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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, 2006
 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.
 þ o
 þ
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE
  o þ




---



##### 



SAVE THE WORLD AIR, INC.
FORM 10-KSB
INDEX
  
 PagePART IItem 1 Business
    
    
    1Item 2 Properties
    
    
    35Item 3 Legal Proceedings
    
    
    36Item 4 Submission of Matters to a Vote of Security Holders
    
    
    38PART IIItem 5 Market for Common Equity and Related Stockholder Matters
    
    
    39Item 6 Managements Discussion and Analysis or Plan of Operation
    
    
    41Item 7 Financial Statements
    
    
    52Item 8 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
    
    
    52Item 8 A Controls and Procedures
    
    
    52Item 8 B Other Information
    
    
    53PART IIIItem 9 Directors and Executive Officers of Registrant
    
    
    54Item 10 Executive Compensation
    
    
    54Item 11 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    54Item 12 Certain Relationships and Related Transactions
    
    
    54Item 13 Exhibits
    
    
    54Item 14 Principal Accountant Fees and Services
    
    
    57SIGNATURES
    
    
    58EXHIBIT 10.13EXHIBIT 10.23EXHIBIT 10.44EXHIBIT 10.45EXHIBIT 10.46EXHIBIT 10.47EXHIBIT 21EXHIBIT 23EXHIBIT 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 and other third-party test results;
    
    sales and marketing expenses and efforts;
    
    liquidity and sufficiency of existing cash;
    
    technology and products;
    
    the outcome of pending or threatened litigation; and
    
    the effect of recent accounting pronouncements on our financial
condition and results of operations.
   
 Item 1. Business
 The discussion of our business is as of the date of filing this report, unless otherwise
indicated.
 Overview
    1




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2




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Recent Developments
         3




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Our Business Strategy
 The Crisis of the Effect of Motor Emissions on Air Pollution
      
    
    The EU has tightened standards on light duty vehicle emissions and fuel quality
for 2000 and 2005, broadened coverage (e.g., cold temperature), and imposed low
sulfur
requirements for diesel fuel and gasoline; Euro 3, 4 and 5 standards for heavy duty
trucks and buses, will require advanced NOx and particulate matter (PM) post-combustion
pollution control systems. The auto industry has agreed to a voluntary commitment
to reduce carbon dioxide (CO2) emissions per kilometer driven by 25%
by 2008.
 4




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
    
    CARB tightened CO, HC, NOx and PM requirements and established principles of
fuel neutrality (diesel vehicles meet the same standards as gasoline vehicles) and
usage neutrality (light trucks and sport utility vehicles used primarily as
passenger cars must meet the same standards as cars); CARB decided that diesel PM
is a toxic air contaminant leading to an effort to further reduce PM emissions
from existing diesel vehicles.
    
    EPA, in conjunction with CARB, imposed the largest enforcement action in
history on the heavy engine industry; EPA adopted stringent national PM and NOx
standards for heavy duty trucks and buses and mandated low sulfur diesel fuel to
enable the advanced technologies necessary to achieve these requirements.
    
    China and India adopted the Euro 1 auto and truck emissions standards and are
phasing out the use of unleaded gasoline.
   Our Technologies and Products
 ZEFS and MK IV.
    5




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ELEKTRA
  6




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The
International Journal of Physics
  .
 CAT-MATE.
 7




---



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Research and Development
        8




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Independent Laboratory and Scientific Testing
         9




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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
    
    COEURO3 Standard
    
    0.80 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 EURO3
    
    
    59
    %
    
    
    28
    %
    
    
    7
    %
    Technical Targets
    
    CO
    
    HC
    
    NOxg/km
    
    g/km
    
    g/kmEURO3 Standard
    
    
    £2.0
    
    
    
    £0.8
    
    
    
    £0.15Measured Values
    
    ZEFS Device (hot start)(a)
    
    
    0.90
    
    
    
    0.20
    
    
    
    0.13ZEFS/CAT-MATE Device (cold start)(b)
    
    
    1.04
    
    
    
    0.18
    
    
    
    0.12
 
 (a)
    
    A hot start test is run for EURO2 compliance, which standard was achieved.(b)
    
    A cold start test is run for EURO3 compliance, which standard was achieved.  10




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##### Table of Contents



Run 1
    
    Run 2
    
    Run 3(l/km)
    
    (l/km)
    
    (l/km)
    
    AverageBaseline FC Test Runs without MK IV Device
    
    
    0.0196
    
    
    
    0.0195
    
    
    
    0.0193
    
    
    
    0.0195FC Test Runs with MK IV Device
    
    
    0.0186
    
    
    
    0.0184
    
    
    
    0.0185
    
    
    
    0.0185Difference
    
    
    0.0010
    
    
    
    0.0011
    
    
    
    0.0008
    
    
    
    0.0010Improvement
    
    
    5.10
    %
    
    
    5.64
    %
    
    
    4.15
    %
    
    
    5.13
    %
  Total Hydrocarbon (THC) Emissions (gms/km)
 Suzuki 110
    
    RevTech 100
    
    Merch 125AVERAGE BASELINE
    
    
    0.124
    
    
    
    1.821
    
    
    
    1.372AVERAGE ECO CHARGR
    
    
    0.098
    
    
    
    1.685
    
    
    
    1.302% Improvement
    
    
    21.0
    %
    
    
    7.5
    %
    
    
    5.1
    %
 Carbon Monoxide (CO) Emissions (gms/km)
 Suzuki 110
    
    RevTech 100
    
    Merch 125AVERAGE BASELINE
    
    
    1.729
    
    
    
    29.086
    
    
    
    21.201AVERAGE ECO CHARGR
    
    
    1.231
    
    
    
    18.160
    
    
    
    15.805% Improvement
    
    
    28.8
    %
    
    
    37.6
    %
    
    
    25.5
    %
 Oxides of Nitrogen (NOx) Emissions (gms/km)
 Suzuki 110
    
    RevTech 100
    
    Merch 125AVERAGE BASELINE
    
    
    0.066
    
    
    
    0.136
    
    
    
    0.287AVERAGE ECO CHARGR
    
    
    0.063
    
    
    
    0.196
    
    
    
    0.268% Improvement
    
    
    4.5
    %
    
    
    -44.0
    %
    
    
    6.4
    %
 Fuel Economy (miles per gallon)
 Suzuki 110
    
    RevTech 100
    
    Merch 125AVERAGE BASELINE
    
    
    241.97
    
    
    
    39.68
    
    
    
    34.83AVERAGE ECO CHARGR
    
    
    253.16
    
    
    
    41.08
    
    
    
    34.82% Improvement
    
    
    4.6
    %
    
    
    3.5
    %
    
    
    0.0
    %
  11




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RAND Report
         12




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Sales and Marketing
  United States
 China
  
   13




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Indonesia
  
   14




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Vietnam.
  
     Europe
 15




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Other Countries
 Other Efforts
      16




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Shanghai Yide 300cc ATV Certification Test Results
 THC
    
    NOx
    
    CO
    
    THC+NOxEPA Standard
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    1.5CARB Standard
    
    
    1.2
    
    
    
    
    
    
    
    15ECO ChargR and CAT-MATE
    
    
    0.187
    
    
    
    0.092
    
    
    
    9.1985
    
    
    
    0.279% Below EPA
    
    
    
    
    
    
    
    
    
    
    74
    %
    
    
    81
    %% Below CARB
    
    
    84
    %
    
    
    
    
    
    
    39
    %
 Manufacturing
    Competition
    17




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Government Regulation and Environmental Matters
  U.S. Government Regulation
  18




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EU Regulation
 2
 2 2  2 2 2
 2 2
 Intellectual Property
    19




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##### Table of Contents



ZEFS Patent Applications
  ZEFS MK IDevice For Saving Fuel and Reducing Emissions . s
  Country
    
    Number
    
    Filing date
    
    StatusAustralia
    
    2001258057
    
    May 21, 2001
    
    GRANTEDBosnia & Herzegovina
    
    BAP 021290A
    
    May 21, 2001
    
    Short Term Patent GRANTED.
Application for Standard Patent FiledBrazil
    
    0111365-8
    
    May 21, 2001
    
    Examination requested September 5,
2003. Report expected mid-2007Bulgaria
    
    107391
    
    May 21, 2001
    
    Under examination  response filedCanada (small 
entity status)
    
    2409195
    
    May 21, 2001
    
    Examination requested April 2006China
    
    01809802.9
    
    May 21, 2001
    
    Under examination  response filedColumbia
    
    02115018
    
    May 21, 2001
    
    Examination requested July 23, 2004.Croatia
    
    P20020982A
    
    May 21, 2001
    
    GRANTEDCzech Republic
    
    PV 2002-4092
    
    May 21, 2001
    
    Under Examination  response filedEurasian +++
    
    200201237
    
    May 21, 2001
    
    GRANTED and VALIDATED in all member
statesEurope ++
    
    019331222.2
    
    May 21, 2001
    
    Awaiting examinationGeorgia
    
    4098/01-2002
    
    May 21, 2001
    
    GRANTEDHong Kong
    
    04100327.0
    
    May 21, 2001
    
    Automatic grant upon grant of the
Chinese applicationHungary
    
    P 03 01796
    
    May 21, 2001
    
    Examination requested April 2006.India*
    
    IN/PCT/2002/01523
    
    May 21, 2001
    
    Under Examination  response filedIndonesia
    
    WO0200202844
    
    May 21, 2001
    
    Registration Fee Paid  Awaiting GrantIsrael
    
    152902
    
    May 21, 2001
    
    GRANTEDKorea [South]
    
    2002-7015531
    
    May 21, 2001
    
    Examination requested May 2006Japan
    
    586731/2001
    
    May 21, 2001
    
    Examination to be requested by May
21, 2008Mexico
    
    PA/A/2002/011365
    
    May 21, 2001
    
    GRANTEDMorocco
    
    PV/26.964
    
    May 21, 2001
    
    GRANTEDNew Zealand
    
    523113
    
    May 21, 2001
    
    GRANTEDNorway
    
    20025531
    
    May 21, 2001
    
    Awaiting examination
 20




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Country
    
    Number
    
    Filing date
    
    StatusPoland
    
    P358837
    
    May 21, 2001
    
    Awaiting examinationSerbia
    
    P-870/02
    
    May 21, 2001
    
    Examination requested December 2002Singapore
    
    93310 [WO
01/90562]
    
    May 21, 2001
    
    GRANTEDSouth Africa
    
    2002/10013
    
    May 21, 2001
    
    GRANTEDSri Lanka
    
    12918
    
    May 21, 2001
    
    GRANTEDTrinidad & Tobago
    
    TT/A/2002/00213
    
    May 21, 2001
    
    GRANTEDUkraine
    
    20021210144
    
    May 21, 2001
    
    GRANTEDUnited States
    
    6901917
    
    May 21, 2001
    
    GRANTEDVietnam
    
    1-2002-01168
    
    May 21, 2001
    
    GRANTED
 
   ZEFS MK IIDevice for Saving Fuel and Reducing Emissions
   Country
    
    Number
    
    Filing date
    
    StatusTaiwan
    
    1236519
    
    July 19, 2003
    
    GRANTEDChina
    
    200480025660.X
    
    July 15, 2004
    
    Exam requested July 2006Europe
    
    04737571.2
    
    July 15, 2004
    
    Filed  Awaiting ExaminationIndia
    
    300/KOL NP/06
    
    July 15, 2004
    
    Under examination 
acceptance/response due
March 18, 2008Indonesia
    
    WO0200600441
    
    July 15, 2004
    
    Examination to be requested
by July 15, 2007Japan
    
    Awaiting
    
    July 15, 2004
    
    Examination to be requested
by July 15, 2007United States
    
    10/564747
    
    July 15, 2004
    
    Filed, awaiting examination
 ZEFS MK IIIEmission Control Devices.
   21




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Country
    
    Number
    
    Filing date
    
    StatusThailand 
China
    
    095155 200480039739.8
    
    November 3, 2004
November 4, 2004
    
    Examination to be
requested by
September 2010
Examination
requested October
2006Japan
    
    Awaiting Number
    
    November 4, 2004
    
    Examination to be requested by
November 3, 2007United States
    
    10/578311
    
    November 4, 2004
    
    Application filed  awaiting
examinationEurope
    
    04796967.0
    
    November 4, 2006
    
    Application filed  awaiting examination
 MK IV Patent Applications
 Device for Saving Fuel and Reducing Emissions .
  Country
    
    Number
    
    Filing date
    
    StatusTaiwan
    
    95115220
    
    April 28, 2006
    
    Examination due by April 29, 2009Thailand
    
    0601001997
    
    May 2, 2006
    
    Application filed - awaiting examinationMalaysia
    
    PI 20062013
    
    May 2, 2006
    
    Examination due by May 2, 2008PCT
    
    PCT/AU2006/000861
    
    June 20, 2006
    
    Demand for IPE filed  IPRP favorable.
    CAT-MATE Patent Applications
 CAT-FLAP (Afterburner) Improvements in or Relating to Emission Control Systems .
 22




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Country
    
    Number
    
    Filing date
    
    StatusAustralia
    
    2004312099
    
    December 23, 2004
    
    Examination to be
requested by
December 2009Canada
    
    2559287
    
    December 23, 2004
    
    Examination to be
requested by
December 2009China
    
    200480042295.3
    
    December 23, 2004
    
    Examination
requested December
2006Europe
    
    04802122.4
    
    December 23, 2004
    
    Application filed -
awaiting
examinationIndonesia
    
    WO0200602208
    
    December 23, 2004
    
    Examination to be
requested by
December 2007Japan
    
    2006-548033
    
    December 23, 2004
    
    Examination to be
requested by
December 2007Korea
    
    2006-7016017
    
    December 23, 2004
    
    Examination Due by
December 23, 2009Mexico
    
    PA/a/2006/007863
    
    December 23, 2004
    
    Application filed 
awaiting
examinationMalaysia
    
    PI20050041
    
    January 6, 2005
    
    Examination to be
requested by
January 2010New Zealand
    
    548993
    
    December 23, 2004
    
    Application filed 
awaiting
examination.Thailand
    
    096762
    
    January 4, 2005
    
    Examination to be
requested by
January 2010Taiwan
    
    93140533
    
    December 24, 2004
    
    Examination to be
requested by
December 2007United States
    
    N/A
    
    
    
    Application filed 
awaiting
examination.
  CAT-MATEInline Exhaust Device to Improve Efficiency of a Catalytic Converter .
   Method and Apparatus for Treatment of a Fluid (Temple University ) .
 23




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Country
    
    Number
    
    Filing date
    
    StatusGCC*
    
    GCC/P/2005/5066
    
    August 22, 2005
    
    Application filed 
awaiting
examination.Brazil
    
    0510871-3
    
    May 13, 2005
    
    Examination to be
requested by May
2008Canada
    
    2566739
    
    May 13, 2005
    
    Examination to be
requested by May
2010China
    
    200580023369.3
    
    May 13, 2005
    
    Examination to be
requested by May
2007Algeria
    
    060593
    
    May 13, 2005
    
    Application filed 
awaiting
examinationEurasia**
    
    200602114
    
    May 13, 2005
    
    Application filed 
awaiting
examinationEgypt
    
    PCT 1087/2006
    
    May 13, 2005
    
    Application filed 
awaiting
examinationUnited Kingdom
    
    0624025.3
    
    May 13, 2005
    
    Application filed 
awaiting
examinationIndonesia
    
    WO0200603429
    
    May 13, 2005
    
    Application filed 
awaiting
examinationMexico
    
    PA/a/2006/013206
    
    May 13, 2005
    
    Application filed 
awaiting
examinationNorway
    
    20065632
    
    May 13, 2005
    
    Application filed 
awaiting
examinationUnited States
    
    11/519168
    
    May 13, 2005
    
    Application filed 
awaiting
examination
 
 *
    
    The GCC application covers Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and
Bahrain.**
    
    This application is in the name of Temple University of the Commonwealth System of Higher
Education.  Trademarks
   Country
    
    Number
    
    Filing Date
    
    Status
    
    RenewalAustralia
    
    
    1008291
    
    
    June 25, 2004
    
    Registered
    
    June 25, 2014Madrid*
    
    
    858359
    
    
    December 21, 2004
    
    Registered
    
    December 21, 2014
 
 *
    
    The Madrid Protocol application designated the following countries:
United States, China, European Union, Japan, Korea and Singapore. 24




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Country
    
    Number
    
    Filing Date
    
    Status
    
    RenewalAustralia
    
    1121860
    
    July 4, 2006
    
    Application AllowedCanada
    
    Awaiting numberIndonesia
    
    D00 2007 000330
    
    January 4, 2007
    
    Awaiting examinationMadrid *
    
    Awaiting numberMalaysia
    
    Awaiting numberThailand
    
    Awaiting numberTaiwan
    
    Awaiting number
 
 *
    
    The Madrid Protocol application designated the following countries:
United States, China, European Union, Japan, Korea, Singapore and
Vietnam.    Country
    
    Number
    
    Filing Date
    
    Status
    
    RenewalAustralia
    
    1121864
    
    July 4, 2006
    
    Application AllowedCanada
    
    Awaiting numberIndonesia
    
    D00 2007 000331
    
    January 4, 2007
    
    Awaiting examinationMadrid *
    
    Awaiting numberMalaysia
    
    Awaiting numberThailand
    
    Awaiting numberTaiwan
    
    Awaiting number
 
 *
    
    The Madrid Protocol application designated the following countries:
United States, China, European Union, Japan, Korea, Singapore and
Vietnam.    25




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Country
    
    Number
    
    Filing Date
    
    StatusAustralia
    
    
    1140033
    
    
    October 11, 2006
    
    Awaiting examination
 Non-Disclosure Agreements
  Employees
  Risk Factors
 We have just begun to generate revenues, we have a history of losses, and we cannot assure you
that we will ever become or remain profitable. As a result, you may lose your entire investment.
  26




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Our independent auditors have expressed doubt about our ability to continue as a going
concern, which may hinder our ability to obtain future financing.
  Since we have not yet begun to generate positive cash flow from operations, our ability
to continue operations is dependent on our ability to either begin to generate positive cash flow
from operations or our ability to raise capital from outside sources.
   We will need substantial 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.
  27




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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.
  The commercial viability of the ZEFS and CAT-MATE technologies remains largely unproven and we
may not be able to attract customers.
  28




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RAND Corporation has raised questions about the scientific basis and testing results of the
ZEFS and CAT-MATE technologies.
    The commercial viability of the ELEKTRA technology 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.
  29




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We need to outsource and rely on third parties for the manufacture, sales and marketing of our
products, and our future success will be dependent on the timeliness and effectiveness of the
efforts of these third parties.
   If any party to which we have outsourced certain functions fails to perform its obligations
under agreements with us, the development and commercialization of our products could be delayed or
curtailed.
  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
    
    expenses related to, and the results of, proceedings relating to our intellectual property.
  30




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Nondisclosure agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information.
  The manufacture, use or sale of our current and proposed products may infringe on the patent
rights of others, and we may be forced to litigate if an intellectual property dispute arises.
  
    
    incur substantial monetary damages;
    
    encounter significant delays in marketing our current and proposed product candidates;
    
    be unable to conduct or participate in the manufacture, use or sale of product
candidates or methods of treatment requiring licenses;
    
    lose patent protection for our inventions and products; or
    
    find our patents are unenforceable, invalid, or have a reduced scope of protection.
  We may face costly intellectual property disputes.
  We are involved in a patent infringement suit brought by our former sole director and
executive officer.
  31




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We may not be able to attract or retain qualified senior personnel.
  If we lose our key personnel or are unable to attract and retain additional personnel, we may
be unable to achieve profitability.
  We expect to incur increased costs under the Sarbanes-Oxley Act of 2002.
  Changes in stock option accounting rules may adversely affect our reported operating results,
our stock price, and our ability to attract and retain employees.
  32




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##### Table of Contents



Currently, there is only very limited trading in our stock, so you may be unable to sell your
shares at or near the quoted bid prices if you need to sell your shares.
  The market price of our stock is volatile.
  
    
    developments with respect to patents or proprietary rights;
    
    announcements of technological innovations by us or our competitors;
    
    announcements of new products or new contracts by us or our competitors;
    
    actual or anticipated variations in our operating results due to the
level of development expenses and other factors;
    
    changes in financial estimates by securities analysts and whether any
future earnings of ours meet or exceed such estimates;
    
    conditions and trends in our industry;
    
    new accounting standards;
    
    general economic, political and market conditions and other factors; and
    
    the occurrence of any of the risks described in this Memorandum.
 33




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##### Table of Contents



Substantial sales of common stock could cause our stock price to fall.
  Potential issuance of additional shares of our common stock could dilute existing
stockholders.
  There are 7,000,000 shares underlying our equity line of credit, which shares we have
registered with the SEC, and the sale of these shares could depress the market price of our common
stock.
  Assuming we utilize the maximum amount available under the equity line of credit, existing
shareholders could experience substantial dilution upon the issuance of shares to Dutchess.
   34




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##### Table of Contents



Percent below
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent ofcurrent market
    
    Price per share
    
    Number of shares
    
    Shares
    
    outstandingprice
    
    (1)
    
    issuable (2)
    
    outstanding (3)
    
    shares (4)0 %
    
    $
    1.4162
    
    
    
    7,061,150
    
    
    
    46,378,769
    
    
    
    15.22
    %10 %
    
    $
    1.2746
    
    
    
    7,845,599
    
    
    
    47,163,218
    
    
    
    16.63
    %25 %
    
    $
    1.0622
    
    
    
    9,414,423
    
    
    
    48,732,042
    
    
    
    19.32
    %50 %
    
    $
    0.7081
    
    
    
    14,122,299
    
    
    
    53,439,918
    
    
    
    26.43
    %
 
 (1)
    
    Represents purchase prices equal to 97% of $1.46 and potential reductions of 10%, 25% and 50%.(2)
    
    Represents the number of shares issuable if the entire $10,000,000 remaining commitment under
the equity line of credit was drawn down at the indicated purchase prices.Since only
7,000,000 shares of our common stock are being registered by us at this time, we would have
to file another registration statement and have it declared effective by the SEC in order to
make additional drawdowns resulting in the issuance of more than the 7,000,000 shares of
common stock being registered hereunder.(3)
    
    Based on 39,317,619 shares of common stock issued and outstanding as of September 20, 2006.(4)
    
    Percentage of the total outstanding common stock after the issuance of the shares indicated,
without considering the 4.99% contractual restriction on the number of shares that Dutchess
may own at any point in time or other restrictions on the number of shares we may issue. The lower the stock price, the greater the number of shares issuable under the equity line of
credit, which could contribute to the future decline of our stock price and dilute existing
shareholders equity and voting rights.
  Our common stock is subject to penny stock regulation, which may make it more difficult for us
to raise capital.
  
 Item 2. Properties
   35




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##### Table of Contents



Item 3. Legal Proceedings
   36




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##### Table of Contents



37




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
  38




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##### Table of Contents



PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
  2005
    
    2006High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    1.50
    
    
    $
    0.80
    
    
    $
    5.00
    
    
    $
    0.56Second Quarter
    
    $
    1.25
    
    
    $
    0.80
    
    
    $
    3.13
    
    
    $
    1.45Third Quarter
    
    $
    1.15
    
    
    $
    0.60
    
    
    $
    2.74
    
    
    $
    1.11Fourth Quarter
    
    $
    1.05
    
    
    $
    0.70
    
    
    $
    1.65
    
    
    $
    0.55
   Issuances of Unregistered Securities in Last Fiscal Year
 Bridge Notes
  Overseas Offering
  2006 PIPE Offering
   39




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##### Table of Contents



Other Issuances
   Morale Orchards Transaction
       40




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##### Table of Contents



Item 6. Managements Discussion and Analysis or Plan of Operation
   Overview
   Results of Operations
    41




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##### Table of Contents



Liquidity and Capital Resources
 General
    
    
    Gross proceeds of $550,000 (net proceeds of $478,500) from the issuance of the
Bridge Notes and related warrants in a private offering conducted by Spencer Clarke
that began in November 2005 and was completed in February 2006. In addition, the
Company received gross proceeds of $525,000 (net proceeds $456,750) in 2005 in this
offering.
    
    Gross proceeds of $737,881 (net proceeds of $667,803) from the sale of stock and
warrants in a private offering conducted by the company in April 2006.
    
    Gross proceeds of $1,650,000 (net proceeds of $1,435,500) from the sale of stock
and warrants in a PIPE offering conducted by Spencer Clarke, LLC of New York in April
and May 2006.
    
    Gross and net proceeds of $500,000 from the issuance of a convertible note and
related warrants in a private offering to Morale Orchards on December 5, 2006. The
face amount of the note is $612,500 due December 4, 2007.
    
    Gross proceeds of $380,095 (net proceeds of $349,693) from the issuance of stock
under our equity line of credit from Dutchess in November and December 2006.
 -
  42




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##### Table of Contents




    
    Gross and net proceeds of $500,000 from the issuance of a convertible note and
related warrants in a private offering to Morale Orchards on January 10, 2007. The
face amount of the note is $612,500 due January 9, 2008.
    
    Gross proceeds of $699,591 (net proceeds of $643,624) from the issuance of stock
under our equity line of credit from Dutchess.
    
    Gross proceeds of $400,000 (net proceeds of $352,000) from the issuance of Bridge
Notes and related warrants in a private offering conducted by Spencer Clarke that
began in January 2007 and was completed on April 27, 2007.
 Details of Recent Financing Transactions
 General .
    Equity Line of Credit .
     43




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##### Table of Contents



Morale Transaction
      44




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##### Table of Contents



2007 PIPE Offering
      45




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##### Table of Contents



Contractual Obligations
  Year ending December 31,
    
    Operating Leases
    
    
    Guaranteed Payments2007
    
    $
    154,449
    (1)
    
    $
    1,585,338
    (3)2008
    
    $
    150,348
    
    
    $
    300,000
    (4)2009
    
    $
    92,343
    (2)
    
    $
    75,000
    (5)$
    397,140
    
    
    $
    1,960,338
 
 (1)
    
    We have assumed that we will renew the lease for our corporate offices at
North Hollywood, California when it expires on July 31, 2007, at an increase in rent
of 10%, as provided for in the lease. We have assumed that we will renew the lease
for our engineering, production and testing facility at Morgan Hill, California when
it expires on August 31, 2007, on the existing terms, including rent, for an
additional two-year period, expiring on July 31, 2009. For a description of these
properties, see Part I, Item 2, Properties.(2)
    
    Does not include rent for (i) our corporate offices at North Hollywood,
California beyond July 31, 2009 or (ii) our engineering, production and testing
facility at Morgan Hill, California beyond August 31, 2009, which are the expiration
dates of the respective renewal terms for those two leases.(3)
    
    Consists of an aggregate $545,600 in total compensation, including base
salary and certain contractually-provided benefits, to two executive officers,
pursuant to employment agreements that expire on December 31, 2007, and to one
additional officer, pursuant to an employment agreement that expires on February 28,
2008; $385,000 in licensing fees to Temple University; $322,800 in severance payments
to a former officer; $240,000 in consulting fees to Spencer Clarke; and $91,938 in
fees to certain other consultants.(4)
    
    Consists of licensing fees in the amount of $290,000 due to Temple
University; and salary in the amount of $10,000 for two months to an officer, pursuant
to an employment agreement that expires on February 28, 2008. Does not include
compensation to our two executive officers, whose employment agreements expire on
December 31, 2007.(5)
    
    Consists of licensing fees due to Temple University. Does not include
compensation to our two executive officers, whose employment agreements expire on
December 31, 2007. Licensing Fees to Temple University.
 Severance Payments to Former Officer.
  46




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##### Table of Contents



Transactions with Spencer Clarke.
     Critical Accounting Policies and Estimates
  47




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##### Table of Contents



Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists;
    
    Delivery has occurred or services rendered;
    
    The sellers price to the buyer is fixed or determinable; and
    
    Collectibility is reasonably assured.
  Property and equipment and depreciation
  Long-lived assets
  48




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##### Table of Contents



Stock-Based Compensation
    CumulativeDecember 31,
    
    
    Since2005
    
    
    InceptionNet loss, as reported
    
    $
    (3,115,186
    )
    
    $
    (30,427,597
    )Add: total fair value method stock-based
employee compensation expense
    
    
    (1,039,268
    )
    
    
    (5,010,310
    )Less: deferred compensation amortization
for below market employee options
    
    
    177,631
    
    
    
    3,060,744Pro forma net loss
    
    $
    (3,976,823
    )
    
    $
    (32,377,163
    )Net loss per share:As reported  basic and diluted
    
    $
    (0.08
    )Pro forma  basic and diluted
    
    $
    (0.10
    )
   49




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##### Table of Contents



Recent Accounting Pronouncements
 Statement No. 123R
  50




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##### Table of Contents



Statement No. 151
  Statement No. 154
  Statement No. 157
  Statement No. 159
  51




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##### Table of Contents



Interpretation No. 48
  SAB No. 108
  
 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.
 52




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##### Table of Contents



(b) Changes in internal control over financial reporting.
 
 Item 8B. Other Information
  53




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##### Table of Contents



PART III
  
 Item 9. Directors and Executive Officers of Registrant
  Code of Business Conduct
 www.stwa.com
 
 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 the consolidated 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.
 54




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##### Table of Contents



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 (10)
    
    Amendment dated August 14, 2005 to Exhibit 10.110.4(10)
    
    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(5)
    
    Modification No. 1 dated as of August 21, 2003 to Exhibit 10.510.8(5)
    
    Modification No. 2 dated as of October 17, 2003 to Exhibit 10.510.9(5)
    
    Modification No. 3 dated as of January 20, 2004 to Exhibit 10.510.10(4)
    
    Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne
Muller (Bankrupts).10.11(4)
    
    Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.10.12(11)
    
    Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Eugene E.
Eichler.10.13*
    
    Separation Agreement and General Mutual Release of Claims dated as of November 9, 2006 between the Registrant and Eugene E. Eichler10.14(11)
    
    Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Bruce H.
McKinnon.10.15(6)
    
    Save the World Air, Inc. 2004 Stock Option Plan10.16(8)
    
    Form of Incentive Stock Option Agreement under 2004 Stock Option Plan10.17(8)
    
    Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan10.18(8)
    
    Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett10.19(7)
    
    License Agreement dated as of July 1, 2004 between the Registrant and Temple University  The Commonwealth
System of Higher Education10.20(8)
    
    Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.10.21(13)
    
    Amendment dated September 14, 2006 to Exhibit 10.2010.22(8)
    
    Employment Agreement dated September 1, 2004 with Erin Brockovich10.23*
    
    Amendment dated as of July 31, 2006 to Exhibit 10.2210.24(8)
    
    Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell10.25(8)
    
    Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell10.26(11)
    
    Amended and Restated Employment
Agreement dated as of March 1, 2006 between the Registrant and John Richard
Bautista III10.27(9)
    
    Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson10.28(10)
    
    Amendment dated February 1, 2006 to Exhibit 10.27
 55




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##### Table of Contents



Exhibit No.
    
    Description10.29(10)
    
    Form of 9% Convertible Note issued in the 2005 Interim Financing10.30(10)
    
    Form of Stock Purchase Warrant issued in the 2005 Interim Financing10.31(10)
    
    Form of Stock Purchase Warrant issued in the 2005 Bridge Financing10.32(11)
    
    Form of Stock Purchase Warrant issued in 2006 Regulation S financing10.33(11)
    
    Form of Stock Purchase Warrant issued in 2006 PIPE financing10.34(12)
    
    Commercial Sublease between the Registrant and KZG Golf dated January 1, 200610.35(12)
    
    Investment Agreement dated September 15, 2006 between the Registrant and Dutchess Private Equities Fund10.36(12)
    
    Registration Rights Agreement dated September 15, 2006 between the registrant and Dutchess Private Equities
Fund, LLP10.37(16)
    
    License Agreement between the Registrant and Temple University dated February 2, 200710.38(16)
    
    License Agreement between the Registrant and Temple University dated February 2, 200710.39(16)
    
    R&D Agreement between the Registrant and Temple University dated February 2, 200710.40(14)
    
    Note Purchase Agreement dated December 5, 2006 between the registrant and Morale Orchards LLC10.41(14)
    
    Form of Stock Purchase Warrant issued to Morale Orchards LLC10.42(14)
    
    Form of Convertible Note issued to Morale Orchards LLC10.43(15)
    
    Consulting Agreement dated January 4, 2007 between the Registrant and Spencer Clarke LLC10.44*
    
    Marketing Representation Agreement dated as of July 15, 2006 between the Company and SS Sales and Marketing Group10.45*
    
    Engagement Agreement between the
Registrant and CFO91110.46*
    
    Form of 10% Convertible Note issued in 2007 PIPE Offering10.47*
    
    Form of Stock Purchase Warrant issued in 2007 PIPE Offering21*
    
    List of Subsidiaries23*
    
    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. 56




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##### Table of Contents



(4)
    
    Incorporated by reference from Registrants Form 8-K filed on November 12, 2002.(5)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31, 2004.(6)
    
    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,
(6) 2004.(7)
    
    Incorporates by reference from Registrant Form 8-K filed on July 12, 2004.(8)
    
    Incorporated by reference from registrants Form 10-KSB for the fiscal year ended December 31, 2004.(9)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended September 30, 2005(10)
    
    Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2005(11)
    
    Incorporated by reference from Registrants Form SB-2 filed on June 28, 2006 (SEC File No. 333- 333-135415)(12)
    
    Incorporated by reference from Registrants Form 8-K filed on September 21, 2006(13)
    
    Incorporated by reference from Registrants Form SB-2 filed on October 6, 2006 (SEC File No. 333-137855)(14)
    
    Incorporated by reference from Registrants Form 8-K filed on December 11, 2006(15)
    
    Incorporated by reference from Registrants Form 8-K filed on January 10, 2007(16)
    
    Incorporated by reference from Registrants form 8-K filed on February 8, 2007 
 Item 14. Principal Accountant Fees and Services
  57




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##### Table of Contents



SIGNATURES
  Save The World Air, Inc.By:

/s/ BRUCE MCKINNONBruce McKinnonDate: May 25, 2007
    
    Chief Executive Officer POWER OF ATTORNEY
   NAME
    
    TITLE
    
    DATE/s/ BRUCE H. MCKINNON
    
    Chief Executive Officer and
Director
    
    May 25, 2007Bruce H. McKinnon/s/ CHARLES K. DARGAN II
    
    Chief Financial Officer
    
    May 25, 2007Charles K. Dargan II/s/ JOSEPH HELLEIS
    
    Chairman of the Board
    
    May 25, 2007Joseph Helleis/s/ STEVEN BOLIO
    
    Director
    
    May 25, 2007Steven Bolio/s/ JOHN BROWN
    
    Director
    
    May 25, 2007John Brown/s/ EUGENE E. EICHLER
    
    Director
    
    May 25, 2007Eugene E. Eichler
 58




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##### Table of Contents



NAME
    
    TITLE
    
    DATE/s/ DENNIS KENNEALLY
    
    Director
    
    May 25, 2007Dennis Kenneally/s/ CECIL KYTE

Cecil Kyte
    
    Director
    
    May 25, 2007/s/ JOHN PRICE
    
    Director
    
    May 25, 2007John Price/s/ NATHAN SHELTON
    
    Director
    
    May 25, 2007Nathan Shelton
 59




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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 (10)
    
    Amendment dated August 14, 2005 to Exhibit 10.110.4(10)
    
    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(5)
    
    Modification No. 1 dated as of August 21, 2003 to Exhibit 10.510.8(5)
    
    Modification No. 2 dated as of October 17, 2003 to Exhibit 10.510.9(5)
    
    Modification No. 3 dated as of January 20, 2004 to Exhibit 10.510.10(4)
    
    Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne
Muller (Bankrupts).10.11(4)
    
    Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.10.12(11)
    
    Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Eugene E.
Eichler.10.13*
    
    Separation Agreement and General Mutual Release of Claims dated as of November 9, 2006 between the Registrant and Eugene E. Eichler10.14(11)
    
    Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Bruce H.
McKinnon.10.15(6)
    
    Save the World Air, Inc. 2004 Stock Option Plan10.16(8)
    
    Form of Incentive Stock Option Agreement under 2004 Stock Option Plan10.17(8)
    
    Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan10.18(8)
    
    Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett10.19(7)
    
    License Agreement dated as of July 1, 2004 between the Registrant and Temple University  The Commonwealth
System of Higher Education10.20(8)
    
    Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.10.21(13)
    
    Amendment dated September 14, 2006 to Exhibit 10.2010.22(8)
    
    Employment Agreement dated September 1, 2004 with Erin Brockovich10.23*
    
    Amendment dated as of July 31, 2006 to Exhibit 10.2210.24(8)
    
    Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell10.25(8)
    
    Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell10.26(11)
    
    Amended and Restated Employment
Agreement dated as of March 1, 2006 between the Registrant and John Richard
Bautista III10.27(9)
    
    Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson10.28(10)
    
    Amendment dated February 1, 2006 to Exhibit 10.27




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##### Table of Contents



Exhibit No.
    
    Description10.29(10)
    
    Form of 9% Convertible Note issued in the 2005 Interim Financing10.30(10)
    
    Form of Stock Purchase Warrant issued in the 2005 Interim Financing10.31(10)
    
    Form of Stock Purchase Warrant issued in the 2005 Bridge Financing10.32(11)
    
    Form of Stock Purchase Warrant issued in 2006 Regulation S financing10.33(11)
    
    Form of Stock Purchase Warrant issued in 2006 PIPE financing10.34(12)
    
    Commercial Sublease between the Registrant and KZG Golf dated January 1, 200610.35(12)
    
    Investment Agreement dated September 15, 2006 between the Registrant and Dutchess Private Equities Fund10.36(12)
    
    Registration Rights Agreement dated September 15, 2006 between the registrant and Dutchess Private Equities
Fund, LLP10.37(16)
    
    License Agreement between the Registrant and Temple University dated February 2, 200710.38(16)
    
    License Agreement between the Registrant and Temple University dated February 2, 200710.39(16)
    
    R&D Agreement between the Registrant and Temple University dated February 2, 200710.40(14)
    
    Note Purchase Agreement dated December 5, 2006 between the registrant and Morale Orchards LLC10.41(14)
    
    Form of Stock Purchase Warrant issued to Morale Orchards LLC10.42(14)
    
    Form of Convertible Note issued to Morale Orchards LLC10.43(15)
    
    Consulting Agreement dated January 4, 2007 between the Registrant and Spencer Clarke LLC10.44*
    
    Marketing Representation Agreement dated as of July 15, 2006 between the Company and SS Sales and Marketing Group10.45*
    
    Engagement Agreement between the
Registrant and CFO91110.46*
    
    Form of 10% Convertible Note issued in 2007 PIPE Offering10.47*
    
    Form of Stock Purchase Warrant issued in 2007 PIPE Offering21*
    
    List of Subsidiaries23*
    
    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.




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##### Table of Contents



(4)
    
    Incorporated by reference from Registrants Form 8-K filed on November 12, 2002.(5)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31, 2004.(6)
    
    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,
(6) 2004.(7)
    
    Incorporates by reference from Registrant Form 8-K filed on July 12, 2004.(8)
    
    Incorporated by reference from registrants Form 10-KSB for the fiscal year ended December 31, 2004.(9)
    
    Incorporated by reference from Registrants Form 10-QSB for the quarter ended September 30, 2005(10)
    
    Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2005(11)
    
    Incorporated by reference from Registrants Form SB-2 filed on June 28, 2006 (SEC File No. 333- 333-135415)(12)
    
    Incorporated by reference from Registrants Form 8-K filed on September 21, 2006(13)
    
    Incorporated by reference from Registrants Form SB-2 filed on October 6, 2006 (SEC File No. 333-137855)(14)
    
    Incorporated by reference from Registrants Form 8-K filed on December 11, 2006(15)
    
    Incorporated by reference from Registrants Form 8-K filed on January 10, 2007(16)
    
    Incorporated by reference from Registrants form 8-K filed on February 8, 2007




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated balance sheets
    
    
    F-3Consolidated statements of operations
    
    
    F-4Consolidated statements of stockholders deficiency
    
    
    F-5Consolidated statements of cash flows
    
    
    F-13Notes to consolidated financial statements
    
    
    F-14
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      /s/ WEINBERG & COMPANY, P.A.WEINBERG & COMPANY, P.A. 
 F-2




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
 December 31,2006
    
    
    2005ASSETSCurrent assetsCash
    
    $
    244,228
    
    
    $
    279,821Inventory
    
    
    21,314
    
    
    
    Other current assets
    
    
    81,232
    
    
    
    9,009Total current assets
    
    
    346,774
    
    
    
    288,830Property and equipment,net
    
    
    322,023
    
    
    
    295,374Other assets
    
    
    4,500
    
    
    
    4,500$
    673,297
    
    
    $
    588,704LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilitiesAccounts payable
    
    $
    233,707
    
    
    $
    155,456Accrued expenses
    
    
    468,413
    
    
    
    179,461Accrued research and development fees
    
    
    95,000
    
    
    
    680,000Accrued professional fees
    
    
    594,945
    
    
    
    450,555Payable to shareholder
    
    
    
    
    
    
    45,000Payable to related parties
    
    
    
    
    
    
    158,732Finders fees payable
    
    
    
    
    
    
    8,916Convertible debentures, net
    
    
    177,926
    
    
    
    318,759Total current liabilities
    
    
    1,569,991
    
    
    
    1,996,879Commitments and contingencies
Stockholders deficiencyCommon stock, $.001 par value: 200,000,000
shares authorized, 40,081,758 and 31,387,418,
shares issued and outstanding at December 31,
2006 and 2005, respectively
    
    
    40,082
    
    
    
    31,387Common stock to be issued
    
    
    60,000
    
    
    
    612,521Additional paid-in capital
    
    
    29,430,821
    
    
    
    18,336,178Deferred compensation
    
    
    
    
    
    
    (142,187
    )Deficit accumulated during the development stage
    
    
    (30,427,597
    )
    
    
    (20,246,074
    )Total stockholders deficiency
    
    
    (896,694
    )
    
    
    (1,408,175
    )$
    673,297
    
    
    $
    588,704
  F-3




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Inception (February18, 1998) toYears Ended December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006Net sales
    
    $
    30,000
    
    
    $
    
    
    
    $
    30,000Cost of goods sold
    
    
    13,400
    
    
    
    
    
    
    
    13,400Gross profit
    
    
    16,600
    
    
    
    
    
    
    
    16,600Operating expenses
    
    
    7,412,227
    
    
    
    2,631,082
    
    
    
    22,902,976Research and development expenses
    
    
    401,827
    
    
    
    1,150,361
    
    
    
    4,205,414Non-cash patent settlement cost
    
    
    
    
    
    
    
    
    
    
    1,610,066Loss before other income
    
    
    (7,797,454
    )
    
    
    (3,781,443
    )
    
    
    (28,701,856
    )Other income (expense)Other income
    
    
    
    
    
    
    
    
    
    
    125Interest income
    
    
    15,422
    
    
    
    
    
    
    
    16,251Interest expense
    
    
    (2,398,691
    )
    
    
    (348,964
    )
    
    
    (2,755,843
    )Settlement of litigation and debt
    
    
    
    
    
    
    1,017,208
    
    
    
    1,017,208Loss before provision for income taxes
    
    
    (10,180,723
    )
    
    
    (3,113,199
    )
    
    
    (30,424,115
    )Provision for income taxes
    
    
    800
    
    
    
    1,987
    
    
    
    3,482Net loss
    
    $
    (10,181,523
    )
    
    $
    (3,115,186
    )
    
    $
    (30,427,597
    )Net loss per common share, basic and diluted
    
    $
    (0.28
    )
    
    $
    (0.08
    )Weighted average common shares outstanding, basic and diluted
    
    
    35,946,022
    
    
    
    38,248,575
  F-4




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 2006
 DeficitAdditional
    
    
    
    
    
    
    AccumulatedPrice per
    
    
    Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    During theShare
    
    
    Shares
    
    
    Amount
    
    
    to be Issued
    
    
    Capital
    
    
    Compensation
    
    
    Development Stage
    
    
    TotalBalance, 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
    
    
    
    
    
    
    
    
    
    
    
    28,874
 F-5




---



##### Table of Contents



DeficitAdditional
    
    
    
    
    
    
    AccumulatedPrice per
    
    
    Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    During theShare
    
    
    Shares
    
    
    Amount
    
    
    to be Issued
    
    
    Capital
    
    
    Compensation
    
    
    Development Stage
    
    
    TotalStock issued for consulting services on September 10, 2000
    
    
    1.50
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    14,740
    
    
    
    
    
    
    
    
    
    
    
    14,750Stock issued for consulting services on November 2, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on November 4, 2000
    
    
    0.88
    
    
    
    9,833
    
    
    
    10
    
    
    
    
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    8,653Stock issued for consulting services on December 20, 2000
    
    
    0.50
    
    
    
    19,082
    
    
    
    19
    
    
    
    
    
    
    
    9,522
    
    
    
    
    
    
    
    
    
    
    
    9,541Stock issued for filing services on December 20, 2000
    
    
    0.50
    
    
    
    5,172
    
    
    
    5
    
    
    
    
    
    
    
    2,581
    
    
    
    
    
    
    
    
    
    
    
    2,586Stock 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
    
    
    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-6




---



##### Table of Contents



DeficitAdditional
    
    
    
    
    
    
    AccumulatedPrice per
    
    
    Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    During theShare
    
    
    Shares
    
    
    Amount
    
    
    to be Issued
    
    
    Capital
    
    
    Compensation
    
    
    Development Stage
    
    
    TotalStock 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
    
    
    
    
    
    
    
    
    
    
    
    125,000Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,875
    
    
    
    (312,582
    )
    
    
    
    
    
    
    
    
    
    
    (268,707
    )
 F-7




---



##### Table of Contents



DeficitAdditional
    
    
    
    
    
    
    AccumulatedPrice per
    
    
    Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    During theShare
    
    
    Shares
    
    
    Amount
    
    
    to be Issued
    
    
    Capital
    
    
    Compensation
    
    
    Development Stage
    
    
    TotalCommon 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000Intrinsic value of options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,891
    
    
    
    (248,891
    )
    
    
    
    
    
    
    
 F-8




---



##### Table of Contents



DeficitAdditional
    
    
    
    
    
    
    AccumulatedPrice per
    
    
    Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    During theShare
    
    
    Shares
    
    
    Amount
    
    
    to be Issued
    
    
    Capital
    
    
    Compensation
    
    
    Development Stage
    
    
    TotalFair 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    696,413
    
    
    
    
    
    
    
    
    
    
    
    696,413Intrinsic value of beneficial conversion associated with convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756,768
    
    
    
    
    
    
    
    
    
    
    
    756,768
 F-9




---



##### Table of Contents



DeficitAdditional
    
    
    
    
    
    
    AccumulatedPrice per
    
    
    Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    During theShare
    
    
    Shares
    
    
    Amount
    
    
    to be Issued
    
    
    Capital
    
    
    Compensation
    
    
    Development Stage
    
    
    TotalNet 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
    )Stock issued, for previously settled payables
    
    
    
    
    
    
    846,549
    
    
    
    847
    
    
    
    (612,521
    )
    
    
    611,674
    
    
    
    
    
    
    
    
    
    
    
    Stock issued upon exercise of warrants on March 23, 2006
    
    
    1.50
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    37,475
    
    
    
    
    
    
    
    
    
    
    
    37,500Stock issued upon exercise of warrants on March 27, 2006
    
    
    1.50
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    74,950
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued upon exercise of warrants on March 27, 2006
    
    
    0.50
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    12,475
    
    
    
    
    
    
    
    
    
    
    
    12,500Stock issued upon exercise of warrants on March 30, 2006
    
    
    1.00
    
    
    
    10,000
    
    
    
    10
    
    
    
    
    
    
    
    9,990
    
    
    
    
    
    
    
    
    
    
    
    10,000Stock issued upon exercise of warrants on April 10, 2006
    
    
    0.50
    
    
    
    36,250
    
    
    
    36
    
    
    
    
    
    
    
    18,089
    
    
    
    
    
    
    
    
    
    
    
    18,125Common stock issued for convertible debt on April 10, 2006
    
    
    0.70
    
    
    
    269,600
    
    
    
    270
    
    
    
    
    
    
    
    188,450
    
    
    
    
    
    
    
    
    
    
    
    188,720Stock issued for cash on April 24, 2006
    
    
    1.56
    
    
    
    473,000
    
    
    
    473
    
    
    
    
    
    
    
    737,408
    
    
    
    
    
    
    
    
    
    
    
    737,881Stock issued upon exercise of warrants on April 26, 2006
    
    
    0.50
    
    
    
    125,000
    
    
    
    125
    
    
    
    
    
    
    
    62,375
    
    
    
    
    
    
    
    
    
    
    
    62,500Stock issued upon exercise of warrants on April 26, 2006
    
    
    1.50
    
    
    
    100,000
    
    
    
    100
    
    
    
    
    
    
    
    149,900
    
    
    
    
    
    
    
    
    
    
    
    150,000Common stock issued for convertible debt on April 26, 2006
    
    
    0.70
    
    
    
    35,714
    
    
    
    36
    
    
    
    
    
    
    
    24,964
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued upon exercise of warrants on May 6, 2006
    
    
    0.50
    
    
    
    200,000
    
    
    
    200
    
    
    
    
    
    
    
    99,800
    
    
    
    
    
    
    
    
    
    
    
    100,000Stock issued upon exercise of warrants on May 15, 2006
    
    
    1.50
    
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    37,475
    
    
    
    
    
    
    
    
    
    
    
    37,500Stock issued upon exercise of warrants on May 15, 2006
    
    
    0.50
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    24,950
    
    
    
    
    
    
    
    
    
    
    
    25,000Stock issued for cash on June 7, 2006
    
    
    1.89
    
    
    
    873,018
    
    
    
    872
    
    
    
    
    
    
    
    1,649,136
    
    
    
    
    
    
    
    
    
    
    
    1,650,008Common stock issued for convertible debt on June 7, 2006
    
    
    0.70
    
    
    
    1,535,716
    
    
    
    1,536
    
    
    
    
    
    
    
    1,073,464
    
    
    
    
    
    
    
    
    
    
    
    1,075,000Stock issued upon exercise of warrants on June 8, 2006
    
    
    0.50
    
    
    
    900,000
    
    
    
    900
    
    
    
    
    
    
    
    449,100
    
    
    
    
    
    
    
    
    
    
    
    450,000Stock issued upon exercise of warrants on June 9, 2006
    
    
    0.50
    
    
    
    9,000
    
    
    
    9
    
    
    
    
    
    
    
    4,491
    
    
    
    
    
    
    
    
    
    
    
    4,500Stock issued upon exercise of warrants on June 23, 2006
    
    
    0.50
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    74,850
    
    
    
    
    
    
    
    
    
    
    
    75,000Stock issued upon exercise of warrants on June 23, 2006
    
    
    1.50
    
    
    
    15,000
    
    
    
    15
    
    
    
    
    
    
    
    22,485
    
    
    
    
    
    
    
    
    
    
    
    22,500Common stock issued for convertible debt on June 30, 2006
    
    
    0.70
    
    
    
    219,104
    
    
    
    219
    
    
    
    
    
    
    
    153,155
    
    
    
    
    
    
    
    
    
    
    
    153,374Common stock issued for convertible debt on July 11, 2006
    
    
    0.70
    
    
    
    14,603
    
    
    
    15
    
    
    
    
    
    
    
    10,207
    
    
    
    
    
    
    
    
    
    
    
    10,222Common stock issued for convertible debt on August 7, 2006
    
    
    0.70
    
    
    
    1,540,160
    
    
    
    1,540
    
    
    
    
    
    
    
    1,076,572
    
    
    
    
    
    
    
    
    
    
    
    1,078,112
 F-10




---



##### Table of Contents



DeficitAdditional
    
    
    
    
    
    
    AccumulatedPrice per
    
    
    Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    During theShare
    
    
    Shares
    
    
    Amount
    
    
    to be Issued
    
    
    Capital
    
    
    Compensation
    
    
    Development Stage
    
    
    TotalCommon stock issued upon exercise of warrants on August 7, 2006
    
    
    1.50
    
    
    
    175,000
    
    
    
    175
    
    
    
    
    
    
    
    262,325
    
    
    
    
    
    
    
    
    
    
    
    262,500Common stock issued upon exercise of warrants on August 21, 2006
    
    
    1.50
    
    
    
    50,000
    
    
    
    50
    
    
    
    
    
    
    
    74,950
    
    
    
    
    
    
    
    
    
    
    
    75,000Common stock issued for cash on August 22, 2006
    
    
    1.00
    
    
    
    14,519
    
    
    
    15
    
    
    
    
    
    
    
    14,504
    
    
    
    
    
    
    
    
    
    
    
    14,519Common stock issued upon exercise of warrants on August 23, 2006
    
    
    1.00
    
    
    
    3,683
    
    
    
    4
    
    
    
    
    
    
    
    3,679
    
    
    
    
    
    
    
    
    
    
    
    3,683Common stock issued upon exercise of warrants on August 28, 2006
    
    
    1.50
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    7,495
    
    
    
    
    
    
    
    
    
    
    
    7,500Common stock issued for convertible debt on September 13, 2006
    
    
    0.70
    
    
    
    4,286
    
    
    
    4
    
    
    
    
    
    
    
    2,996
    
    
    
    
    
    
    
    
    
    
    
    3,000Common stock issued upon exercise of warrants on September 13, 2006
    
    
    0.50
    
    
    
    150,000
    
    
    
    150
    
    
    
    
    
    
    
    74,850
    
    
    
    
    
    
    
    
    
    
    
    75,000Common stock issued for convertible debt on October 16, 2006
    
    
    0.70
    
    
    
    66,654
    
    
    
    67
    
    
    
    
    
    
    
    46,591
    
    
    
    
    
    
    
    
    
    
    
    46,658Common stock issued upon exercise of warrants on November 3, 2006
    
    
    0.50
    
    
    
    210,000
    
    
    
    210
    
    
    
    
    
    
    
    104,790
    
    
    
    
    
    
    
    
    
    
    
    105,000Common stock issued for put on equity line of credit on November 7, 2006
    
    
    1.22
    
    
    
    94,471
    
    
    
    94
    
    
    
    
    
    
    
    115,368
    
    
    
    
    
    
    
    
    
    
    
    115,462Common stock issued for put on equity line of credit on November 14, 2006
    
    
    1.14
    
    
    
    7,300
    
    
    
    7
    
    
    
    
    
    
    
    8,349
    
    
    
    
    
    
    
    
    
    
    
    8,356Common stock issued for put on equity line of credit on November 27, 2006
    
    
    0.83
    
    
    
    27,500
    
    
    
    28
    
    
    
    
    
    
    
    22,913
    
    
    
    
    
    
    
    
    
    
    
    22,941Common stock issued for put on equity line of credit on November 28, 2006
    
    
    0.82
    
    
    
    36,500
    
    
    
    36
    
    
    
    
    
    
    
    30,059
    
    
    
    
    
    
    
    
    
    
    
    30,095Common stock issued for put on equity line of credit on December 6, 2006
    
    
    0.78
    
    
    
    73,863
    
    
    
    74
    
    
    
    
    
    
    
    57,244
    
    
    
    
    
    
    
    
    
    
    
    57,318Common stock issued for put on equity line of credit on December 26, 2006
    
    
    0.55
    
    
    
    18,800
    
    
    
    19
    
    
    
    
    
    
    
    10,377
    
    
    
    
    
    
    
    
    
    
    
    10,396Common stock issued for put on equity line of credit on December 31, 2006
    
    
    0.59
    
    
    
    229,050
    
    
    
    229
    
    
    
    
    
    
    
    135,300
    
    
    
    
    
    
    
    
    
    
    
    135,529Common stock paid for, but not issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,000Fair value of options issued to employees and officers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,253,263
    
    
    
    
    
    
    
    
    
    
    
    2,253,263Fair value of warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    401,130
    
    
    
    
    
    
    
    
    
    
    
    401,130Write off of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142,187
    )
    
    
    142,187
    
    
    
    
    
    
    
    
 F-11




---



##### Table of Contents



DeficitAdditional
    
    
    
    
    
    
    AccumulatedPrice per
    
    
    Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    During theShare
    
    
    Shares
    
    
    Amount
    
    
    to be Issued
    
    
    Capital
    
    
    Compensation
    
    
    Development Stage
    
    
    TotalWarrants issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,497
    
    
    
    
    
    
    
    
    
    
    
    62,497Warrants issued with convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    408,596
    
    
    
    
    
    
    
    
    
    
    
    408,596Intrinsic value of beneficial conversion associated with convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    851,100
    
    
    
    
    
    
    
    
    
    
    
    851,100Finders fees related to stock issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (284,579
    )
    
    
    
    
    
    
    
    
    
    
    (284,579
    )Fees paid on equity line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,402
    )
    
    
    
    
    
    
    
    
    
    
    (30,402
    )Net loss for year ended December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,181,523
    )
    
    
    (10,181,523
    )Balance, December 31, 2006
    
    
    
    
    
    
    40,081,758
    
    
    $
    40,082
    
    
    $
    60,000
    
    
    $
    29,430,821
    
    
    $
    
    
    
    $
    (30,427,597
    )
    
    $
    (896,694
    )
  F-12




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Inception(February 18, 1998)Years Ended December 31,
    
    
    Decmber 31,2006
    
    
    2005
    
    
    2006Cash flows from operating activitiesNet loss
    
    $
    (10,181,523
    )
    
    $
    (3,115,186
    )
    
    $
    (30,427,597
    )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
    )
    
    
    (1,017,208
    )Stock based compensation expense
    
    
    2,716,889
    
    
    
    13,505
    
    
    
    2,901,584Issuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    4,668,102Issuance of options for legal settlement
    
    
    
    
    
    
    31,500
    
    
    
    31,500Issuance of warrants for legal settlement
    
    
    
    
    
    
    4,957
    
    
    
    4,957Patent acquisition cost
    
    
    
    
    
    
    
    
    
    
    1,610,066Amortization of issuance costs and original issue debt discounts
    
    
    2,284,742
    
    
    
    318,759
    
    
    
    2,799,305Amortization of deferred compensation
    
    
    
    
    
    
    177,631
    
    
    
    3,060,744Depreciation
    
    
    154,457
    
    
    
    19,345
    
    
    
    188,219Changes in operating assets and liabilities:Inventory
    
    
    (21,314
    )
    
    
    
    
    
    
    (21,314
    )Prepaid expenses and other
    
    
    (72,223
    )
    
    
    (6,407
    )
    
    
    (81,232
    )Other assets
    
    
    
    
    
    
    (4,500
    )
    
    
    (4,500
    )Accounts payable and accrued expenses
    
    
    (78,615
    )
    
    
    1,010,426
    
    
    
    2,232,114Net cash used in operating activities
    
    
    (5,197,587
    )
    
    
    (2,567,178
    )
    
    
    (13,550,260
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (181,106
    )
    
    
    (279,123
    )
    
    
    (506,692
    )Net cash used in investing activities
    
    
    (181,106
    )
    
    
    (279,123
    )
    
    
    (506,692
    )Cash flows from financing activitiesNet proceeds under equity line of credit
    
    
    349,695
    
    
    
    
    
    
    
    349,695(Decrease) increase in payables to related parties and stockholder
    
    
    (158,733
    )
    
    
    167,255
    
    
    
    511,450Advances from founding executive officer
    
    
    
    
    
    
    
    
    
    
    517,208Net proceeds from issuance of convertible notes and warrants
    
    
    1,365,500
    
    
    
    1,453,182
    
    
    
    2,667,878Net proceeds from issuance of common stock and common stock
issuable
    
    
    3,786,638
    
    
    
    1,420,859
    
    
    
    10,254,949Net cash provided by financing activities
    
    
    5,343,100
    
    
    
    3,041,296
    
    
    
    14,301,180Net (decrease) increase in cash
    
    
    (35,593
    )
    
    
    194,995
    
    
    
    244,228Cash, beginning of period
    
    
    279,821
    
    
    
    84,826
    
    
    
    Cash, end of period
    
    $
    244,228
    
    
    $
    279,821
    
    
    $
    244,228Supplemental disclosures of cash flow informationCash paid during the year for
Interest
    
    $
    128,634
    
    
    $
    
    
    
    $
    141,479Income taxes
    
    $
    800
    
    
    $
    1,987
    
    
    $
    3,482Non-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
    
    
    
    3,202,931Purchase of property and equipment financed by advance from
related party
    
    
    
    
    
    
    
    
    
    
    3,550Conversion of related party debt to equity
    
    
    
    
    
    
    
    
    
    
    515,000Issuance of common stock in settlement of payable
    
    
    
    
    
    
    
    
    
    
    113,981Cancellation of stock
    
    
    
    
    
    
    8,047
    
    
    
    8,047Conversion of accounts payable and accrued expenses to common stock
    
    
    
    
    
    
    612,521
    
    
    
    612,521Conversion of related party debt to convertible debentures
    
    
    45,000
    
    
    
    
    
    
    
    45,000Conversion of convertible debentures to common stock
    
    
    2,580,086
    
    
    
    
    
    
    
    2,580,086Write off of deferred compensation
    
    
    142,187
    
    
    
    
    
    
    
    142,187
  F-13




---



##### Table of Contents



SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Description of business
 Description of business
    Consolidation policy
  2. Summary of significant accounting policies
 Development stage enterprise
   F-14




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##### Table of Contents



Liquidity
  Going concern
  Revenue Recognition Policy
  
    
    Persuasive evidence of an arrangement exists;
    
    Delivery has occurred or services rendered;
    
    The sellers price to the buyer is fixed or determinable; and
    
    Collectibility is reasonably assured.
  Property and equipment and depreciation
  Long-lived assets
  Earnings (loss) per share
  F-15




---



##### Table of Contents



Income taxes
  Stock-based compensation
    CumulativeDecember 31
    
    
    Since2005
    
    
    InceptionNet loss, as reported
    
    $
    (3,115,186
    )
    
    $
    (30,427,597
    )Add: total fair value method
stock-based employee
compensation expense
    
    
    (1,039,268
    )
    
    
    (5,010,310
    )Less: deferred compensation
amortization for below market
employee options
    
    
    177,631
    
    
    
    3,060,744Pro forma net loss
    
    $
    (3,976,823
    )
    
    $
    (32,377,163
    )Net loss per share:As reported  basic and diluted
    
    $
    (0.08
    )Pro forma  basic and diluted
    
    $
    (0.10
    )
   F-16




---



##### Table of Contents



Business and credit concentrations
  Warranties
  Inventories
  F-17




---



##### Table of Contents



Reclassifications
  Recent accounting pronouncements
        consolidated)
   F-18




---



##### Table of Contents



3. Inventories
  4. Certain relationships and related transactions
 Advances from founding executive officer
    Loans from related parties
    Lease agreement
    F-19




---



##### Table of Contents



5. Property and equipment
  December 31,2006
    
    
    2005Office equipment
    
    $
    50,670
    
    
    $
    38,231Furniture and fixtures
    
    
    18,957
    
    
    
    15,434Machinery and equipment
    
    
    54,161
    
    
    
    26,930Dies and molds
    
    
    3,000
    
    
    
    Testing equipment
    
    
    147,312
    
    
    
    147,312Leasehold improvements
    
    
    236,142
    
    
    
    101,229Subtotal
    
    
    510,242
    
    
    
    329,136Less accumulated depreciation
    
    
    (188,219
    )
    
    
    (33,762
    )Total current assets
    
    $
    322,023
    
    
    $
    295,374
  6. Income taxes
  For the years endedDecember 31,2006
    
    
    2005Current:Federal
    
    $
    
    
    
    $
    State
    
    
    800
    
    
    
    1,987Total current
    
    
    800
    
    
    
    1,987Deferred:Federal
    
    
    
    
    
    
    State
    
    
    
    
    
    
    Total deferred
    
    
    
    
    
    
    Total income tax provision
    
    $
    800
    
    
    $
    1,987
  F-20




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##### Table of Contents



December 31,2006
    
    
    2005Computed tax provision (benefit) at federal statutory rate (34%)
    
    $
    (3,461,446
    )
    
    $
    (1,058,492
    )State income taxes, net of federal benefit
    
    
    (406,769
    )
    
    
    (218,030
    )Permanent items
    
    
    1,087,922
    
    
    
    (45,815
    )Credits
    
    
    
    
    
    
    (60,194
    )Valuation allowance
    
    
    2,781,093
    
    
    
    1,384,518Income tax provision
    
    $
    800
    
    
    $
    1,987
  December 31, 2006
    
    
    December 31, 2005Deferred tax
    
    
    Deferred tax
    
    
    Deferred tax
    
    
    Deferred taxassets
    
    
    liabilities
    
    
    assets
    
    
    liabilitiesCurrent:Accrued liabilities
    
    $
    382,359
    
    
    $
    
    
    
    $
    173,796
    
    
    $
    Other
    
    
    272
    
    
    
    
    
    
    
    675
    
    
    
    382,631
    
    
    
    
    
    
    
    174,471
    
    
    
    Noncurrent:Net operating loss carry forwards
    
    
    8,490,347
    
    
    
    
    
    
    
    5,852,406
    
    
    
    Unexercised stock options and warrants
    
    
    1,118,553
    
    
    
    
    
    
    
    1,217,259
    
    
    
    Credit carryovers
    
    
    259,391
    
    
    
    
    
    
    
    256,757
    
    
    
    Depreciation
    
    
    25,515
    
    
    
    
    
    
    
    
    
    
    
    (5,549
    )Valuation allowance
    
    
    (10,276,437
    )
    
    
    
    
    
    
    (7,495,344
    )
    
    
    (382,631
    )
    
    
    
    
    
    
    (168,922
    )
    
    
    (5,549
    )Total deferred taxes net of valuation allowance
    
    $
    
    
    
    $
    
    
    
    $
    5,549
    
    
    $
    (5,549
    )
  7. Equity line of credit
   F-21




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##### Table of Contents



8. Stockholders deficiency
        9. 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
    
    
    
    0.53Options granted
    
    
    1,313,605
    
    
    
    1.21Options exercised
    
    
    (2,860,000
    )
    
    
    0.10Options forfeited
    
    
    (962,607
    )
    
    
    0.84
 F-22




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##### Table of Contents



Weighted Avg.
    
    
    Weighted Avg.Options
    
    
    Exercise PriceOptions cancelled
    
    
    
    
    
    
    Options, December 31, 2006
    
    
    3,999,559
    
    
    $
    0.99
  WeightedWeighted
    
    AverageAverage
    
    RemainingNumber
    
    Exercise
    
    Contractualof Shares
    
    Price
    
    Life (Years)As of December 31, 2006:Outstanding
    
    
    3,999,559
    
    
    $
    0.99
    
    
    
    5.55Expected to Vest
    
    
    3,974,774
    
    
    $
    0.99
    
    
    
    5.51Exercisable
    
    
    3,352,932
    
    
    $
    0.96
    
    
    
    4.99
 Intrinsic value of employee options
   Black-Scholes value of employee options
  2006
    
    2005Expected life (years)
    
    
    5.15
    
    
    
    5.26Risk free interest rate
    
    
    4.59
    %
    
    
    4.02
    %Volatility
    
    
    262.84
    %
    
    
    188.83
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
   Warrants
  Weighted Avg.Warrants
    
    
    Exercise PriceWarrants outstanding, January 1, 2004
    
    
    14,252,414
    
    
    $
    0.48Warrants granted
    
    
    2,372,500
    
    
    
    1.27Warrants exercised
    
    
    (960,500
    )
    
    
    0.20Warrants cancelled
    
    
    
    
    
    
    
 F-23




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##### Table of Contents



Weighted Avg.Warrants
    
    
    Exercise PriceWarrants outstanding, December 31, 2004
    
    
    15,664,414
    
    
    
    0.62Warrants granted
    
    
    5,198,574
    
    
    
    1.16Warrants exercised
    
    
    (50,500
    )
    
    
    0.99Warrants cancelled
    
    
    (20,000
    )
    
    
    1.50Warrants outstanding, December 31, 2005
    
    
    20,792,488
    
    
    
    0.75Warrants granted
    
    
    3,624,894
    
    
    
    1.28Warrants exercised
    
    
    (2,328,452
    )
    
    
    0.68Warrants cancelled
    
    
    (1,191,619
    )
    
    
    1.46Warrants outstanding, December 31, 2006
    
    
    20,897,311
    
    
    $
    0.81
    10. Convertible notes and warrants
 9% Convertible Notes
      F-24




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##### Table of Contents



Morale Notes
        F-25




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##### Table of Contents



11. Research and development
  12. Commitments and contingencies
 Legal matters
     F-26




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F-27




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##### Table of Contents



Employment agreements
      Year2007
    
    $
    868,0002008
    
    $
    10,000Total
    
    $
    878,000
  F-28




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##### Table of Contents



Consulting agreements
  Leases
       Years Ending December 31,2007
    
    $
    154,4492008
    
    
    150,3482009
    
    
    92,343Total
    
    $
    397,140
 13. Subsequent events
  F-29




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F-30




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F-31