principal executive offices)  (818) 487-8000  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value.
 o o
 o o
 þ o
 o
 o o o
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE
  o þ




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##### 



SAVE THE WORLD AIR, INC.
FORM 10-KSB
INDEX
 PagePART IItem 1
    
    Business
    
    1Item 2
    
    Properties
    
    14Item 3
    
    Legal Proceedings
    
    15Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    17PART IIItem 5
    
    Market for Common Equity and Related Stockholder Matters
    
    18Item 6
    
    Managements Discussion and Analysis or Plan of Operation
    
    19Item 7
    
    Financial Statements
    
    23Item 8
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    23Item 8A
    
    Controls and Procedures
    
    23Item 8B
    
    Other Information
    
    23PART IIIItem 9
    
    Directors and Executive Officers of Registrant
    
    24Item 10
    
    Executive Compensation
    
    24Item 11
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    24Item 12
    
    Certain Relationships and Related Transactions
    
    24Item 13
    
    Exhibits
    
    24Item 14
    
    Principal Accountant Fees and Services
    
    26SIGNATURES
    
    
    
    27Exhibit 10.3Exhibit 10.4Exhibit 10.42Exhibit 10.45Exhibit 10.46Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I
 Forward-Looking Statements
  
    
    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.
   
 Item 1. Business
 The discussion of our business is as of the date of filing this report, unless otherwise
indicated.
 General
 Overview
   1




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Governmental Mandates to Reduce Air Pollution
   Our Business Strategy
 Our Devices
  2




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Research and Development
   3




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Independent Laboratory and Scientific Testing
    4




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THC
    
    NOx
    
    COEURO2 Standard
    
    1.20 g/km
    
    0.30 g/km
    
    5.50 g/kmWith ZEFS Device
    
    0.52 g/km
    
    0.10 g/km
    
    1.42 g/km% Below EURO2
    
    56%
    
    65%
    
    74%
   THC
    
    NOx
    
    COEURO 3 Standard
    
    0.8 g/km
    
    0.15 g/km
    
    2.0 g/kmWith ZEFS Device
    
    0.33 g/km
    
    0.108 g/km
    
    1.86 g/km% Below EURO 3
    
    59%
    
    28%
    
    7%
   5




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Marketing
        Competition
  6




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Government Regulation
  Intellectual Property
    ZEFS Patent Applications
  ZEFS MK1Device For Saving Fuel and Reducing Emissions . s
 7




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Country
    
    Number
    
    Filing date
    
    StatusAustralia
    
    
    2001258057
    
    
    21 May 2001
    
    GRANTEDBosnia & Herzegovina
    
    BAP 021290A
    
    21 May 2001
    
    Short Term Patent GRANTED. Apply for
Standard Patent by 21/05/2009Brazil
    
    
    0111365-8
    
    
    21 May 2001
    
    Examination requested 5 September 2003.
Report expected mid 2007Bulgaria
    
    
    107391
    
    
    21 May 2001
    
    Awaiting examinationCanada (small
entity status)
    
    
    2409195
    
    
    21 May 2001
    
    Examination to be requested by 21 May 2006China
    
    
    01809802.9
    
    
    21 May 2001
    
    Under examination  response filedColumbia
    
    
    02115018
    
    
    21 May 2001
    
    Examination requested 23 July 2004.Croatia
    
    
    P20020982A
    
    
    21 May 2001
    
    Examination requested 29 August 2005Czech Republic
    
    PV 2002-4092
    
    21 May 2001
    
    Under ExaminationEurasian +++
    
    
    200201237
    
    
    21 May 2001
    
    GRANTEDEurope ++
    
    
    019331222.2
    
    
    21 May 2001
    
    Awaiting examinationGeorgia
    
    
    4098/01-2002
    
    
    21 May 2001
    
    GRANTEDHong Kong
    
    
    04100327.0
    
    
    21 May 2001
    
    Automatic grant upon grant of the Chinese
applicationHungary
    
    
    P 03 01796
    
    
    21 May 2001
    
    Examination to be requested by 28 April
2006.India
    
    IN/PCT/2002/01523
    
    21 May 2001
    
    Examination requested May 2005.Indonesia
    
    WO0200202844
    
    21 May 2001
    
    Examination requested November 2003Israel
    
    
    152902
    
    
    21 May 2001
    
    Allowed/accepted  awaiting grantKorea [South]
    
    
    2002-7015531
    
    
    21 May 2001
    
    Examination to be requested by 21 May 2006Japan
    
    
    586731/2001
    
    
    21 May 2001
    
    Examination to be requested by 21 May 2008Mexico
    
    PA/A/2002/011365
    
    21 May 2001
    
    Awaiting examinationMorocco
    
    PV/26.964
    
    21 May 2001
    
    GRANTEDNew Zealand
    
    
    523113
    
    
    21 May 2001
    
    GRANTEDNorway
    
    
    20025531
    
    
    21 May 2001
    
    Awaiting examinationPoland
    
    
    P358837
    
    
    21 May 2001
    
    Awaiting examinationSerbia/Montenegro
    
    
    P-870/02
    
    
    21 May 2001
    
    Examination requested December 2002Singapore
    
    93310
[WO 01/90562]
    
    21 May 2001
    
    GRANTEDSouth Africa
    
    
    2002/10013
    
    
    21 May 2001
    
    GRANTEDSri Lanka
    
    
    12918
    
    
    21 May 2001
    
    Awaiting examinationTrinidad & Tobago
    
    TT/A/2002/00213
    
    21 May 2001
    
    Allowed/accepted  awaiting grant.Ukraine
    
    
    20021210144
    
    
    21 May 2001
    
    Allowed/accepted  awaiting grant.United States
    
    
    10/275946
    
    
    21 May 2001
    
    GRANTEDVietnam
    
    
    1-2002-01168
    
    
    21 May 2001
    
    Response to Office Action filed with IPO
 
 ++
    
    European patent application covers Austria Belgium Switzerland Liechtenstein Cyprus Germany
Denmark Spain Finland France Great Britain Greece Ireland Italy Luxembourg Netherlands Portugal
Sweden Turkey Lithuania Latvia Slovenia Romania Macedonia.+++
    
    The Eurasian Patent Convention was signed on September 9, 1994 in Moscow by the Heads of the
Governments of the Republic of Azerbaijan, the Republic of Armenia, the Republic of Belarus,
Georgia, the Republic of Kazahkstan, the Kyrgyz Republic, the Republic of Moldova, the Russian
Federation, the Republic of Tajikistan and Ukraine . 8




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ZEFS MK2Device for Saving Fuel and Reducing Emissions .
   Country
    
    Number
    
    Filing Date
    
    StatusTaiwan
    
    92134811
    
    July 19, 2003
    
    GrantedInternational
    
    PCT/AU2004/000950
    
    July 15, 2004
    
    Clear International
Search Report
issued. Clear
International
Preliminary
Examination Report
issued.
  ZEFS MK3Emission Control Devices.
   Country
    
    Number
    
    Filing Date
    
    StatusThailand
    
    095155
    
    November 3, 2004
    
    Awaiting ExaminationInternational
    
    PCT/AU2004/001518
    
    November 4, 2004
    
    Demand for
International
Preliminary
Examination filed
June 8, 2005 
awaiting report.
  CAT-MATE Patent Applications
 CAT-FLAP
(Afterburner) Improvements in or Relating to Emission Control Systems .
 9




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Country
    
    Number
    
    Filing date
    
    StatusThailand
    
    
    096762
    
    
    4 January 2005
    
    Application filed  awaiting examinationTaiwan
    
    
    93140533
    
    
    24 December 2004
    
    Application filed. Substantive examination to be
requested by 24 December 2007.Malaysia
    
    PI20050041
    
    6 January 2005
    
    Application filed  awaiting
examination.International
    
    PCT/AU2004/001821
    
    23 December 2004
    
    IPE requested 21 June 2005  awaiting report.
Awaiting Written
Opinion
   CAT-MATEInline Exhaust Device to Improve Efficiency of a Catalytic Converter .
   Method and Apparatus for Treatment of a Fluid (Temple University ) .
 Country
    
    Number
    
    Filing date
    
    StatusGCC*
    
    GCC/P/2005/5066
    
    22 August 2006
    
    Application filed  awaiting
examination.International **
    
    PCT/AU2005/000688
    
    13 May 2005
    
    Clear ISR received.
 
     Device for Saving Fuel and Reducing Emissions .
   10




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Employees
  Advisory Board
  Sir Jack Brabham
 Kevin Pro Hart
 Jack Reader, Ph.D
 Bobby Unser, Jr
 Risk Factors
 We expect to incur future losses and may not be able to achieve profitability.
  11




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We will need additional capital to meet our operating needs, and we cannot be sure that
additional financing will be available.
 $
 We will need additional capital to repay certain short-term debt as it matures during 2006.
  ,
  As a company with an unproven business strategy, our limited history of operations makes
evaluation of our business and prospects difficult.
  If we are not able to devote adequate resources to product development and commercialization,
we may not be able to develop our products.
  
    
    raise additional needed capital for research and development;
 
    
    complete development of our products in development; and
    
    successfully introduce and commercialize our new products.
 12




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The commercial viability of the ZEFS and CAT-MATE devices remains largely unproven and we may
not be able to attract customers.
  If our products and services do not gain market acceptance, it is unlikely that we will become
profitable.
  
    
    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.
  Any revenues that we may earn in the future are unpredictable, and our operating results are
likely to fluctuate from quarter to quarter.
  
    
    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
 13




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
    
    expenses related to, and the results of, proceedings relating to our intellectual property.
  If we lose our key personnel or are unable to attract and retain additional personnel, we may
be unable to achieve profitability.
  We may face costly intellectual property disputes.
  Our common stock is subject to penny stock regulation, which may make it more difficult for us
to raise capital.
  
 Item 2. Properties
  14




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Item 3. Legal Proceedings
   15




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16




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Item 4. Submission of Matters to a Vote of Security Holders.
  17




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PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
  2004
    
    2005High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    1.50
    
    
    $
    0.95
    
    
    $
    1.49
    
    
    $
    0.90Second Quarter
    
    $
    2.05
    
    
    $
    1.20
    
    
    $
    1.20
    
    
    $
    0.90Third Quarter
    
    $
    1.95
    
    
    $
    1.20
    
    
    $
    1.14
    
    
    $
    0.75Fourth Quarter
    
    $
    1.90
    
    
    $
    1.16
    
    
    $
    1.01
    
    
    $
    0.72
   Issuances of Unregistered Securities in Last Fiscal Year
      18




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Item 6. Managements Discussion and Analysis or Plan of Operation
   Overview
   Results of Operation
   19




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Liquidity and Capital Resources
    
    
    Gross proceeds of $1,480,500 (net proceeds of $1,420,860) from the sale
of stock and warrants in a private offering conducted by the company that
terminated in July 2005;
    
    Gross proceeds of $1,051,378 (net proceeds of $996,432) from the sale
of the Investor Notes and related warrants in a private offering conducted
by the company from July 2005 through September 2005; and
    
    Gross proceeds of $1,075,000 (net proceeds of $935,250) from the
issuance of the Bridge Notes and related warrants in a private offering
conducted by Spencer Clarke LLC of New York that began in November 2005
and was completed in February 2006. Of this amount, the Company received
gross proceeds of $525,000 (net proceeds $456,750) in 2005.
  20




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-
  $
 ,
   Critical Accounting Policies and Estimates
    21




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Stock-Based Compensation
   Recent Accounting Pronouncements
    22




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Item 7. Financial Statements
  
 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 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 not adequate to
ensure that information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms. We
have developed, and have partially implemented, 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, hiring additional personnel and
additional funding. We began to implement this plan during 2005,
including the hiring in August 2005 of a Controller who is a Certified
Public Accountant. However, full implementation of the plan has been
delayed due the lack of adequate financial resources during the majority
of 2005. 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
  23




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PART III
  
 Item 9. Directors and Executive Officers of Registrant
  Code of Business Conduct
  
 Item 10. Executive Compensation
  
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 12. Certain Relationships and Related Transactions
  
 Item 13. Exhibits
 (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.
 24




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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(9)
    
    Amendment dated June 15, 2004 to Exhibit 10.110.3*
    
    Amendment dated August 14, 2005 to Exhibit 10.110.4*
    
    General Tenancy Agreement dated March 14, 2006 between the Registrant
and Autumlee Pty Ltd.10.5(3)
    
    Agreement dated December 13, 2002 between the Registrant and RAND.10.6(2)**
    
    Agreement dated May 7, 2003 between the Registrant and RAND.10.7(4)
    
    Modification No. 1 dated as of August 21, 2003 to Exhibit 10.510.8(4)
    
    Modification No. 2 dated as of October 17, 2003 to Exhibit 10.510.9(4)
    
    Modification No. 3 dated as of January 20, 2004 to Exhibit 10.510.10(5)
    
    Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne Muller (Bankrupts).10.11(5)
    
    Assignment and Bill of Sale dated May 28, 2002
between the Registrant
and Kevin Charles Hart.10.12(6)
    
    Consulting Agreement dated December 1, 2003 between the Registrant and
Joseph Helleis.10.13(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and
Edward L. Masry.10.14(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and
Eugene E. Eichler.10.15(9)
    
    Amendment dated as of March 2, 2004 to Exhibit 10.1310.16(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and
Bruce H. McKinnon.10.17(9)
    
    Amendment dated as of March 2, 2004 to Exhibit 10.1510.18(7)
    
    Save the World Air, Inc. 2004 Stock Option Plan10.19(9)
    
    Form of Incentive Stock Option Agreement under 2004 Stock Option Plan10.20(9)
    
    Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan10.21(9)
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant
and Adrian Menzell10.22(10)
    
    Amendment to Exhibit 10.2110.23(9)
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant
and Pat Baker10.24(10)
    
    Amendment to Exhibit 10.2310.25(9)
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant
and John Kostic10.26(10)
    
    Amendment to Exhibit 10.2510.27(9)
    
    Consulting Agreement dated as of October 1, 2004 between the Registrant
and John Fawcett10.28(9)
    
    Advisory Services Agreement dated as of February 26, 2003 between the
Registrant and Kevin Charles Hart10.29(9)
    
    Advisory Services Agreement dated as of July 7, 2003 between the
Registrant and Sir Jack Brabham10.30(8)
    
    License Agreement dated as of
July 1, 2004 between the Registrant and Temple University  The Commonwealth System of Higher Education
 25




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Exhibit No.
    
    Description10.31(9)
    
    Exclusive Capital Raising Agreement dated as of July 29, 2004 between
the Registrant and London Aussie Marketing, Ltd.10.32(9)
    
    Consulting Agreement dated as of November 19, 2004 between the
Registrant and London Aussie Marketing, Ltd.10.33(9)
    
    Employment Agreement dated September 1, 2004 with Erin Brockovich10.34(9)
    
    Representation Agreement dated as of October 1, 2004 between the
Registrant and Gurminder Singh10.35(9)
    
    Advisory Services Agreement dated as of August , 2002 between the
Registrant and Bobby Unser, Jr.10.36(9)
    
    Advisory Services Agreement dated as of August , 2002 between the
Registrant and Jack Reader10.37(9)
    
    Advisory Services Agreement dated as of August , 2002 between the
Registrant and Nate Sheldon10.38(9)
    
    Assignment of Patent Rights dated as of September 1, 2003 between the
Registrant and Adrian Menzell10.39(9)
    
    Global Deed of Assignment dated June 26, 2004 between the Registrant and
Adrian Menzell10.40(11)
    
    Employment Agreement dated July 1, 2005 between the Registrant and John
K. Bautista10.41(11)
    
    Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson10.42*
    
    Amendment dated February 1, 2006 to Exhibit 10.4110.43(11)
    
    Form of Registrants 9% convertible note issued in 2005 Interim Financing10.44(11)
    
    Form of Registrants stock
purchase warrant issued in 2005 Interim Financing10.45*
    
    Form of Registrants 9% convertible note issued in 2005 Bridge Financing10.46*
    
    Form of Registrants stock purchase warrant issued in 2005 Bridge Financing23.1*
    
    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.(9)
    
    Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2004.(10)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended June 30, 2005.(11)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended September 30, 2005. 
 Item 14. Principal Accountant Fees and Services
  26




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SIGNATURES
  Save The World Air, Inc.By:
    /s/ EUGENE E. EICHLEREugene E. EichlerChief Executive Officer  POWER OF ATTORNEY
   Name
    
    Title
    
    Date/s/ EUGENE E. EICHLER
    
    Chief Executive Officer,
Chief Financial
    
    March 31, 2006Eugene E. Eichler
    
    Officer,Treasurer and Director/s/ BRUCE H. McKINNON
    
    President and Director
    
    March 31, 2006Bruce H. McKinnon/s/ JOSEPH HELLEIS
    
    Chairman of the Board
    
    March 31, 2006Joseph Helleis/s/ ROBERT F. SYLK
    
    Director
    
    March 31, 2006Robert F. Sylk/s/ J. JOSEPH BROWN
    
    Director
    
    March 31, 2006J. Joseph Brown/s/ JOHN F. PRICE
    
    Director
    
    March 31, 2006John F. Price/s/ CECIL BOND KYTE
    
    Director
    
    March 31, 2006Cecil Bond Kyte
 27




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SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 YEARS ENDED DECEMBER 31, 2005 AND 2004
 CONTENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Balance sheets
    
    
    F-3Statements of operations
    
    
    F-5Statements of stockholders deficiency
    
    
    F-6Statements of cash flows
    
    
    F-12Notes to financial statements
    
    
    F-14
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 F-2




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SAVE THE WORLD AIR, INC.  (A DEVELOPMENT STAGE ENTERPRISE)
 BALANCE SHEETS  DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004ASSETSCurrent assetsCash
    
    $
    279,821
    
    
    $
    84,826Other current assets
    
    
    9,009
    
    
    
    2,602Total current assets
    
    
    288,830
    
    
    
    87,428Property and equipment, net of accumulated depreciation
    
    
    295,374
    
    
    
    35,596Other assets
    
    
    4,500
    
    
    
    $
    588,704
    
    
    $
    123,024
  F- 3




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##### Table of Contents



SAVE THE WORLD AIR, INC.  (A DEVELOPMENT STAGE ENTERPRISE)
 BALANCE SHEETS  Continued  DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilitiesAccounts payable
    
    $
    155,456
    
    
    $
    64,089Accrued expenses
    
    
    179,461
    
    
    
    84,420Accrued research and development fees
    
    
    680,000
    
    
    
    50,000Accrued professional fees
    
    
    450,555
    
    
    
    876,452Payable to stockholder
    
    
    45,000
    
    
    
    Payable to related parties
    
    
    158,732
    
    
    
    36,478Finders fees payable
    
    
    8,916
    
    
    
    1,521Convertible notes, net
    
    
    318,759
    
    
    
    Total current liabilities
    
    
    1,996,879
    
    
    
    1,112,960Advances from founding executive officer
    
    
    
    
    
    
    1,017,208Commitments and contingenciesStockholders deficiencyCommon stock, $.001 par value: 200,000,000 shares
authorized, 31,387,418 and 37,784,821 shares
issued and outstanding at December 31, 2005
and 2004, respectively
    
    
    31,387
    
    
    
    37,784Common stock
to be issued, 846,548 shares
    
    
    612,521
    
    
    
    119,000Additional paid-in capital
    
    
    18,336,178
    
    
    
    15,043,028Deferred compensation
    
    
    (142,187
    )
    
    
    (76,068
    )Deficit accumulated during the development stage
    
    
    (20,246,074
    )
    
    
    (17,130,888
    )Total stockholders deficiency
    
    
    (1,408,175
    )
    
    
    (2,007,144
    )$
    588,704
    
    
    $
    123,024
  F- 4




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##### Table of Contents



SAVE THE WORLD AIR, INC.  (A DEVELOPMENT STAGE ENTERPRISE)
 STATEMENTS OF OPERATIONS  YEARS ENDED DECEMBER 31, 2005 AND 2004 AND FOR THE PERIOD FROM  INCEPTION (FEBRUARY 18, 1998) TO
DECEMBER 31, 2005
 CumulativeDecember 31,
    
    
    December 31,
    
    
    since2005
    
    
    2004
    
    
    inceptionNet sales
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses
    
    
    2,980,046
    
    
    
    3,323,030
    
    
    
    15,845,413Research and development expenses
    
    
    1,150,361
    
    
    
    1,873,464
    
    
    
    3,803,587Non-cash patent settlement cost
    
    
    
    
    
    
    1,610,066
    
    
    
    1,610,066Loss before other income
    
    
    (4,130,407
    )
    
    
    (6,806,560
    )
    
    
    (21,259,066
    )Other IncomeInterest income
    
    
    
    
    
    
    514
    
    
    
    953Settlement of litigation and debt
    
    
    1,017,208
    
    
    
    
    
    
    
    1,017,208Loss before provision for income taxes
    
    
    (3,113,199
    )
    
    
    (6,806,046
    )
    
    
    (20,240,905
    )Provision (benefit) for income taxes
    
    
    1,987
    
    
    
    (2,766
    )
    
    
    5,169Net loss
    
    $
    (3,115,186
    )
    
    $
    (6,803,280
    )
    
    $
    (20,246,074
    )Net loss per common share, basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.19
    )Weighted average common shares outstanding, basic and diluted
    
    
    38,248,575
    
    
    
    35,841,225
  F- 5




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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, 2005
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyBalance, February 18, 1998(date of inception)
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common stock on April 18, 1998
    
    
    .0015  .01
    
    
    
    10,030,000
    
    
    
    10,030
    
    
    
    
    
    
    
    14,270
    
    
    
    
    
    
    
    
    
    
    
    24,300Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,307
    )
    
    
    (21,307
    )Balance, December 31, 1998
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    8,653
 F- 6




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 STATEMENTS OF STOCKHOLDERS DEFICIENCY  Continued
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 2005
 Additional
    
    
    
    
    
    Deficit accumulated
    
    Total stockholdersPrice per
    
    Common Stock
    
    Common stock
    
    paid-in
    
    Deferred
    
    during the
    
    developmentshare
    
    Shares
    
    Amount
    
    to be issued
    
    capital
    
    compensation
    
    development stage
    
    stage deficiencyStock
issued
for
consulting
services
on
November
4, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock
issued
for
consulting
services
on
December
20, 2000
    
    
    0.50
    
    
    
    19,082
    
    
    
    19
    
    
    
    
    
    
    
    9,522
    
    
    
    
    
    
    
    
    
    
    
    9,541Stock
issued
for
filing
services
on
December
20, 2000
    
    
    0.50
    
    
    
    5,172
    
    
    
    5
    
    
    
    
    
    
    
    2,581
    
    
    
    
    
    
    
    
    
    
    
    2,586Stock
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
    
    
    
    
    
    
    
    
    
    
    
    17,000
 F - 7




---



##### 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, 2005
 Additional
    
    
    
    
    
    Deficit accumulated
    
    Total stockholdersPrice per
    
    Common Stock
    
    Common stock
    
    paid-in
    
    Deferred
    
    during the
    
    developmentshare
    
    Shares
    
    Amount
    
    to be issued
    
    capital
    
    compensation
    
    development stage
    
    stage deficiencyStock
issued
for
consulting
services
on
November
20, 2001
    
    
    0.98
    
    
    
    43,000
    
    
    
    43
    
    
    
    
    
    
    
    42,097
    
    
    
    
    
    
    
    
    
    
    
    42,140Stock
issued
for
consulting
services
on
November
27, 2001
    
    
    0.98
    
    
    
    10,000
    
    
    
    10
    
    
    
    
    
    
    
    9,790
    
    
    
    
    
    
    
    
    
    
    
    9,800Stock
issued
for
consulting
services
on
November
28, 2001
    
    
    0.98
    
    
    
    187,000
    
    
    
    187
    
    
    
    
    
    
    
    183,073
    
    
    
    
    
    
    
    
    
    
    
    183,260Intrinsic
value
of
options
issued
to
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600,000
    
    
    
    (2,600,000
    )
    
    
    
    
    
    
    Fair
value
of
options
issued
to
non-employees
for
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,318
    
    
    
    
    
    
    
    
    
    
    
    142,318Amortization
of
deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,667
    
    
    
    
    
    
    
    191,667Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,735,013
    )
    
    
    (2,735,013
    )Balance,
December
31, 2001
    
    
    
    
    
    
    18,085,847
    
    
    
    18,086
    
    
    
    
    
    
    
    6,220,322
    
    
    
    (2,408,333
    )
    
    
    (5,102,346
    )
    
    
    (1,272,271
    )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
for the
year
ended
December
31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,749,199
    )
    
    
    (2,749,199
    )Balance,
December
31, 2002
    
    
    
    
    
    
    20,235,847
    
    
    
    20,236
    
    
    
    389,875
    
    
    
    7,133,081
    
    
    
    (1,572,060
    )
    
    
    (7,851,545
    )
    
    
    (1,880,413
    )Common
stock
issued,
previously
paid for
    
    
    0.15
    
    
    
    1,425,000
    
    
    
    1,425
    
    
    
    (213,750
    )
    
    
    212,325
    
    
    
    
    
    
    
    
    
    
    
    Common
stock
issued,
previously
paid for
    
    
    0.25
    
    
    
    880,000
    
    
    
    880
    
    
    
    (220,000
    )
    
    
    219,120
    
    
    
    
    
    
    
    
    
    
    
    Stock
issued
for
cash on
March
20, 2003
    
    
    0.25
    
    
    
    670,000
    
    
    
    670
    
    
    
    
    
    
    
    166,830
    
    
    
    
    
    
    
    
    
    
    
    167,500Stock
issued
for
cash on
April
4, 2003
    
    
    0.25
    
    
    
    900,000
    
    
    
    900
    
    
    
    
    
    
    
    224,062
    
    
    
    
    
    
    
    
    
    
    
    224,962Stock
issued
for
cash on
April
8, 2003
    
    
    0.25
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    24,900
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock
issued
for
cash on
May 8,
2003
    
    
    0.25
    
    
    
    1,150,000
    
    
    
    1,150
    
    
    
    
    
    
    
    286,330
    
    
    
    
    
    
    
    
    
    
    
    287,480Stock
issued
for
cash on
June
16, 2003
    
    
    0.25
    
    
    
    475,000
    
    
    
    475
    
    
    
    
    
    
    
    118,275
    
    
    
    
    
    
    
    
    
    
    
    118,750Stock
issued
for
legal
services
on June
27, 2003
    
    
    0.55
    
    
    
    83,414
    
    
    
    83
    
    
    
    
    
    
    
    45,794
    
    
    
    
    
    
    
    
    
    
    
    45,877Debt
converted
to
stock
on June
27, 2003
    
    
    0.25
    
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    
    
    
    
    498,000
    
    
    
    
    
    
    
    
    
    
    
    500,000Stock and
warrants
issued
for
cash on
July
11, 2003
    
    
    0.25
    
    
    
    519,000
    
    
    
    519
    
    
    
    
    
    
    
    129,231
    
    
    
    
    
    
    
    
    
    
    
    129,750Stock and
warrants
issued
for
cash on
September
29, 2003
    
    
    0.25
    
    
    
    1,775,000
    
    
    
    1,775
    
    
    
    
    
    
    
    441,976
    
    
    
    
    
    
    
    
    
    
    
    443,751Stock and
warrants
issued
for
cash on
October
21, 2003
    
    
    0.25
    
    
    
    1,845,000
    
    
    
    1,845
    
    
    
    
    
    
    
    459,405
    
    
    
    
    
    
    
    
    
    
    
    461,250Stock and
warrants
issued
for
cash on
October
28, 2003
    
    
    0.25
    
    
    
    1,570,000
    
    
    
    1,570
    
    
    
    
    
    
    
    390,930
    
    
    
    
    
    
    
    
    
    
    
    392,500Stock and
warrants
issued
for
cash on
November
19, 2003
    
    
    0.25
    
    
    
    500,000
    
    
    
    500
    
    
    
    
    
    
    
    124,500
    
    
    
    
    
    
    
    
    
    
    
    125,000
 F - 8




---



##### 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, 2005
 Additional
    
    
    
    
    
    Deficit accumulated
    
    Total stockholdersPrice per
    
    Common Stock
    
    Common stock
    
    paid-in
    
    Deferred
    
    during the
    
    developmentshare
    
    Shares
    
    Amount
    
    to be issued
    
    capital
    
    compensation
    
    development stage
    
    stage deficiencyFinders
fees
related
to
stock
issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,875
    
    
    
    (312,582
    )
    
    
    
    
    
    
    
    
    
    
    (268,707
    )Common
stock
paid
for,
but not
issued
(25,000
shares)
    
    
    0.25
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,250Amortization
of
deferred
comp
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    863,727
    
    
    
    
    
    
    
    863,727Net loss
for
year
ended
December
31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,476,063
    )
    
    
    (2,476,063
    )Balance,
December
31, 2003
    
    
    
    
    
    
    34,128,261
    
    
    
    34,128
    
    
    
    6,250
    
    
    
    10,162,177
    
    
    
    (708,333
    )
    
    
    (10,327,608
    )
    
    
    (833,386
    )Common
stock
issued,
previously
paid for
    
    
    0.25
    
    
    
    25,000
    
    
    
    25
    
    
    
    (6,250
    )
    
    
    6,225
    
    
    
    
    
    
    
    
    
    
    
    Stock
issued
for
director
services
on
March
31, 2004
    
    
    1.50
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    74,950
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock
issued
for
finders
fees on
March
31, 2004
    
    
    0.15
    
    
    
    82,500
    
    
    
    82
    
    
    
    
    
    
    
    12,293
    
    
    
    
    
    
    
    
    
    
    
    12,375Stock
issued
for
finders
fees on
March
31, 2004
    
    
    0.25
    
    
    
    406,060
    
    
    
    407
    
    
    
    
    
    
    
    101,199
    
    
    
    
    
    
    
    
    
    
    
    101,606Stock
issued
for
services
on
April
2, 2004
    
    
    1.53
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    99,385
    
    
    
    
    
    
    
    
    
    
    
    99,450Debt
converted
to
stock
on
April
2, 2004
    
    
    1.53
    
    
    
    60,000
    
    
    
    60
    
    
    
    
    
    
    
    91,740
    
    
    
    
    
    
    
    
    
    
    
    91,800Stock
issued
upon
exercise
of
warrants
on May
21, 2004
    
    
    0.20
    
    
    
    950,000
    
    
    
    950
    
    
    
    
    
    
    
    189,050
    
    
    
    
    
    
    
    
    
    
    
    190,000Stock
issued
for
directors
services
on June
8, 2004
    
    
    1.70
    
    
    
    600,000
    
    
    
    600
    
    
    
    
    
    
    
    1,019,400
    
    
    
    
    
    
    
    
    
    
    
    1,020,000Stock
issued
for
cash on
August
25, 2004
    
    
    1.00
    
    
    
    550,000
    
    
    
    550
    
    
    
    
    
    
    
    549,450
    
    
    
    
    
    
    
    
    
    
    
    550,000Stock
issued
upon
exercise
of
options
on
August
30, 2004
    
    
    0.40
    
    
    
    4,000
    
    
    
    4
    
    
    
    
    
    
    
    1,596
    
    
    
    
    
    
    
    
    
    
    
    1,600Stock
issued
for
cash on
September
8, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock
issued
for
consulting
services
on
September
15, 2004
    
    
    1.31
    
    
    
    50,000
    
    
    
    49
    
    
    
    
    
    
    
    65,451
    
    
    
    
    
    
    
    
    
    
    
    65,500Stock
issued
for
patent
settlement
on
September
22, 2004
    
    
    1.24
    
    
    
    20,000
    
    
    
    20
    
    
    
    
    
    
    
    24,780
    
    
    
    
    
    
    
    
    
    
    
    24,800Stock
issued
for
research
and
development
on
October
6, 2004
    
    
    1.40
    
    
    
    65,000
    
    
    
    65
    
    
    
    
    
    
    
    90,935
    
    
    
    
    
    
    
    
    
    
    
    91,000Stock
issued
for
cash on
October
6, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock
issued
for
cash on
October
15, 2004
    
    
    1.00
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    149,850
    
    
    
    
    
    
    
    
    
    
    
    150,000Stock
issued
upon
exercise
of
stock
options
on
October
21, 2004
    
    
    0.40
    
    
    
    6,500
    
    
    
    6
    
    
    
    
    
    
    
    2,594
    
    
    
    
    
    
    
    
    
    
    
    2,600Stock
issued
for
cash on
November
3, 2004
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock
issued
for
cash on
November
18, 2004
    
    
    1.00
    
    
    
    172,500
    
    
    
    173
    
    
    
    
    
    
    
    172,327
    
    
    
    
    
    
    
    
    
    
    
    172,500Stock
issued
for
cash on
December
9, 2004
    
    
    1.00
    
    
    
    75,000
    
    
    
    75
    
    
    
    
    
    
    
    74,925
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock
issued
for
cash on
December
23, 2004
    
    
    1.00
    
    
    
    250,000
    
    
    
    250
    
    
    
    
    
    
    
    249,750
    
    
    
    
    
    
    
    
    
    
    
    250,000Finders
fees
related
to
stock
issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,384
    )
    
    
    
    
    
    
    
    
    
    
    (88,384
    )Common
stock
paid
for,
but not
issued
(119,000
shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000
 F - 9




---



##### 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, 2005
 Additional
    
    
    
    
    
    Deficit accumulated
    
    Total stockholdersPrice per
    

Common Stock
    

Common stock
    
    paid-in
    
    Deferred
    
    during the
    
    developmentshare
    
    Shares
    
    Amount
    
    to be issued
    
    capital
    
    compensation
    
    development stage
    
    stage deficiencyIntrinsic value
of options
issued to
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,891
    
    
    
    (248,891
    )
    
    
    
    
    
    
    Fair value of
options issued
to
non-employees
for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,381
    
    
    
    (55,381
    )
    
    
    
    
    
    
    Fair value of
warrants
issued for
settlement
costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,585,266
    
    
    
    
    
    
    
    
    
    
    
    1,585,266Fair value of
warrants
issued to
non-employees
for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,872
    
    
    
    
    
    
    
    
    
    
    
    28,872Amortization of
deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936,537
    
    
    
    
    
    
    
    936,537Net loss for
year ended
December 31,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,803,280
    )
    
    
    (6,803,280
    )Balance, December
31, 2004
    
    
    
    
    
    
    37,784,821
    
    
    
    37,784
    
    
    
    119,000
    
    
    
    15,043,028
    
    
    
    (76,068
    )
    
    
    (17,130,888
    )
    
    
    (2,007,144
    )Common stock
issued,
previously
paid for
    
    
    1.00
    
    
    
    69,000
    
    
    
    69
    
    
    
    (69,000
    )
    
    
    68,931
    
    
    
    
    
    
    
    
    
    
    
    Stock issued
upon exercise
of warrants,
previously
paid for
    
    
    1.00
    
    
    
    50,000
    
    
    
    50
    
    
    
    (50,000
    )
    
    
    49,950
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for
cash on
January 20,
2005
    
    
    1.00
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    24,975
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued
upon exercise
of warrants on
January 31,
2005
    
    
    0.40
    
    
    
    500
    
    
    
    1
    
    
    
    
    
    
    
    199
    
    
    
    
    
    
    
    
    
    
    
    200Stock issued for
cash on
February 17,
2005
    
    
    1.00
    
    
    
    325,000
    
    
    
    325
    
    
    
    
    
    
    
    324,675
    
    
    
    
    
    
    
    
    
    
    
    325,000Stock issued for
cash on March
31, 2005
    
    
    1.00
    
    
    
    215,000
    
    
    
    215
    
    
    
    
    
    
    
    214,785
    
    
    
    
    
    
    
    
    
    
    
    215,000Stock issued for
cash on May
17, 2005
    
    
    1.00
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    4,995
    
    
    
    
    
    
    
    
    
    
    
    5,000Stock issued for
cash on June
7, 2005
    
    
    1.00
    
    
    
    300,000
    
    
    
    300
    
    
    
    
    
    
    
    299,700
    
    
    
    
    
    
    
    
    
    
    
    300,000Stock issued for
cash on August
5, 2005
    
    
    1.00
    
    
    
    480,500
    
    
    
    480
    
    
    
    
    
    
    
    480,020
    
    
    
    
    
    
    
    
    
    
    
    480,500Stock issued for
cash on August
9, 2005
    
    
    1.00
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    99,900
    
    
    
    
    
    
    
    
    
    
    
    100,000Stock issued for
cash on
October 27,
2005
    
    
    1.00
    
    
    
    80,000
    
    
    
    80
    
    
    
    
    
    
    
    79,920
    
    
    
    
    
    
    
    
    
    
    
    80,000Common stock
cancelled on
December 7,
2005
    
    Various
    
    
    
    (8,047,403
    )
    
    
    (8,047
    )
    
    
    
    
    
    
    8,047
    
    
    
    
    
    
    
    
    
    
    
    Stock issued for
settlement of
payables on
December 21,
2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,092Stock issued for
settlement of
payables on
December 31,
2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    555,429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    555,429Finders fees
related to
stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (109,840
    )
    
    
    
    
    
    
    
    
    
    
    (109,840
    )Intrinsic value
of options
issued to
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243,750
    
    
    
    (243,750
    )
    
    
    
    
    
    
    Fair value of
options issued
for settlement
costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,500
    
    
    
    
    
    
    
    
    
    
    
    31,500Fair value of
warrants
issued for
settlement
costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,957
    
    
    
    
    
    
    
    
    
    
    
    4,957Fair value of
warrants
issued to
non-employees
for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,505
    
    
    
    
    
    
    
    
    
    
    
    13,505Amortization of
deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,631
    
    
    
    
    
    
    
    177,631Warrants issued
with convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756,768
    
    
    
    
    
    
    
    
    
    
    
    756,768
 F - 10




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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, 2005
 
 Additional
    
    
    
    
    
    
    Deficit accumulated
    
    
    Total stockholdersPrice per
    
    
    Common Stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    during the
    
    
    developmentshare
    
    
    Shares
    
    
    Amount
    
    
    to be issued
    
    
    capital
    
    
    compensation
    
    
    development stage
    
    
    stage deficiencyIntrinsic value of beneficial
conversion associated
with convertible
notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    696,413
    
    
    
    
    
    
    
    
    
    
    
    696,413Net loss for year ended
December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,115,186
    )
    
    
    (3,115,186
    )Balance, December 31, 2005
    
    
    
    
    
    
    31,387,418
    
    
    $
    31,387
    
    
    $
    612,521
    
    
    $
    18,336,178
    
    
    $
    (142,187
    )
    
    $
    (20,246,074
    )
    
    $
    (1,408,175
    )
  F-11




---



##### Table of Contents



SAVE THE WORLD AIR, INC.  (A DEVELOPMENT STAGE ENTERPRISE)
 STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO
DECEMBER 31, 2005
 
 CumulativeDecember 31,
    
    
    December 31,
    
    
    since2005
    
    
    2004
    
    
    inceptionCash flows from operating activitiesNet loss
    
    $
    (3,115,186
    )
    
    $
    (6,803,280
    )
    
    $
    (20,246,074
    )Adjustments to reconcile net loss to net cash
used in operating activities:Write off of intangible assets
    
    
    
    
    
    
    
    
    
    
    505,000Settlement
of litigation and debt
    
    
    (1,017,208
    )
    
    
    
    
    
    
    Fair value of options issued for services
    
    
    
    
    
    
    28,872
    
    
    
    171,190Issuance of common stock for services
    
    
    
    
    
    
    1,427,750
    
    
    
    5,280,623Issuance of options for legal settlement
    
    
    31,500
    
    
    
    
    
    
    
    31,500Issuance of warrants for legal settlement
    
    
    4,957
    
    
    
    
    
    
    
    4,957Issuance of warrants for services
    
    
    13,505
    
    
    
    
    
    
    
    13,505Patent acquisition cost
    
    
    
    
    
    
    1,610,066
    
    
    
    1,610,066Amortization of debt discount
    
    
    318,759
    
    
    
    
    
    
    
    318,759Amortization of deferred compensation
    
    
    177,631
    
    
    
    936,537
    
    
    
    3,060,744Depreciation
    
    
    19,345
    
    
    
    8,685
    
    
    
    33,762Changes in operating assets and liabilities:Prepaid expenses and other
    
    
    (10,907
    )
    
    
    (2,602
    )
    
    
    (13,509
    )Income taxes payable
    
    
    
    
    
    
    (5,991
    )
    
    
    Accounts payable and accrued expenses
    
    
    1,010,426
    
    
    
    388,499
    
    
    
    1,799,923Net cash used in operating activities
    
    
    (2,567,178
    )
    
    
    (2,411,464
    )
    
    
    (7,429,554
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (279,123
    )
    
    
    (9,037
    )
    
    
    (325,586
    )Net cash used in investing activities
    
    
    (279,123
    )
    
    
    (9,037
    )
    
    
    (325,586
    )Cash flows from financing activitiesIncrease (decrease) in payables to related parties and stockholder
    
    
    167,255
    
    
    
    (6,425
    )
    
    
    715,183Advances from founding executive officer
    
    
    
    
    
    
    
    
    
    
    (500,000
    )Net proceeds
from issuance of convertible notes
    
    
    1,453,182
    
    
    
    
    
    
    
    1,453,182Issuance of common stock for cash
    
    
    1,420,859
    
    
    
    1,466,700
    
    
    
    6,366,596Common stock issuable
    
    
    
    
    
    
    119,000
    
    
    
    Net cash provided by financing activities
    
    
    3,041,296
    
    
    
    1,579,275
    
    
    
    8,034,961Net increase (decrease) in cash
    
    
    194,995
    
    
    
    (841,226
    )
    
    
    279,821Cash, beginning of period
    
    
    84,826
    
    
    
    926,052
    
    
    
    Cash, end of period
    
    $
    279,821
    
    
    $
    84,826
    
    
    $
    279,821
  F-12




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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, 2005 AND 2004 AND FOR THE
PERIOD FROM INCEPTION (FEBRUARY 18, 1998) TO
DECEMBER 31, 2005
 
 CumulativeDecember 31,
    
    
    December 31,
    
    
    since2005
    
    
    2004
    
    
    inceptionSupplemental disclosures of cash flow
informationCash paid during the year forInterest
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    1,987
    
    
    $
    2,400
    
    
    $
    5,157Non-cash investing and financing
activitiesAcquisition of intangible asset through
advance from related party and issuance
of common stock
    
    $
    
    
    
    $
    
    
    
    $
    505,000Deferred compensation for stock options
issued for services
    
    
    243,750
    
    
    
    304,272
    
    
    
    3,202,931Purchase of property and equipment
financed by advance from related party
    
    
    
    
    
    
    
    
    
    
    3,550Conversion of related party debt to equity
    
    
    
    
    
    
    15,000
    
    
    
    515,000Issuance of common stock in settlement of
payable
    
    
    
    
    
    
    113,981
    
    
    
    113,981Common stock, previously paid for
    
    
    119,000
    
    
    
    6,250
    
    
    
    119,000Finders fees accrued for issuance of
common stock
    
    
    
    
    
    
    88,384
    
    
    
    400,966Value of warrants and beneficial conversion
feature of convertible notes
    
    
    1,453,182
    
    
    
    
    
    
    
    1,453,182Cancellation of stock
    
    
    8,047
    
    
    
    
    
    
    
    8,047Conversion of accounts payable and accrued expenses to common stock to be issued
    
    
    612,521
    
    
    
    
    
    
    
    612,521
  F-13




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 1. Description of business, significant matters and prior period corrections
   2. Summary of significant accounting policies
    F - 14




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2. Summary of significant accounting policies  Continued
       F - 15




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##### Table of Contents



SAVE THE WORLD AIR, INC.  (A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued  YEARS ENDED DECEMBER 31, 2005 AND 2004
 2. Summary of significant accounting policies  Continued
       F - 16




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2. Summary of significant accounting policies  Continued
     CumulativeDecember 31,
    
    
    December 31,
    
    
    since2005
    
    
    2004
    
    
    inceptionNet loss, as reported
    
    $
    (3,115,186
    )
    
    $
    (6,803,280
    )
    
    $
    (20,246,074
    )Add: total fair value method stock-
based employee compensation expense
    
    
    (1,039,268
    )
    
    
    (1,721,222
    )
    
    
    (5,010,310
    )Less: deferred compensation
amortization for below market
employee options
    
    
    163,786
    
    
    
    895,001
    
    
    
    2,950,454Pro forma net loss
    
    $
    (3,990,668
    )
    
    $
    (7,629,501
    )
    
    $
    (22,305,930
    )Pro forma loss per share
    
    $
    (0.10
    )
    
    $
    (0.21
    )
 F - 17




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2. Summary of significant accounting policies  Continued
   Expected life (years)
    
    
    5.26Risk free interest rate
    
    
    4.02
    %Volatility
    
    
    188.83
    %Expected dividend yield
    
    
    0.00
    %
       F - 18




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2. Summary of significant accounting policies  Continued
     F - 19




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2. Summary of significant accounting policies  Continued
    3. Certain relationships and related transactions
     F - 20




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 3. Certain relationships and related transactions  Continued
      4. Property and equipment
  December 31,
    
    
    December 31,2005
    
    
    2004Office equipment
    
    $
    329,136
    
    
    $
    50,013Less accumulated depreciation
    
    
    (33,762
    )
    
    
    (14,417
    )$
    295,374
    
    
    $
    35,596
  F - 21




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 5. Income taxes
    December 31,
    
    
    December 31,2005
    
    
    2004Income taxes at statutory federal rate
    
    $
    (1,032,035
    )
    
    $
    (2,316,681
    )State income taxes, net of federal benefit
    
    
    (268,021
    )
    
    
    (408,197
    )Valuation allowance
    
    
    1,301,243
    
    
    
    2,721,312Minimum state income taxes, plus penalties and interest
    
    
    800
    
    
    
    800$
    1,987
    
    
    $
    (2,766
    )
 6. Stockholders deficiency
  F - 22




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 6. Stockholders deficiency  Continued
        7. Stock options and warrants
  Weighted Avg.
    
    
    Weighted Avg.Options
    
    
    Exercise PriceOptions, January 1, 2004
    
    
    13,250,000
    
    
    
    0.11Options granted
    
    
    1,172,652
    
    
    
    1.03Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    
    
    
    
    Options, December 31, 2004
    
    
    14,422,652
    
    
    
    0.18Options granted
    
    
    2,085,909
    
    
    
    0.92Options exercised
    
    
    
    
    
    
    Options cancelled
    
    
    (10,000,000
    )
    
    
    0.10Options, December 31, 2005
    
    
    6,508,561
    
    
    $
    0.53
 F - 23




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 7. Stock options and warrants  Continued
  Total
    
    
    
    
    
    
    ExercisableWeighted
    
    weighted
    
    
    
    
    
    
    weightedRange of
    
    Total
    
    
    average
    
    average
    
    
    
    
    
    
    averageexercise
    
    options
    
    
    remaining
    
    exercise
    
    
    Options
    
    
    exerciseprices
    
    outstanding
    
    
    life in years
    
    price
    
    
    exercisable
    
    
    price$0.10
    
    
    3,000,000
    
    
    3.84
    
    $
    0.10
    
    
    
    3,000,000
    
    
    $
    0.100.40
    
    
    250,000
    
    
    3.17
    
    
    0.40
    
    
    
    250,000
    
    
    
    0.400.85
    
    
    400,000
    
    
    4.58
    
    
    0.85
    
    
    
    
    
    
    
    0.85
    
    
    1,225,000
    
    
    9.58
    
    
    0.85
    
    
    
    
    
    
    
    0.98
    
    
    900,000
    
    
    3.17
    
    
    0.98
    
    
    
    900,000
    
    
    
    0.981.00
    
    
    370,000
    
    
    9.58
    
    
    1.00
    
    
    
    
    
    
    
    1.10
    
    
    90,909
    
    
    4.58
    
    
    1.10
    
    
    
    
    
    
    
    1.15
    
    
    193,912
    
    
    3.17
    
    
    1.15
    
    
    
    86,956
    
    
    
    1.151.27
    
    
    78,740
    
    
    3.17
    
    
    1.27
    
    
    
    185,696
    
    
    
    1.27$0.10-$1.27
    
    
    6,508,561
    
    
    5.26
    
    $
    0.27
    
    
    
    4,422,652
    
    
    $
    0.23
   F - 24




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 7. Stock options and warrants  Continued
   Weighted Avg.Warrants
    
    
    Exercise PriceWarrants outstanding, January 1, 2004
    
    
    14,117,414
    
    
    
    .48Warrants granted
    
    
    2,372,500
    
    
    
    1.27Warrants exercised
    
    
    (960,500
    )
    
    
    .20Warrants cancelled
    
    
    
    
    
    
    Warrants outstanding, December 31, 2004
    
    
    15,529,414
    
    
    
    .62Warrants granted
    
    
    5,198,578
    
    
    
    1.16Warrants exercised
    
    
    (50,500
    )
    
    
    .59Warrants cancelled
    
    
    (20,000
    )
    
    
    1.50Warrants outstanding, December 31, 2005
    
    
    20,657,492
    
    
    $
    .75
   F - 25




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 7. Stock options and warrants  Continued
   8. Convertible debentures and warrants
     F - 26




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 9. Research and development
  10. Commitments and contingencies
   F - 27




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 10. Commitments and contingencies  Continued
    F - 28




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 10. Commitments and contingencies  Continued
      F - 29




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 10. Commitments and contingencies  Continued
     F - 30




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 10. Commitments and contingencies  Continued
     F - 31




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 10. Commitments and contingencies  Continued
        F - 32




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##### Table of Contents



SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO FINANCIAL STATEMENTS  Continued
YEARS ENDED DECEMBER 31, 2005 AND 2004
 10.
Commitments and contingencies  Continued
   Year ending December 31,2006
    
    $
    109,7812007
    
    
    88,2242008
    
    
    3,655Total
    
    $
    201,660
 11. Subsequent events
   F - 33




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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(9)
    
    Amendment dated June 15, 2004 to Exhibit 10.110.3*
    
    Amendment dated August 14, 2005 to Exhibit 10.110.4*
    
    General Tenancy Agreement dated March 14, 2006 between the Registrant
and Autumlee Pty Ltd.10.5(3)
    
    Agreement dated December 13, 2002 between the Registrant and RAND.10.6(2)**
    
    Agreement dated May 7, 2003 between the Registrant and RAND.10.7(4)
    
    Modification No. 1 dated as of August 21, 2003 to Exhibit 10.510.8(4)
    
    Modification No. 2 dated as of October 17, 2003 to Exhibit 10.510.9(4)
    
    Modification No. 3 dated as of January 20, 2004 to Exhibit 10.510.10(5)
    
    Deed and Document Conveyance between the Trustee of the Property of
Jeffrey Ann Muller and Lynette Anne Muller (Bankrupts).10.11(5)
    
    Assignment and Bill of Sale dated May 28, 2002 between the Registrant
and Kevin Charles Hart.10.12(6)
    
    Consulting Agreement dated December 1, 2003 between the Registrant and
Joseph Helleis.10.13(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and
Edward L. Masry.10.14(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and
Eugene E. Eichler.10.15(9)
    
    Amendment dated as of March 2, 2004 to Exhibit 10.1310.16(6)
    
    Employment Agreement dated December 1, 2003 between the Registrant and
Bruce H. McKinnon.10.17(9)
    
    Amendment dated as of March 2, 2004 to Exhibit 10.1510.18(7)
    
    Save the World Air, Inc. 2004 Stock Option Plan10.19(9)
    
    Form of Incentive Stock Option Agreement under 2004 Stock Option Plan10.20(9)
    
    Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan10.21(9)
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant
and Adrian Menzell10.22(10)
    
    Amendment to Exhibit 10.2110.23(9)
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant
and Pat Baker10.24(10)
    
    Amendment to Exhibit 10.2310.25(9)
    
    Consulting Agreement dated as of April 1, 2003 between the Registrant
and John Kostic10.26(10)
    
    Amendment to Exhibit 10.2510.27(9)
    
    Consulting Agreement dated as of October 1, 2004 between the Registrant
and John Fawcett10.28(9)
    
    Advisory Services Agreement dated as of February 26, 2003 between the
Registrant and Kevin Charles Hart




---



##### Table of Contents



Exhibit No.
    
    Description10.29(9)
    
    Advisory Services Agreement dated as of July 7, 2003 between the
Registrant and Sir Jack Brabham10.30(8)
    
    License Agreement dated as of July 1, 2004 between the Registrant and
Temple University  The Commonwealth System of Higher Education10.31(9)
    
    Exclusive Capital Raising Agreement dated as of July 29, 2004 between
the Registrant and London Aussie Marketing, Ltd.10.32(9)
    
    Consulting Agreement dated as of November 19, 2004 between the
Registrant and London Aussie Marketing, Ltd.10.33(9)
    
    Employment Agreement dated September 1, 2004 with Erin Brockovich10.34(9)
    
    Representation Agreement dated as of October 1, 2004 between the
Registrant and Gurminder Singh10.35(9)
    
    Advisory Services Agreement dated
as of August ___, 2002 between the
Registrant and Bobby Unser, Jr.10.36(9)
    
    Advisory Services Agreement dated
as of August ___, 2002 between the
Registrant and Jack Reader10.37(9)
    
    Advisory Services Agreement dated
as of August  ___, 2002 between the
Registrant and Nate Sheldon10.38(9)
    
    Assignment of Patent Rights dated as of September 1, 2003 between the
Registrant and Adrian Menzell10.39(9)
    
    Global Deed of Assignment dated June 26, 2004 between the Registrant and
Adrian Menzell10.40(11)
    
    Employment Agreement dated July 1, 2005 between the Registrant and John
K. Bautista10.41(11)
    
    Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson10.42*
    
    Amendment dated February 1, 2006 to Exhibit 10.4110.43(11)
    
    Form of Registrants 9% convertible note issued in 2005 Interim Financing10.44(11)
    
    Form of Registrants stock purchase warrant issued in 2005 Interim Financing10.45*
    
    Form of Registrants 9% convertible note issued in 2005 Bridge Financing10.46*
    
    Form of Registrants stock purchase warrant issued in 2005 Bridge
Financing23.1*
    
    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.




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(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.(9)
    
    Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2004.(10)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended June 30, 2005.(11)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended September 30, 2005.